Section 196: tax on short-term capital gains in certain cases

Introduction

Section 196 applies the special short-term capital-gains rate to the specified equity-related transfers. Eligibility depends on the asset, transaction and statutory conditions.

Key takeaways

When the special rate applies

The special rate applies where the assessee's total income includes capital gains from the transfer of a short-term capital asset that is:

• an equity share in a company, a unit of an equity oriented fund, or a unit of a business trust; and
• sold in a transaction on which securities transaction tax is chargeable under Chapter VII of the Finance (No. 2) Act, 2004.

The rate

Where these conditions are met, the tax payable on the total income (subject to the shortfall benefit below) is the aggregate of:

• Income-tax on such short-term capital gains at the rate of 20%; and
• Income-tax on the balance of the total income, as if that balance were the assessee's total income.

Shortfall benefit for resident individuals and HUFs

Where the assessee is a resident individual or Hindu undivided family, and the total income (after excluding these short-term capital gains) is below the maximum amount not chargeable to income-tax, the short-term capital gains are reduced by the amount of that shortfall, and only the balance of the capital gains is taxed at 20%.

IFSC exception and other rules

The securities-transaction-tax condition does not apply to a transaction on a recognised stock exchange located in an International Financial Services Centre, where the consideration is paid or payable in foreign currency.

Where the assessee's gross total income includes short-term capital gains under this section, Chapter VIII deductions are allowed only from the gross total income as reduced by such capital gains.

The expression "equity oriented fund" for this section carries the meaning assigned to it in section 198.

Step-by-step flow for applying Section 196

1. 1

   Is the gain a short-term capital gain on an equity share, a unit of an equity oriented fund, or a unit of a business trust?

   • No: Section 196 does not apply.
   • Yes: Go to the next step.
2. 2

   Was the sale chargeable to securities transaction tax?

   The condition does not apply to a transaction on a recognised stock exchange in an IFSC where the consideration is paid or payable in foreign currency (Section 196(3)).

   • No, and no IFSC exception: Section 196 does not apply.
   • Yes, or IFSC exception applies: Go to the next step.
3. 3

   Is the assessee a resident individual or HUF whose other income is below the maximum amount not chargeable to tax?

   • Yes: Reduce the gain by the shortfall (Section 196(2)).
   • No: Go to the next step.
4. 4

   Compute the tax

   20% on the gain (after any shortfall reduction), plus tax on the balance of total income. Chapter VIII deductions are allowed only from gross total income reduced by these gains (Section 196(4)).

Practical checklist

Glossary

Securities transaction tax

The tax under Chapter VII of the Finance (No. 2) Act, 2004; it must be chargeable on the sale for this section to apply, subject to the IFSC exception.

Shortfall

The amount by which a resident individual's or HUF's other income falls short of the maximum amount not chargeable to tax.

Equity oriented fund

Has the meaning given in Section 198.

Frequently asked questions