Section 198 · Special cases
Section 198 of the Income-tax Act, 2025 — Tax on Long-Term Capital Gains from Listed Equity Shares, Equity Mutual Funds and Business Trusts (12.5% LTCG Rule)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 198, Income-tax Act 2025
198. (1) Irrespective of anything contained in section 197, the tax payable by an
assessee on his total income shall be determined as per the provisions of
sub-section (2), if—
(a) the total income includes any income chargeable under the head “Capital
gains”;
(b) the capital gains arise from the transfer of a long-term capital asset being
an equity share in a company or a unit of an equity oriented fund or a
unit of a business trust;
(c) securities transaction tax under Chapter VII of the Finance (No. 2) Act,
2004 (23 of 2004) has—
(i) in a case where the long-term capital asset is in the nature of an
equity share in a company, been paid on acquisition and transfer
of such capital asset; or
(ii) in a case where the long-term capital asset is in the nature of a unit
of an equity oriented fund or a unit of a business trust, been paid
on transfer of such capital asset.
(2) The tax payable by the assessee on the total income referred to in sub-section
(1) shall be the aggregate of—
(a) income-tax calculated on such long-term capital gains exceeding
` 125000 at the rate of 12.5%; and
(b) income-tax payable on the total income as reduced by long-term capital
gains referred to in sub-section (1) as if the total income so reduced were
the total income of the assessee.
(3) In the case of an individual or a Hindu undivided family, being a resident, where
the total income as reduced by long-term capital gains computed under sub-section
(1) is below the maximum amount which is not chargeable to income-tax, then,—
(a) such long-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 long-term capital gains shall be computed
at the rate as referred to in sub-section (2).
(4) The condition specified in sub-section (1)(c) shall not apply to a transfer under-
taken on a recognised stock exchange located in any International Financial Services
Centre and where the consideration for such transfer is received or receivable in
foreign currency.
(5) The Central Government may, by notification, specify the nature of acquisition
in respect of which the provisions of sub-section (1)
In plain language
What Section 198 is all about
Section 198 of the Income-tax Act, 2025 (effective from 1 April 2026, i.e., Tax Year 2026-27 onwards) is the special provision that taxes long-term capital gains (LTCG) from the stock market. It replaces the well-known Section 112A of the Income-tax Act, 1961, carrying forward the same scheme with renumbered cross-references. In plain words: when you sell listed equity shares, units of an equity-oriented mutual fund, or units of a business trust (REITs/InvITs) after holding them long enough to be "long-term", your gain is not taxed at your normal slab rate. Instead, gains above ₹1,25,000 in a tax year are taxed at a flat 12.5% (plus surcharge and 4% cess), without indexation.
Who it applies to
- All taxpayers — resident and non-resident individuals, HUFs, firms, companies, NRIs and FPIs — whose total income includes LTCG from the three specified assets.
- Assets covered: (a) equity shares of a company, (b) units of an equity-oriented fund, and (c) units of a business trust.
- The asset must be a long-term capital asset — for these listed securities, a holding period of more than 12 months.
Key conditions under Section 198(1)
- STT condition for shares: Securities Transaction Tax must have been paid on both acquisition and sale of the equity shares (with the Central Government empowered under sub-section (5) to notify acquisitions — such as IPO allotments, bonus, rights, ESOPs, gifts and inheritance — where the acquisition-side STT condition is relaxed, continuing the position under the old-law notification).
- STT condition for units: For equity-oriented fund units and business trust units, STT is required only on the sale.
- IFSC carve-out (sub-section (4)): The STT condition does not apply at all to transfers on a recognised stock exchange in an International Financial Services Centre (GIFT City) where the consideration is received in foreign currency.
How the tax is computed — sub-sections (2) and (3)
- Step 1: Aggregate all Section 198 LTCG for the year. The first ₹1,25,000 is tax-free (this is a yearly aggregate limit, not per share or per fund).
- Step 2: Tax the excess at 12.5% flat. No indexation benefit is available, and losses/expenses follow normal capital gains computation rules.
- Step 3 — basic exemption adjustment: For a resident individual or HUF, if other income is below the basic exemption limit, the unused exemption limit is first reduced from the LTCG, and only the balance is taxed at 12.5%. Non-residents do not get this adjustment.
What you cannot claim against these gains
- No Chapter VIII deductions (old Chapter VI-A — 80C, 80D etc.): Sub-section (6) allows these deductions only against income other than Section 198 gains.
- No Section 156 rebate (old Section 87A): Sub-section (7) computes the rebate only on tax excluding the tax on these LTCG — so even small taxpayers pay the 12.5% on gains above ₹1.25 lakh.
Interaction with related provisions
- Section 196 taxes short-term gains on the same STT-paid assets at 20% (old Section 111A).
- Section 197 is the residual LTCG rate section for other assets — land, unlisted shares, gold, debt funds (old Section 112).
- Grandfathering continues: for shares/units bought before 1 February 2018, the cost of acquisition is stepped up to the fair market value as on 31 January 2018 under the cost-of-acquisition rules of the 2025 Act, so pre-2018 appreciation stays untaxed.
- Equity-oriented fund (sub-section (8)): a fund investing at least 65% in listed equity shares of domestic companies (or 90% in the fund-of-fund structure).
- Surcharge on this LTCG is capped at 15% even for high-income taxpayers.
Practical implications
- Use "tax-gain harvesting": book up to ₹1.25 lakh of LTCG every year tax-free and reinvest.
- Report these gains in the capital gains schedule of your ITR with ISIN-wise details; brokers and RTAs issue capital gains statements that map to it.
- Long-term capital losses on equity can be set off against these gains and carried forward for 8 years if the return is filed on time.
💡 Example
Example 1 — Simple case: Priya sells listed shares in December 2026 that she bought in 2022 (STT paid on both legs). Her LTCG is ₹4,00,000. Exempt portion: ₹1,25,000. Taxable LTCG: ₹2,75,000. Tax at 12.5% = ₹34,375; add 4% health and education cess ₹1,375. Total tax on the gains: ₹35,750 — regardless of whether her salary puts her in the 30% slab.
Example 2 — Basic exemption adjustment for a retiree: Sharma ji, a 62-year-old resident with pension income of ₹2,00,000, earns LTCG of ₹5,00,000 on equity mutual funds. His other income is ₹2,00,000 below the ₹4,00,000 basic exemption limit (new regime), so his LTCG is first reduced by that ₹2,00,000 shortfall → ₹3,00,000. From this, the ₹1,25,000 exemption is applied → taxable LTCG ₹1,75,000. Tax = 12.5% × ₹1,75,000 = ₹21,875 + cess ₹875 = ₹22,750. A non-resident with identical numbers would pay 12.5% on ₹3,75,000 (₹5,00,000 − ₹1,25,000) = ₹46,875 plus cess, since the shortfall adjustment is only for residents.
A short story: Rakesh, a schoolteacher in Jaipur, started a ₹5,000 monthly SIP in an equity fund in 2019. In 2027 he redeemed units for his daughter's college admission, making a gain of ₹1,10,000. His CA smiled and told him the tax was zero — the entire gain sat within the ₹1.25 lakh annual exemption under Section 198. The next year, the CA advised him to redeem and reinvest units each March to "harvest" the exemption annually, so his growing corpus never builds up a large taxable gain in a single year.
| Feature | Section 198, Income-tax Act 2025 (old S.112A) |
|---|
| Assets covered | Listed equity shares, equity-oriented fund units, business trust (REIT/InvIT) units |
| Holding period for "long-term" | More than 12 months |
| Exemption threshold | First ₹1,25,000 of aggregate LTCG per tax year |
| Tax rate on excess | 12.5% flat (+ surcharge capped at 15% + 4% cess); no indexation |
| STT condition | Shares: on purchase and sale; Units: on sale only; waived for IFSC trades in foreign currency |
| Basic exemption adjustment | Available to resident individuals/HUF only — unused exemption limit reduces taxable LTCG |
| Chapter VIII deductions (old 80C–80U) | Not allowed against these gains |
| Section 156 rebate (old 87A) | Not available against tax on these gains |
| Grandfathering | Cost stepped up to FMV as on 31 January 2018 for assets acquired before 1 February 2018 |
Related sections
Section 196 — Tax on short-term capital gains from STT-paid equity (old Section 111A) Section 197 — Tax on long-term capital gains on other assets (old Section 112) Section 156 — Rebate for resident individuals (old Section 87A) Section 67 — Charge of capital gains (old Section 45) Sections 85–88 — Reinvestment exemptions on capital gains (old Sections 54 to 54F)
Frequently asked questions
Is Section 198 of the Income-tax Act, 2025 the same as Section 112A of the old Act?
Yes. Section 198 carries forward Section 112A of the Income-tax Act, 1961 into the new Act effective 1 April 2026 — same 12.5% rate, same ₹1.25 lakh exemption and same STT conditions, with only internal cross-references renumbered.
Is the ₹1.25 lakh exemption per transaction, per fund or per year?
It is a single aggregate limit per tax year across all your Section 198 assets combined — stocks, equity mutual funds and business trust units together. Gains beyond ₹1.25 lakh in the year are taxed at 12.5%.
Can I claim 80C-type deductions or the Section 156 (old 87A) rebate against this LTCG?
No. Chapter VIII deductions can only be claimed against your other income, and the rebate under Section 156 is computed excluding the tax on these long-term capital gains, so it cannot wipe out this LTCG tax.
Do I get indexation benefit on equity LTCG under Section 198?
No. The 12.5% rate applies to the plain gain without cost inflation indexation. However, shares and units bought before 1 February 2018 keep the grandfathering benefit — cost is stepped up to the FMV as on 31 January 2018.
What if my total income is below the basic exemption limit?
If you are a resident individual or HUF, the unused portion of your basic exemption limit is first reduced from the LTCG, and only the balance above ₹1.25 lakh is taxed at 12.5%. Non-residents do not get this adjustment.
Does Section 198 apply if no STT was paid, for example on unlisted shares or off-market sales?
No. Without STT on the specified legs of the transaction, the gains fall under Section 197 (old Section 112) instead. Exceptions exist for government-notified acquisition modes (like IPOs, bonus and rights issues) and for trades on IFSC exchanges settled in foreign currency.
Can I set off losses against Section 198 gains?
Yes. Long-term capital losses (including on equity) can be set off against these gains, and unabsorbed losses can be carried forward for 8 years provided 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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