Income Tax 2025

Appearance

B.—Special provisions relating to tax on capital gains

Tax on shortterm capital gains in certain cases. ​

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 securities transaction tax under Chapter VII of the Finance (No. 2) Act, 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— (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.

196(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 incometax, 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).

196(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 foreign currency.

196(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.

196(5) ​

In this section, “equity oriented fund” shall have the meaning assigned to it in section 198.

Explanation

Section Summary: ​

This section deals with the taxation of short-term capital gains (STCG) arising from the transfer of specific assets like equity shares, units of equity-oriented funds, or units of a business trust. It outlines how the tax is calculated and provides special provisions for certain cases, such as when the total income is below the taxable threshold or when transactions occur in specific financial centers.

Key Changes: ​

  1. Introduction of a 20% tax rate on STCG: For equity shares, units of equity-oriented funds, or units of a business trust, STCG is taxed at a flat rate of 20% if the transaction is subject to Securities Transaction Tax (STT).
  2. Exclusion for International Financial Services Centre (IFSC) transactions: Transactions on recognized stock exchanges in IFSCs, where payment is made in foreign currency, are exempt from the provisions of this section.
  3. Adjustment for individuals/HUFs with low income: If the total income (after excluding STCG) is below the taxable threshold, the STCG is reduced by the shortfall, and tax is calculated only on the remaining STCG.

Practical Implications: ​

  1. For taxpayers:

    • Individuals and HUFs with low income can benefit from reduced tax liability on STCG if their total income (excluding STCG) is below the taxable threshold.
    • Investors in equity shares or equity-oriented funds must pay a flat 20% tax on STCG if the transaction is subject to STT.
    • Transactions in IFSCs (e.g., GIFT City) are exempt from this provision, making them more attractive for foreign currency transactions.

  2. For businesses:

    • Businesses dealing in equity-oriented funds or business trusts must ensure compliance with the 20% STCG tax rate.
    • Transactions in IFSCs can be structured to avoid this tax provision, provided they meet the conditions.

  3. Compliance processes:

    • Taxpayers must accurately calculate STCG and apply the 20% rate where applicable.
    • Deductions under Chapter VIII (e.g., deductions for savings, medical insurance, etc.) must be claimed after reducing the gross total income by the STCG.

Critical Concepts: ​

  1. Short-term capital gains (STCG): Gains arising from the sale of assets held for less than 36 months (or 12 months for listed equity shares/units of equity-oriented funds).
  2. Securities Transaction Tax (STT): A tax levied on the purchase/sale of securities listed on recognized stock exchanges.
  3. Equity-oriented fund: A mutual fund where at least 65% of its total assets are invested in equity shares of domestic companies.
  4. International Financial Services Centre (IFSC): A financial hub like GIFT City, where transactions are conducted in foreign currency and exempt from certain taxes.

Compliance Steps: ​

  1. Identify STCG: Determine if the gains arise from the sale of equity shares, units of equity-oriented funds, or business trusts.
  2. Check STT applicability: Verify if the transaction is subject to STT.
  3. Calculate tax:
    • Apply a 20% tax rate on STCG.
    • Calculate tax on the remaining income (excluding STCG) as per applicable slab rates.
  4. Adjust for low-income individuals/HUFs: If total income (excluding STCG) is below the taxable threshold, reduce STCG by the shortfall and compute tax only on the balance.
  5. Exclude IFSC transactions: Ensure transactions in IFSCs (paid in foreign currency) are excluded from this provision.
  6. Claim deductions: Reduce gross total income by STCG before claiming deductions under Chapter VIII.

Examples: ​

  1. Example 1:

    • An individual earns ₹10 lakh from salary and ₹2 lakh as STCG from selling equity shares (subject to STT).
    • Taxable income (excluding STCG) = ₹10 lakh (below the taxable threshold of ₹12.5 lakh for FY 2023-24).
    • STCG is reduced by ₹2.5 lakh (₹12.5 lakh - ₹10 lakh).
    • Taxable STCG = ₹2 lakh - ₹2.5 lakh = ₹0 (no tax on STCG).
    • Tax is calculated only on ₹10 lakh as per slab rates.

  2. Example 2:

    • A taxpayer earns ₹15 lakh from salary and ₹3 lakh as STCG from selling units of an equity-oriented fund (subject to STT).
    • Tax on STCG = 20% of ₹3 lakh = ₹60,000.
    • Tax on remaining income (₹15 lakh) is calculated as per slab rates.
    • Total tax = Tax on ₹15 lakh + ₹60,000.

  3. Example 3:

    • A transaction involving the sale of equity shares on a recognized stock exchange in an IFSC, paid in USD, is exempt from this provision. No 20% STCG tax applies.