Section 196 of the Income-tax Act, 2025 taxes short-term capital gains on equity shares, equity-oriented fund units and business trust units, where the sale is chargeable to securities transaction tax, at 20% instead of slab rates.
What section 196 does
Section 196 is the short-term counterpart to section 198 — the successor to section 111A of the Income-tax Act, 1961. Where it applies, short-term gains are taxed at a flat 20% instead of being added to slab income.
The conditions are narrower than for long-term gains. The asset must be an equity share in a company, a unit of an equity oriented fund or a unit of a business trust, and the sale transaction must be chargeable to securities transaction tax. Note that only the sale needs to attract STT — there is no acquisition condition as there is in section 198.
Unlike section 198, there is no threshold. The 20% applies from the first rupee of qualifying short-term gains.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 111A(1) | Concessional rate for STT-paid short-term equity gains | 196(1) |
| 111A(1), proviso | Relief where other income is below the exemption limit | 196(2) |
| 111A(3) | IFSC exception to the STT condition | 196(3) |
| 111A(2) | Chapter VIII deduction on reduced gross total income | 196(4) |
| 112A | Long-term equity gains | 198 |
| 112 | General long-term capital gains | 197 |
Section 196 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the 20% rate and its conditions
Where total income includes capital gains from the transfer of a short-term capital asset being (a) an equity share in a company, a unit of an equity oriented fund, or a unit of a business trust, and (b) the transaction of sale is chargeable to securities transaction tax, tax is the aggregate of income-tax on those gains at 20% and income-tax on the balance of total income as if that balance were the total income.
Sub-section (2) — absorbing the basic exemption limit
For a resident individual or HUF, where total income as reduced by these short-term gains is below the maximum amount not chargeable to tax, the gains are reduced by the shortfall and only the balance is taxed at 20%. A taxpayer with modest other income can therefore shelter part of the gains within the exemption limit.
Sub-section (3) — the IFSC exception
The STT condition in clause (1)(b) does not apply to a transaction undertaken on a recognised stock exchange located in an International Financial Services Centre where the consideration is paid or payable in foreign currency.
Sub-section (4) — Chapter VIII deductions
Where gross total income includes short-term capital gains referred to in sub-section (1), Chapter VIII deductions are allowed from the gross total income as reduced by those gains. Deductions such as section 123 cannot be set against this concessionally taxed income.
Sub-section (5) — the definition
Equity oriented fund has the meaning assigned in section 198 — the long-term provision — so a single definition, with its 90% investment tests, governs both sections.
Worked example
A resident individual aged 40 has the following in tax year 2026-27.
| Item | Amount |
|---|---|
| Short-term gains on listed shares sold on an exchange with STT paid | ₹6,00,000 |
| Other income (interest) | ₹2,80,000 |
Assume the maximum amount not chargeable to tax is ₹4,00,000 under the section 202 slab table.
| Step | Working | Amount |
|---|---|---|
| Total income as reduced by the short-term gains | ₹2,80,000 | Below ₹4,00,000 |
| Shortfall | ₹4,00,000 − ₹2,80,000 | ₹1,20,000 |
| Short-term gains reduced under sub-section (2)(a) | ₹6,00,000 − ₹1,20,000 | ₹4,80,000 |
| Tax on the reduced gains | 20% × ₹4,80,000 | ₹96,000 |
| Tax on the other income of ₹2,80,000 | Absorbed into the exemption limit | Nil |
Without sub-section (2), the ₹1,20,000 of unused exemption limit would have been wasted and the tax would have been ₹1,20,000 — a saving of ₹24,000 from that one provision.
Contrast this with unlisted shares sold within the short-term holding period, or an off-market sale with no STT: those gains do not qualify for section 196 and are added to total income at slab rates.
Compliance checklist and due dates
- Confirm the sale attracted securities transaction tax; unlike section 198, acquisition STT is not required.
- Check the asset is an equity share, an equity oriented fund unit, or a business trust unit — debt fund and unlisted share gains do not qualify.
- For a resident individual or HUF with low other income, apply sub-section (2) to absorb the exemption limit.
- Do not set Chapter VIII deductions against these gains; sub-section (4) removes them from the base.
- Remember there is no ₹1,25,000 threshold here — that belongs to section 198 for long-term gains.
- For an IFSC exchange transaction in foreign currency, rely on sub-section (3) to disapply the STT condition.
Common mistakes
- Applying the ₹1,25,000 threshold to short-term gains. It exists only in section 198.
- Treating off-market or unlisted share gains as eligible for 20%; they are taxed at slab rates.
- Overlooking sub-section (2) and paying 20% on the entire gain when other income is below the exemption limit.
- Setting section 123 or section 126 deductions against these gains.
- Confusing the equity oriented fund definition — it comes from section 198, including the 90% investment tests.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.