Section 197 of the Income-tax Act, 2025 taxes long-term capital gains at 12.5%. For a resident individual or HUF transferring land or building acquired before 23 July 2024, any excess over tax computed at 20% with indexation is ignored.
What section 197 does
Section 197 is the general long-term capital gains rate — the successor to section 112 of the Income-tax Act, 1961. The rate written into the Act is 12.5%, applied to the long-term gains, with the rest of the total income taxed as if the gains had not been earned.
The most important sub-section for property owners is (3). For a resident individual or HUF transferring land or building, or both, acquired before 23 July 2024, the Act compares two computations and ignores the excess: tax at 12.5% without indexation, against tax at 20% with indexation. In effect the taxpayer gets whichever is lower.
This grandfathering is written as a formula — E = A − B — rather than as an option, so it operates automatically for those who qualify. It does not extend to non-residents, to companies, or to assets other than land and building.
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 |
|---|---|---|
| 112(1) | Long-term capital gains rate | 197(1) |
| 112, proviso | Relief where income falls below the exemption limit | 197(2) |
| 112(1), proviso | 20% with indexation option for pre-23 July 2024 property | 197(3) |
| 112(1)(c)(iii) | Non-residents and unlisted securities | 197(4) |
| 112(2) | Chapter VIII deduction on reduced gross total income | 197(5) |
| 112A | Listed equity long-term gains | 198 |
Section 197 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 12.5% rate
Where total income includes long-term capital gains, tax is the aggregate of (a) income-tax on the total income as reduced by those gains, as if that were the total income, and (b) income-tax on the long-term capital gains at 12.5%. The gains are therefore carved out and taxed separately rather than added to slab income.
Sub-section (2) — using up the basic exemption limit
For a resident individual or HUF, if total income as reduced by the long-term capital gains falls below the maximum amount not chargeable to tax, the gains are reduced by that shortfall and only the balance is taxed at the section rate. A retiree with little other income can therefore absorb part of the gains into the exemption limit.
Sub-section (3) — grandfathering for property acquired before 23 July 2024
For a resident individual or HUF transferring land or building, or both, acquired before 23 July 2024, the excess income-tax computed as E = A − B is ignored, where A is tax under sub-section (1)(b) — that is, 12.5% without indexation — and B is tax computed at 20% with the cost of acquisition and improvement taken as the indexed figures. Where A exceeds B, the difference is ignored, so the taxpayer effectively pays the lower of the two.
Sub-section (4) — non-residents and unlisted securities
For a non-resident (not being a company) or a foreign company, long-term gains on unlisted securities or shares of a company in which the public are not substantially interested are computed without giving effect to section 72(6) — that is, without the foreign currency conversion mechanism.
Sub-section (5) — Chapter VIII deductions
Where gross total income includes long-term capital gains, the gross total income is reduced by them and Chapter VIII deductions are allowed as if the reduced figure were the gross total income. Deductions such as section 123 or section 126 cannot be set against long-term capital gains.
Sub-section (6) — the definitions
Securities takes its meaning from section 2(h) of the Securities Contracts (Regulation) Act, 1956. Listed securities are those listed on a recognised stock exchange in India, and unlisted securities are everything else. Indexed cost of acquisition and indexed cost of improvement take their meanings from section 72.
Worked example
A resident individual sells a plot in tax year 2026-27. It was purchased in 2015 — that is, before 23 July 2024 — so sub-section (3) applies.
| Computation A: 12.5% without indexation | Computation B: 20% with indexation | |
|---|---|---|
| Sale consideration | ₹1,80,00,000 | ₹1,80,00,000 |
| Cost of acquisition | ₹70,00,000 (actual) | ₹1,26,00,000 (indexed) |
| Long-term capital gains | ₹1,10,00,000 | ₹54,00,000 |
| Rate | 12.5% | 20% |
| Tax | ₹13,75,000 | ₹10,80,000 |
Under sub-section (3), E = A − B = ₹13,75,000 − ₹10,80,000 = ₹2,95,000, and that excess is ignored. The tax payable is therefore ₹10,80,000.
Two limits on this relief are worth noting. It is confined to a resident individual or HUF — a company or a non-resident selling the same plot would pay the full ₹13,75,000. And it applies only to land or building; gold, unlisted shares or other long-term assets acquired before that date get no such comparison.
Compliance checklist and due dates
- Establish the acquisition date of land or building against 23 July 2024 — it decides whether sub-section (3) applies.
- Run both computations (12.5% without indexation and 20% with indexation) for qualifying property and apply the formula.
- Confirm the taxpayer is a resident individual or HUF before relying on sub-section (3).
- Where other income is below the basic exemption limit, use sub-section (2) to absorb part of the gains.
- Do not set Chapter VIII deductions against long-term capital gains; sub-section (5) removes them from the base.
- For listed equity shares and equity-oriented funds with STT paid, use section 198, not section 197.
- Check section 78 for the stamp duty value substitution before fixing the sale consideration.
Common mistakes
- Applying the 20%-with-indexation comparison to assets other than land or building.
- Claiming it for a company, a firm or a non-resident. Sub-section (3) is confined to a resident individual or HUF.
- Using the property's sale date rather than its acquisition date for the 23 July 2024 test.
- Setting off section 123 or section 126 deductions against long-term capital gains.
- Applying section 197 to STT-paid listed equity gains, which fall under section 198 with its ₹1,25,000 threshold.
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.