Section 196 · Special cases
Section 196 of the Income-tax Act, 2025 — Tax on Short-Term Capital Gains on Listed Equity, Equity Mutual Funds & Business Trusts (20% Rate)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 196, Income-tax Act 2025
196. (1) Where the total income of an assessee includes any income chargeable
under the head “Capital gains”, arising from the transfer of a short-term capital
asset—
(a) being an equity share in a company or a unit of an equity oriented fund
or a unit of a business trust; and
(b) the transaction of sale of such equity share or unit is chargeable to secu-
rities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004
(23 of 2004), then,
the tax payable by the assessee on the total income, subject to the provisions of
sub-section (2), shall be the aggregate of—
24. Substituted for “60%” by the Finance Act, 2026, w.e.f. 1-4-2026.
(i) income-tax calculated on such short-term capital gains at the rate of
20%;
(ii) income-tax payable on the balance amount of the total income as if such
balance amount were the total income of the assessee.
(2) In the case of an individual or a Hindu undivided family, being a resident, where
the total income, as reduced by short-term capital gains computed under sub-section
(1), is below the maximum amount which is not chargeable to income-tax, then,—
(a) such short-term capital gains shall be reduced by the amount by which
the total income as so reduced falls short of the maximum amount which
is not chargeable to income-tax; and
(b) the tax on the balance of such short-term capital gains shall be computed
at the rate as applicable in sub-section (1)(i).
(3) The provisions of sub-section (1)(b) shall not apply to a transaction undertaken
on a recognised stock exchange located in any International Financial Services
Centre and where the consideration for such transaction is paid or payable in for-
eign currency.
(4) Where the gross total income of an assessee includes any short-term capital gains
referred to in sub-section (1), the deduction under Chapter VIII shall be allowed
from the gross total income as reduced by such capital gains.
(5) For the purposes of this section, the expression “equity oriented fund” shall have
the meaning assigned to it in section 198.
Tax on long-term capital gains.
197.
(1) Where the total income of an assessee includes any income arising
from the transfer of a long-term capital asset which is chargeable under the
head “Capital gains”, the tax payable by the assessee on the total income, subject
to sub-sections (2), (3) and (4), shall be the ag
In plain language
What Section 196 is about
Section 196 of the Income-tax Act, 2025 (effective from 1 April 2026, i.e., tax year 2026-27 onwards) prescribes a special flat tax rate of 20% on short-term capital gains (STCG) from the sale of three specific assets: equity shares listed on a stock exchange, units of equity-oriented mutual funds, and units of a business trust (REITs/InvITs) — provided the sale transaction has suffered Securities Transaction Tax (STT). It replaces the well-known Section 111A of the Income-tax Act, 1961, carrying forward the same scheme with the 20% rate that was introduced by the Finance (No. 2) Act, 2024 for transfers on or after 23 July 2024 (the rate was 15% earlier).
Who it applies to
- All categories of taxpayers — resident and non-resident individuals, HUFs, firms, companies, NRIs and FPIs — whose total income includes STCG from the specified assets.
- Investors and traders in the stock market who sell listed shares or equity mutual fund units within the short-term holding period (generally 12 months or less for listed equity shares, equity-oriented fund units and business trust units).
- It does not apply to intraday traders (that is speculative business income) or to derivatives (F&O) traders (non-speculative business income).
Key conditions to get the 20% rate
- Asset type: the capital asset must be an equity share in a company, a unit of an equity-oriented fund, or a unit of a business trust.
- Short-term: the asset must qualify as a short-term capital asset — for these listed securities, a holding period of not more than 12 months.
- STT paid on sale: the sale must be chargeable to STT under Chapter VII of the Finance (No. 2) Act, 2004 — i.e., executed on a recognised stock exchange in India (or a normal redemption of equity fund units).
- IFSC exception: the STT condition is waived for transactions on a recognised stock exchange in an International Financial Services Centre (e.g., GIFT City) where consideration is paid in foreign currency.
How the tax is computed
Your total income is split into two buckets: (a) the qualifying STCG, taxed flat at 20% plus applicable surcharge and 4% health & education cess (surcharge on such gains is capped at 15%), and (b) the balance income, taxed at your normal slab rates or applicable corporate rate. Relief for small resident taxpayers: if you are a resident individual or HUF and your other income is below the basic exemption limit (₹4,00,000 under the default regime for individuals), the unused exemption limit is first reduced from the STCG, and only the balance STCG is taxed at 20%. Non-residents do not get this adjustment.
Interaction with other provisions
- No Chapter VIII deductions against these gains: deductions such as those for LIC/PPF/ELSS, mediclaim, etc. (the 2025 Act's equivalent of the old Chapter VI-A, 80C–80U) can be claimed only against your other income, not against STCG taxed under Section 196.
- Rebate (Section 156, old 87A): under the default new regime, the rebate is generally not available against income taxed at special rates such as Section 196 STCG, following the position clarified by the Finance Act, 2025.
- Section 198 (old 112A): if the same assets are held for more than 12 months, gains become long-term and are taxed at 12.5% above the ₹1.25 lakh annual exemption.
- Losses: short-term capital losses can be set off against these gains (and STCG loss can be set off against both STCG and LTCG), with carry-forward for 8 tax years if the return is filed on time.
Practical implications
- Even if you are in the 5% or nil slab, qualifying STCG is taxed at a flat 20% (subject to the basic-exemption adjustment for residents) — the slab benefit does not apply to these gains beyond that adjustment.
- Selling listed shares off-market (e.g., a private transfer without STT) pushes the gain out of Section 196 into normal slab-rate taxation — which may be better or worse depending on your slab.
- STCG on unlisted shares, debt funds, gold, and property is never covered by Section 196; it is taxed at slab rates.
- Advance tax applies: if your total tax liability (including 20% on STCG) exceeds ₹10,000 in a year, pay advance tax instalments to avoid interest.
💡 Example
Example 1 — Salaried investor: Ananya has a salary of ₹9,00,000 and sells listed shares held for 4 months at a profit of ₹1,50,000 (STT paid on the sale). Her salary is taxed at normal slab rates. Her STCG is taxed separately under Section 196 at 20%: ₹1,50,000 × 20% = ₹30,000, plus 4% cess of ₹1,200 = ₹31,200. She cannot reduce this ₹1,50,000 by investing in ELSS or PPF — those deductions apply only against her salary income.
Example 2 — Retiree using the basic exemption adjustment: Mr. Sharma, a 62-year-old resident, has pension income of ₹2,50,000 and STCG of ₹3,00,000 from equity mutual fund units sold within 8 months. Under the default regime his basic exemption limit is ₹4,00,000. His pension of ₹2,50,000 leaves an unused exemption of ₹1,50,000, which is first adjusted against the STCG. Taxable STCG = ₹3,00,000 − ₹1,50,000 = ₹1,50,000. Tax = 20% × ₹1,50,000 = ₹30,000 + 4% cess = ₹31,200. Had he been a non-resident, the full ₹3,00,000 would be taxed at 20% (₹62,400 with cess).
A short story: Riya, a graphic designer in Jaipur, started investing during a market dip. Five months later her Nifty ETF units were up ₹80,000 and she sold them on the exchange, assuming the profit would simply be added to her modest income and taxed at 5%. At filing time her CA explained that because STT was paid and the holding was under 12 months, Section 196 taxed the gain at a flat 20% — ₹16,640 with cess. Her friend Kabir, who sold unlisted startup shares the same year, paid tax at his slab rate instead, because no STT applied. Riya learnt the golden rule: for listed equity, crossing the 12-month mark converts a 20% STCG into a 12.5% LTCG with a ₹1.25 lakh exemption under Section 198.
| Transaction / Asset | Holding period | STT on sale? | Tax treatment |
|---|
| Listed equity shares sold on exchange | ≤ 12 months | Yes | 20% flat under Section 196 (+ surcharge capped at 15% + 4% cess) |
| Equity-oriented mutual fund units | ≤ 12 months | Yes | 20% flat under Section 196 |
| Units of business trust (REIT / InvIT) | ≤ 12 months | Yes | 20% flat under Section 196 |
| Trade on IFSC exchange (GIFT City), consideration in foreign currency | ≤ 12 months | Not required | 20% under Section 196 (STT condition waived) |
| Listed shares sold off-market (no STT) | ≤ 12 months | No | Normal slab rates — Section 196 does not apply |
| Unlisted shares, debt funds, gold, property (short-term) | As applicable | N.A. | Normal slab rates |
| Listed equity / equity MF / business trust units | > 12 months | Yes | LTCG under Section 198 — 12.5% above ₹1.25 lakh exemption |
Related sections
Frequently asked questions
Which section of the old Income-tax Act, 1961 does Section 196 replace?
Section 196 of the Income-tax Act, 2025 replaces Section 111A of the 1961 Act. The scheme is substantially the same — a special flat rate on STT-paid short-term gains from listed equity, equity mutual funds and business trust units.
What is the STCG tax rate under Section 196?
A flat 20%, plus applicable surcharge (capped at 15% for such gains) and 4% health and education cess. This 20% rate was introduced from 23 July 2024 by the Finance (No. 2) Act, 2024 — earlier it was 15% — and is carried into the 2025 Act.
Can I adjust my basic exemption limit against STCG under Section 196?
Yes, if you are a resident individual or HUF. Where your other income is below the basic exemption limit (₹4,00,000 under the default regime), the unused portion is reduced from the STCG and only the balance is taxed at 20%. Non-residents cannot claim this adjustment.
Can I claim deductions like 80C-type investments (PPF, ELSS, insurance) against this STCG?
No. Chapter VIII deductions under the 2025 Act (the equivalent of old Chapter VI-A) are allowed only against your gross total income as reduced by these capital gains — they cannot reduce STCG taxed under Section 196.
Is the Section 156 (old 87A) rebate available against Section 196 STCG?
Under the default new regime, no — following the clarification made by the Finance Act, 2025, the rebate applies only to income taxed at normal slab rates, not to special-rate income like STCG on listed equity. Check the position for your regime and year before filing.
What if I sell listed shares off-market without paying STT?
Section 196 will not apply because the STT condition fails. The short-term gain is then taxed at your normal slab rates like any other income. The only exception to the STT condition is a trade on an IFSC exchange (such as GIFT City) settled in foreign currency.
Does Section 196 apply to intraday trading or F&O profits?
No. Intraday equity trading is speculative business income and F&O trading is non-speculative business income — both are taxed under the business head at slab rates, not as capital gains under Section 196.
Can I set off losses against STCG taxed under Section 196?
Yes. Short-term capital losses from any capital asset can be set off against these gains. Unabsorbed short-term capital losses can be carried forward for 8 tax years if you file your return by the due date.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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