Section 198 of the Income-tax Act, 2025 taxes long-term capital gains on equity shares, equity-oriented fund units and business trust units, where securities transaction tax has been paid, at 12.5% on gains exceeding ₹1,25,000 in the tax year.
What section 198 does
Section 198 is the provision every equity investor needs — the successor to section 112A of the Income-tax Act, 1961. It overrides section 197 and applies where three conditions are met.
The conditions are: total income includes capital gains; the gains arise from transfer of a long-term capital asset being an equity share in a company, a unit of an equity oriented fund, or a unit of a business trust; and securities transaction tax has been paid — on both acquisition and transfer for an equity share, and on transfer for a fund or business trust unit.
The rate is 12.5%, and it applies only to gains exceeding ₹1,25,000. The first ₹1,25,000 of qualifying long-term gains in a tax year bears no tax at all.
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 |
|---|---|---|
| 112A(1) | Conditions for the concessional equity LTCG rate | 198(1) |
| 112A(2) | Rate and the threshold exemption | 198(2) |
| 112A(3) | STT on acquisition condition | 198(1)(c)(i) |
| 112A(4) | Notified exceptions to the STT-on-acquisition condition | 198(5) |
| 112A(5) | IFSC exception | 198(4) |
| 112A(6) | Chapter VIII deduction on reduced gross total income | 198(6) |
| 112A(7) | Rebate computed excluding this tax | 198(7) |
Section 198 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 three conditions
The section applies irrespective of anything in section 197 where: (a) total income includes income under the head Capital gains; (b) the gains arise from transfer of a long-term capital asset being an equity share in a company, a unit of an equity oriented fund, or a unit of a business trust; and (c) securities transaction tax has been paid — for an equity share, on both acquisition and transfer; for a fund or business trust unit, on transfer.
Sub-section (2) — the rate and the ₹1,25,000 threshold
Tax is the aggregate of (a) income-tax on such long-term capital gains exceeding ₹1,25,000 at 12.5%, and (b) income-tax on the total income as reduced by those gains, as if that were the total income. The ₹1,25,000 is a threshold applied to the gains, not a deduction from income, and it is available once for the tax year across all qualifying transactions.
Sub-section (3) — absorbing the basic exemption limit
For a resident individual or HUF, where total income as reduced by these long-term gains is below the maximum amount not chargeable to tax, the gains are reduced by that shortfall and only the balance is taxed. This operates in addition to the ₹1,25,000 threshold.
Sub-sections (4) and (5) — the STT exceptions
The STT condition in sub-section (1)(c) does not apply to a transfer on a recognised stock exchange in an International Financial Services Centre where the consideration is received or receivable in foreign currency. And the Central Government may, by notification, specify modes of acquisition to which the STT-on-acquisition condition in clause (1)(c)(i) does not apply — which is how IPO allotments, bonus shares and similar acquisitions are preserved.
Sub-sections (6) and (7) — deductions and the rebate
Chapter VIII deductions are allowed from gross total income as reduced by these capital gains. And the section 156 rebate is allowed from income-tax on the total income as reduced by the tax payable on these capital gains — so the rebate cannot be used to wipe out equity capital gains tax.
Sub-section (8) — what an equity oriented fund is
A fund set up under a scheme of a mutual fund specified in Schedule VII (Table serial 20 or 21), or under a scheme of an insurance company comprising unit linked insurance policies to which the Schedule II (Table serial 2) exemption does not apply — subject to minimum investment tests, including a minimum of 90% where the fund invests in units of another exchange-traded fund that itself invests a minimum of 90% in the relevant securities.
Worked example
A resident individual has the following in tax year 2026-27, taxed under section 202(1).
| Item | Working | Amount |
|---|---|---|
| Salary income after standard deduction | — | ₹9,25,000 |
| Long-term gains on listed shares, STT paid on purchase and sale | Qualifying under section 198(1) | ₹4,25,000 |
| Less: threshold under section 198(2)(a) | First ₹1,25,000 of qualifying gains | (₹1,25,000) |
| Taxable long-term capital gains | ₹3,00,000 | |
| Tax on capital gains | 12.5% × ₹3,00,000 | ₹37,500 |
| Tax on the balance income of ₹9,25,000 | Section 202 slabs | ₹32,500 |
Now the point most people get wrong. Total income is ₹13,50,000, so no rebate arises. But even if the salary alone had been within ₹12,00,000, section 198(7) allows the section 156 rebate only against tax on income excluding the capital gains tax — the ₹37,500 would still be payable.
Note also that the ₹1,25,000 threshold is annual and aggregate: it is not available per scrip or per transaction, and unused threshold does not carry forward.
Compliance checklist and due dates
- Confirm STT was paid on acquisition as well as transfer for equity shares; for fund and business trust units, only on transfer.
- Check whether the acquisition falls within a mode notified under sub-section (5) where the acquisition-STT condition does not apply.
- Apply the ₹1,25,000 threshold once for the year across all qualifying gains, not per transaction.
- For a resident individual or HUF with low other income, apply sub-section (3) to absorb gains into the exemption limit.
- Do not expect the section 156 rebate to cover this tax — sub-section (7) excludes it from the rebate base.
- Do not set Chapter VIII deductions against these gains.
- For gains that do not meet the STT conditions, fall back to section 197 at 12.5%.
Common mistakes
- Treating ₹1,25,000 as available per scrip, per folio or per transaction.
- Assuming shares bought before listing or off-market automatically qualify — the acquisition-STT condition must be met or a notification under sub-section (5) must cover the mode.
- Expecting the section 156 rebate to eliminate equity capital gains tax.
- Applying section 197's 20%-with-indexation grandfathering to equity. That is confined to land or building.
- Carrying forward an unused ₹1,25,000 threshold to the next year.
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.