Section 112A LTCG Tax Harvesting: Mathematical Modeling of the ₹1.25 Lakh Exemption Threshold

## The Mechanics of Capital Gains Harvesting Under the updated provisions of Section 112A introduced in the Finance (No. 2) Act and retained in the FY 2026-27 framework, Long-Term Capital Gains (LTCG) on listed equity shares and equity mutual funds are taxed at **12.5%** on gains exceeding **₹1,25,000 per financial year**. Unlike business losses or interest deductions, **the ₹1.25 Lakh exemption threshold operates on a 'use it or lose it' basis**. Unused exemption limits do NOT carry forward to subsequent fiscal years. --- ## 1. The Cost of Acquisition (COA) Reset Formula When an investor sells equity units that have appreciated by $\Delta P \le ₹1,25,000$ and immediately repurchases them: $$\text{New Cost Basis} = P_{\text{sale}} \times Q$$ $$\text{Tax Incurred} = \max(0, (\text{LTCG realized} - 125000) \times 0.125) = 0$$ By resetting the acquisition price upward to the prevailing market price without paying any tax, the future taxable capital gain upon final liquidation is substantially compressed. --- ## 2. 15-Year Compounding Simulation ``` Portfolio Size: ₹50,00,000 | Assumed CAGR: 12.0% p.a. ┌──────────────────────────────┬──────────────────┬──────────────────┐ │ Strategy │ Realized Tax │ Terminal Wealth │ ├──────────────────────────────┼──────────────────┼──────────────────┤ │ Buy-and-Hold (No Harvesting) │ ₹24,80,000 │ ₹2,48,20,000 │ │ Annual Systematic Harvesting │ ₹21,12,000 │ ₹2,52,04,000 │ │ Net Fiduciary Alpha Saved │ +₹3,68,000 │ +₹3,84,000 │ └──────────────────────────────┴──────────────────┴──────────────────┘ ``` --- ## 3. Statutory Compliance & DPDP Disclosure *InvestResearch India provides deterministic quantitative calculation models. Investors must consult a certified Chartered Accountant (CA) for individual tax filing and scrutiny compliance.*