Income Tax 2025

Appearance

Tax on longterm capital gains in certain cases. ​

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 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.

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.

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).

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.

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.

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.

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.

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.

Explanation

Section Summary: ​

Section 198 of the Income Tax Act deals with the taxation of long-term capital gains (LTCG) arising from the transfer of specific capital assets, such as equity shares in a company, units of equity-oriented mutual funds, or units of a business trust. The section provides a special tax calculation method for such gains, ensuring that they are taxed at a concessional rate of 12.5% (after a basic exemption limit of ₹1,25,000) and outlines conditions under which this treatment applies. It also includes provisions for exemptions in certain cases, such as transfers in International Financial Services Centres (IFSCs).

Key Changes: ​

  1. Introduction of Concessional Tax Rate: LTCG on equity shares, equity-oriented mutual funds, and units of business trusts are taxed at 12.5% (after a basic exemption of ₹1,25,000). This is a specific carve-out from the general LTCG tax rate.
  2. Securities Transaction Tax (STT) Condition: The concessional tax rate applies only if STT has been paid on the acquisition and transfer of equity shares or on the transfer of units of equity-oriented funds or business trusts.
  3. Exemption for IFSC Transactions: Transfers on recognized stock exchanges in IFSCs, where consideration is received in foreign currency, are exempt from the STT condition.
  4. Adjustments for Low-Income Individuals/HUFs: If an individual or HUF’s total income (excluding LTCG) is below the taxable threshold, the LTCG is reduced by the shortfall, and tax is calculated on the remaining amount.
  5. Interaction with Deductions and Rebates: Deductions under Chapter VIII and rebates under Section 156 are calculated after reducing the gross total income by LTCG.

Practical Implications: ​

  1. For Investors in Equity Markets: Investors earning LTCG from equity shares or equity-oriented funds will benefit from the concessional tax rate, provided STT has been paid. This encourages long-term equity investments.
  2. For Transactions in IFSCs: Investors transferring assets in IFSCs (with consideration in foreign currency) are exempt from the STT condition, making IFSCs more attractive for international transactions.
  3. For Low-Income Individuals/HUFs: Individuals or HUFs with total income below the taxable threshold can reduce their LTCG liability by the amount of the shortfall, ensuring they are not unfairly taxed.
  4. For Mutual Funds and Business Trusts: Funds must ensure compliance with the 65% or 90% equity investment thresholds to qualify as "equity-oriented funds" and avail the concessional tax rate.

Critical Concepts: ​

  1. Long-Term Capital Gains (LTCG): Gains arising from the sale of capital assets held for more than 12 months (for equity shares and equity-oriented funds) or 36 months (for other assets).
  2. Securities Transaction Tax (STT): A tax levied on the purchase and sale of securities listed on recognized stock exchanges. It is a prerequisite for availing the concessional LTCG tax rate.
  3. Equity-Oriented Fund: A mutual fund or unit-linked insurance policy that invests at least 65% or 90% of its proceeds in equity shares of domestic companies listed on recognized stock exchanges.
  4. International Financial Services Centre (IFSC): A special economic zone designed to facilitate international financial services, such as the Gujarat International Finance Tec-City (GIFT City).

Compliance Steps: ​

  1. Verify STT Payment: Ensure STT has been paid on the acquisition and transfer of equity shares or on the transfer of units of equity-oriented funds or business trusts.
  2. Calculate LTCG: Compute LTCG by deducting the cost of acquisition and indexed cost of improvement (if applicable) from the sale consideration.
  3. Apply Basic Exemption: Deduct ₹1,25,000 from the LTCG before applying the 12.5% tax rate.
  4. Adjust for Low-Income Individuals/HUFs: If total income (excluding LTCG) is below the taxable threshold, reduce LTCG by the shortfall and calculate tax on the remaining amount.
  5. File Accurate Returns: Report LTCG separately in the income tax return and ensure compliance with documentation requirements.

Examples: ​

  1. Example 1: An individual sells equity shares held for 2 years, realizing LTCG of ₹2,00,000. STT was paid on both acquisition and transfer. The taxable LTCG is ₹2,00,000 - ₹1,25,000 = ₹75,000. Tax payable = 12.5% of ₹75,000 = ₹9,375.
  2. Example 2: An HUF has total income (excluding LTCG) of ₹2,00,000 and LTCG of ₹1,00,000. The taxable threshold is ₹2,50,000. The shortfall is ₹50,000. Taxable LTCG = ₹1,00,000 - ₹50,000 = ₹50,000. Tax payable = 12.5% of ₹50,000 = ₹6,250.
  3. Example 3: A unit of an equity-oriented fund is sold on a stock exchange in an IFSC, with consideration received in USD. The STT condition does not apply, and the concessional tax rate is available without verifying STT payment.

This section simplifies the taxation of LTCG for specific assets while ensuring compliance with STT requirements and promoting investments in IFSCs.