The ₹1.25 Lakh LTCG Exemption: How to Book Equity Gains Tax-Free in FY 2025-26
Every financial year, the Income Tax Act hands every equity investor a tax-free allowance worth up to ₹16,250 — and most of it goes unclaimed. The ₹1.25 lakh long-term capital gains exemption under Sec 112A resets every April, doesn't carry forward, and quietly expires for anyone who doesn't deliberately use it.
This article explains exactly how the exemption works in FY 2025-26, how gain harvesting lets you capture it without changing your portfolio, the 12-month holding cliff that decides whether you qualify, and how a family can stack two exemptions into a ₹2.5 lakh tax-free runway.
Reading time: ~10 minutes. If you just want to see the numbers, jump to the worked example.
The ₹1.25 Lakh Exemption: Sec 112A Explained
Under Section 112A of the Income Tax Act, the first ₹1,25,000 of Long-Term Capital Gains (LTCG) from equity shares and equity-oriented mutual funds is entirely tax-free each financial year. Any gains above this threshold are taxed at a flat 12.5% (plus a 4% Health & Education cess, bringing the effective rate to 13%).
This exemption is strictly per-Permanent Account Number (PAN) and resets annually. It is one of the most powerful, straightforward tax-saving mechanisms available to Indian equity investors, yet a surprising amount of retail capital leaves it entirely untouched.
The "Use It or Lose It" Reality
The defining characteristic of the ₹1.25L exemption is that it does not carry forward.
If you book ₹0 in long-term gains in FY 2024-25, your limit for FY 2025-26 does not become ₹2.5L. It resets to ₹1.25L. By failing to utilise this buffer annually, investors artificially inflate their tax burden when they eventually liquidate their portfolio down the line.
Every year you let the ₹1.25L limit expire unused is effectively throwing away up to ₹16,250 in future tax savings (₹1.25L × 13% effective rate).
The Mechanics of Gain Harvesting
Gain harvesting (or tax-gain harvesting) is the deliberate process of utilising this expiring quota.
The strategy is simple: you sell your long-term equity holdings that have accumulated gains up to exactly ₹1.25L, and then buy them back.
What does this achieve?
- You realise ₹1.25L in profit completely tax-free.
- Your portfolio value and composition remain identical.
- Your cost of acquisition (purchase price) for those shares is permanently reset to today's higher market price.
- When you eventually sell those shares years from now, your taxable profit is calculated from this newly reset, higher base — drastically reducing your future LTCG liability.
Use the calculator below to see how a given amount of long-term gains splits into the tax-free portion and the taxable surplus.
LTCG Harvesting Calculator
Enter the long-term equity gains you plan to book this financial year.
The annual Section 112A exemption is ₹1,25,000.
Annual Exemption Limit
Standard per financial year
₹1,25,000
Tax-Free Gains Utilised
Use-it-or-lose-it
₹0
Unused Exemption
Capacity remaining
₹1,25,000
Taxable Surplus
Gains above ₹1.25L limit
₹0
Tax Liability (12.5%)
Owed on taxable surplus
₹0
+ Health & Education Cess (4%)
Levied on the LTCG tax
₹0
Total Tax Payable
Effective 13% on the taxable surplus
₹0
Illustrative, for FY 2025-26 (Sec 112A). Rates mirror the income-tax rules in effect for the year; confirm your final figures with your CA or the income-tax portal before filing.
The 12-Month Cliff: Holding Period Arbitrage
To harvest the ₹1.25L exemption, the gains must be long-term. Under the FY 2025-26 tax regime, equity assets transition from short-term to long-term exactly at the 12-month mark.
Timing is everything. Selling even one day early triggers a punitive tax rate.
| Holding Period | Classification | Applicable Tax Rate | The ₹1.25L Exemption |
|---|---|---|---|
| < 12 Months | Short-Term (STCG) | Flat 20% | ❌ Not Applicable |
| ≥ 12 Months | Long-Term (LTCG) | 12.5% | ✅ Fully Applicable |
If you have recent short-term trades, see how the new rates affect you in our Budget 2024 capital gains explainer.
Multiplying the Limit: The Family Strategy
Because the ₹1.25L exemption is bound to an individual PAN, married couples managing their wealth jointly effectively have a ₹2.5L annual tax-free runway.
However, be careful when applying this to minors. Under Section 64(1A), a minor child's capital gains are clubbed with the income of the parent whose total income is higher. This means a minor's gains eat into the parent's single ₹1.25L exemption rather than getting their own.
For a deeper dive on structuring family investments across PANs, read our guide on Section 64(1A) minor income clubbing.
The Indian Wash-Sale Reality
In markets like the US, a wash-sale rule prevents investors from claiming tax benefits if they buy back the exact same asset within 30 days. India does not have a formal 30-day wash-sale rule.
You are legally permitted to sell a stock and buy it back to reset your cost basis. However, caution is required.
GAAR warning: While same-day buybacks for gain harvesting are technically permissible, executing them as intraday trades (where delivery isn't taken) risks classifying the transaction as speculative income rather than capital gains. To stay safely outside the General Anti-Avoidance Rule (GAAR), execute the sell, let the funds settle, and buy back on the next trading day.
Worked Example: A ₹2.5 Lakh Family Reset
Let's look at a married couple, Aditi and Rohan, navigating FY 2025-26.
Both hold units of a mutual fund bought 3 years ago. Aditi's lot has an unrealised gain of ₹1,40,000. Rohan's lot has an unrealised gain of ₹1,10,000.
- Aditi's trade: sells enough units to realise exactly ₹1,25,000 in gains — leaving ₹15,000 unharvested to avoid the 13% tax.
- Rohan's trade: sells his entire lot, realising ₹1,10,000 in gains (well under his ₹1.25L limit).
- The buyback: the next morning, both reinvest the full proceeds back into the same fund.
The result: together they extracted ₹2,35,000 in tax-free gains, resetting their cost basis higher and saving ₹30,550 in future tax liabilities (₹2,35,000 × 13%) — without altering their actual investment positions.
See your unused exemption at a glance
VriddhiQ imports your broker statements, applies FIFO lot matching per tax entity, and shows exactly how much of each family member's ₹1.25L LTCG exemption is still available to harvest this year.
Try VriddhiQ freeFrequently Asked Questions
Does the ₹1.25L exemption apply to mutual funds?
Yes. It applies to all equity-oriented mutual funds (where equity exposure is 65% or more) and to direct equity shares listed on recognised stock exchanges in India.
Can I carry forward an unused LTCG limit to next year?
No. The ₹1.25L limit under Section 112A is strictly use-it-or-lose-it for the current financial year. It resets to zero on 1 April.
Does the 4% Health & Education cess apply to the ₹1.25L exemption?
No tax or cess is levied on the first ₹1.25L of long-term capital gains. The 12.5% tax, plus the 4% cess on that tax, only applies to the amount exceeding ₹1.25L.
What happens if I sell my shares before 12 months?
Gains realised before a 12-month holding period are classified as Short-Term Capital Gains (STCG) and taxed at a flat 20% rate. The ₹1.25L exemption cannot be used against STCG.
Are intraday trades eligible for the LTCG exemption?
No. Intraday equity trades are treated as speculative business income, not capital gains, and are taxed at your applicable income-tax slab rate.
Further reading
- What Budget 2024 changed for capital gains — the new STCG 20% and LTCG 12.5% rates
- Section 64(1A) minor income clubbing — why a minor doesn't get a separate exemption
- Consolidating tax P&L across multiple brokers — cross-broker FIFO for families
This article reflects rules as of FY 2025-26 (Budget 2024 amendments). Tax laws change yearly — always confirm with your CA or the income-tax portal before filing.