Tax on long-term capital gains in certain cases
[Section-198 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 198(1) of 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—
- 198(1)(a) the total income includes any income chargeable under the head “Capital gains”;
- 198(1)(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;
- 198(1)(c) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 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.
Section 198(2) of Income Tax Act 2025
198(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 one lakh twenty five thousand rupees on long-term capital gains 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.
Section 198(3) of Income Tax Act 2025
198(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).
Section 198(4) of Income Tax Act 2025
198(4) The condition specified in sub-section (1)(c) shall not apply to a transfer undertaken 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.
Section 198(5) of Income Tax Act 2025
198(5) The Central Government may, by notification, specify the nature of acquisition in respect of which the provisions of sub-section (1)(c)(i) shall not apply.
Section 198(6) of Income Tax Act 2025
198(6) Where the gross total income of an assessee includes any long-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.
Section 198(7) of Income Tax Act 2025
198(7) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 156 shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.
Section 198(8) of Income Tax Act 2025
198(8) In this section, “equity oriented fund” means a fund set up under a scheme of a mutual fund specified in Schedule VII (Table: Sl. No. 20 or 21) or under a scheme of an insurance company comprising unit linked insurance policies to which exemption in Schedule II (Table: Sl. No. 2) does not apply and—
- (i) in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,—
- (A) a minimum of 90% of the total proceeds of such fund is invested in the units of such other fund; and
- (B) such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and
- (ii) in any other case, a minimum of 65% of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange,
- and, for the purposes of this clause,––
- (I) the percentage of equity shareholding or unit held in respect of the fund, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;
- (II) in case of a scheme of an insurance company comprising unit linked insurance policies to which exemption in Schedule II (Table: Sl. No. 2) does not apply, the minimum requirement of 90% or 65%, as the case may be, is required to be satisfied throughout the term of such insurance policy.
FAQs on Section 198 of Income Tax Act 2025
What type of capital asset is covered under Section 198?
Section 198 applies to long-term capital assets being equity shares in a company, units of an equity-oriented fund, or units of a business trust.
When is tax under Section 198 applicable?
Tax under Section 198 is applicable when long-term capital gains arise from specified capital assets and securities transaction tax (STT) has been paid as prescribed.
What is the rate of tax on long-term capital gains under Section 198?
The tax is levied at 12.5% on long-term capital gains exceeding ₹1,25,000.
Is any basic exemption available from long-term capital gains under this section?
Yes, long-term capital gains up to ₹1,25,000 are exempt from tax under Section 198(2)(a).
How is the remaining total income taxed under this section?
The balance of total income, excluding the specified long-term capital gains, is taxed at normal rates applicable to the assessee under Section 198(2)(b).
Is there any benefit available if the assessee’s total income excluding capital gains is below the basic exemption limit?
Yes, for a resident individual or HUF, if the total income excluding long-term capital gains is below the exemption limit, the shortfall can be adjusted against the capital gains under Section 198(3).
What happens to the tax rate on the remaining long-term capital gains after the exemption adjustment?
After adjusting the shortfall, tax on the balance long-term capital gains is computed at 12.5% under Section 198(3)(b).
Is STT payment mandatory for taxability under this section?
Yes, STT must be paid on acquisition and transfer (for equity shares) or at least on transfer (for units of equity-oriented funds or business trusts) as per Section 198(1)(c).
Is there any exception to the STT condition?
Yes, the STT condition does not apply if the transfer takes place on a recognised stock exchange in an International Financial Services Centre and the consideration is received in foreign currency, as per Section 198(4).
Can the government notify exceptions to the STT requirement?
Yes, the Central Government may notify cases where STT on acquisition of equity shares is not mandatory under Section 198(5).
Can deductions under Chapter VIII be claimed against such long-term capital gains?
No, deductions under Chapter VIII are not allowed on the portion of long-term capital gains referred to in Section 198(1), as per Section 198(6).
Can rebate under Section 156 be availed on tax payable on such capital gains?
No, rebate under Section 156 is allowed only after reducing the tax payable on such long-term capital gains, as per Section 198(7).
What is the meaning of ‘equity-oriented fund’ under this section?
An equity-oriented fund is defined based on investment patterns into equity shares or units of other equity funds, subject to specified percentages and conditions under Section 198(8).
What is the investment condition for a fund to be treated as equity-oriented when it invests in another fund?
Both the investing fund and the target fund must each invest at least 90% of their proceeds in equity shares of listed domestic companies.
What is the investment condition for other cases of equity-oriented funds?
In other cases, at least 65% of the fund’s proceeds must be invested in listed domestic equity shares.
How are the percentage conditions for equity-oriented funds computed?
The percentage is calculated using the annual average of monthly averages of opening and closing figures of investments, as per Section 198(8)(I).
Are there any special requirements for ULIPs under the definition of equity-oriented fund?
Yes, in the case of unit linked insurance policies (ULIPs), the 90% or 65% investment condition must be met throughout the term of the policy, as per Section 198(8)(II).
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