Chapter XIII - Determination of Tax in Special Cases
Section 197
Section 197: general tax on long-term capital gains
Section 197 is the general rule for taxing long-term capital gains under the Income-tax Act, 2025 - a flat 12.5% rate on the gains themselves, with the rest of the total income taxed as if the gains were excluded. It also carries a transitional grandfathering benefit for land or building acquired before 23 July 2024.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income, subject to sub-sections (2), (3) and (4), shall be the aggregate of—
(a) income-tax payable on the total income as reduced by such long-term capital gains, had the total income, as so reduced, been his total income; and
(b) income-tax calculated on such long-term capital gains at the rate of 12.5%.
(2) 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 in sub-section (1).
(3) In the case of an individual or a Hindu undivided family, being a resident, in the case of transfer of a long-term capital asset, being land or building, or both, which was acquired before the 23rd July, 2024, the excess income-tax computed as per the following formula shall be ignored:–– E = A – B where–– E = excess income-tax to be ignored; A = income-tax computed under sub-section (1)(b); B = income-tax computed under sub-section (1)(b) taking the rate as 20% and the capital gains is computed by taking the cost of acquisition as “indexed cost of acquisition” and the cost of improvement as “indexed cost of improvement”.
(4) In the case of an assessee being a non-resident (not being a company) or a foreign company, the long term capital gains arising from the transfer of a capital asset, being unlisted securities or shares of a company not being a company in which the public are substantially interested, shall be computed without giving effect to the provisions under section 72(6).
(5) Where the gross total income of an assessee includes any income arising from the transfer of a long-term capital asset, the gross total income shall be reduced by such income and the deduction under Chapter VIII shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
(6) For the purposes of this section,—
(a) “securities” shall have the same meaning as assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956;
(b) “listed securities” means the securities which are listed on any recognised stock exchange in India;
(c) “unlisted securities” means securities other than listed securities;
(d) “indexed cost of acquisition” and “indexed cost of improvement” shall have the meanings respectively assigned to them in section 72.
Introduction
Section 197 is the general long-term capital-gains tax rule, subject to asset-specific and transitional conditions. It includes a special computation choice for specified land or buildings acquired before 23 July 2024.
Key takeaways
General long-term capital-gain computation
Section 197 taxes long-term capital gains separately from the rest of total income, subject to its special rules.
Resident basic-exemption adjustment
A resident individual or HUF can use the shortfall below the basic exemption against covered long-term gains.
Older land or building can have a comparison
For a resident individual or HUF transferring land or building acquired before 23 July 2024, the section provides the stated comparison to the earlier tax method.
The general rate
Where an assessee's total income includes long-term capital gains chargeable under the head "Capital gains", the tax payable on the total income (subject to the rules below) is the aggregate of:
- Income-tax on the total income as reduced by such long-term capital gains, as if that reduced amount were the total income; and
- Income-tax on the long-term capital gains at the rate of 12.5%.
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 long-term capital gains) is below the maximum amount not chargeable to income-tax, the long-term capital gains are reduced by the amount of that shortfall, and only the balance is taxed at 12.5%.
Grandfathering for land or building acquired before 23 July 2024
For a resident individual or Hindu undivided family transferring long-term capital asset being land or building (or both) acquired before 23 July 2024, an excess amount of income-tax is ignored, computed by the formula E = A - B, where:
- E = the excess income-tax to be ignored;
- A = income-tax computed under the 12.5% rate described above;
- B = income-tax computed by instead taking the rate as 20% and computing the capital gains using "indexed cost of acquisition" and "indexed cost of improvement".
Non-residents and closely held company shares
For an assessee who is a non-resident (not being a company) or a foreign company, long-term capital gains from transfer of unlisted securities or shares of a company in which the public are not substantially interested are computed without giving effect to the indexation provision in section 72(6).
Other rules
Where the gross total income includes long-term capital gains under this section, the gross total income is first reduced by such gains, and Chapter VIII deductions are then allowed as if the reduced amount were the gross total income.
| Term | Meaning (for this section) |
|---|---|
| "Securities" | As defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956 |
| "Listed securities" | Securities listed on a recognised stock exchange in India |
| "Unlisted securities" | Securities other than listed securities |
| "Indexed cost of acquisition" / "indexed cost of improvement" | As defined in section 72 |
Step-by-step flow for applying Section 197
- 1
Does the total income include long-term capital gains chargeable under the head "Capital gains"?
- No: Section 197 is not relevant; tax the total income normally.
- Yes: Go to the next step.
- 2
Is the gain covered by a specific provision such as Section 198 (STT-paid equity shares and equity-oriented or business trust units)?
- Yes: Apply that provision instead of the general rule.
- No: Go to the next step.
- 3
Split the income
Under Section 197(1), tax the total income as reduced by the long-term capital gains as if it were the whole income, and separately tax the long-term capital gains at 12.5%.
- 4
Is the assessee a resident individual or HUF whose other income is below the maximum amount not chargeable to tax?
Under Section 197(2), the long-term capital gains are reduced by that shortfall, and only the balance is taxed at 12.5%.
- 5
Is it land or building (or both) acquired before 23 July 2024, transferred by a resident individual or HUF?
Under Section 197(3), compute A (tax at 12.5% without indexation) and B (tax at 20% using indexed cost of acquisition and improvement). The excess E = A - B is ignored, so the lower figure is effectively payable.
- 6
Apply the remaining rules
A non-resident (not a company) or foreign company computes gains on unlisted securities or closely held company shares without giving effect to Section 72(6) (Section 197(4)). Chapter VIII deductions are allowed only from gross total income as reduced by the long-term capital gains (Section 197(5)).
Practical checklist
Do
- Identify the asset and acquisition date before computing long-term capital gains.
- Check the transitional land/building rule only for an eligible transferor and asset.
Avoid
- Assume the same cost and rate method applies to every long-term asset.
Illustrative example
Worked example: a resident individual sells a plot bought before 23 July 2024
Hypothetical facts (illustration only, not a real taxpayer): Mrs. Iyer, a resident individual, sells a plot of land acquired in 2015. Her long-term capital gain computed without indexation is ₹40,00,000. Her gain computed using indexed cost of acquisition (assumed figure for illustration) is ₹20,00,000. Her other income exceeds the maximum amount not chargeable to tax.
Tax at 12.5% (A)
₹40,00,000 x 12.5% = ₹5,00,000. This is the tax under Section 197(1)(b).
Tax at 20% with indexation (B)
₹20,00,000 x 20% = ₹4,00,000.
Excess to be ignored (E = A - B)
₹5,00,000 - ₹4,00,000 = ₹1,00,000 is ignored under Section 197(3).
Shortfall rule
Because her other income is already above the maximum amount not chargeable to tax, there is no shortfall to set against the gain under Section 197(2).
Outcome
- Tax attributable to the long-term capital gain is ₹4,00,000 (₹5,00,000 less the ignored excess of ₹1,00,000); her other income is taxed separately as if it were her total income.
- If B had been higher than A, there would be no excess to ignore and the 12.5% figure would apply.
- Surcharge and cess, if applicable, are outside this illustration.
Glossary
- Long-term capital gains
- Gains from the transfer of a long-term capital asset chargeable under the head "Capital gains", which Section 197(1) taxes at 12.5%.
- Maximum amount not chargeable to income-tax
- The level of income below which no tax is payable; Section 197(2) lets a resident individual or HUF use any shortfall below it against long-term capital gains. The figure itself is not stated in Section 197.
- Indexed cost of acquisition / improvement
- Costs adjusted as defined in Section 72; used only for the comparison figure B in Section 197(3).
- Unlisted securities
- Securities other than those listed on a recognised stock exchange in India (Section 197(6)(c)).
Frequently asked questions
What is the general tax rate on long-term capital gains?
12.5%, under Section 197, on the gains themselves, with the rest of total income taxed separately.
Is there any relief for land or a house bought before 23 July 2024?
Yes - for a resident individual or HUF, Section 197(3) compares tax at 12.5% (no indexation) with tax at 20% (with indexation) and ignores the excess where the 12.5% figure works out higher, effectively grandfathering the indexation benefit for such assets.
Do non-residents get indexation benefit on unlisted shares?
No - for a non-resident (not a company) or a foreign company, long-term capital gains on unlisted securities or shares of a closely held company are computed without indexation under section 72(6).
How does the shortfall rule in Section 197(2) work?
If a resident individual or HUF has other income below the maximum amount not chargeable to tax, the long-term capital gains are reduced by the unused amount and only the balance is taxed at 12.5%. For example, assuming a non-chargeable limit of ₹4,00,000 (assumed figure), other income of ₹2,50,000 and gains of ₹10,00,000, the shortfall is ₹1,50,000 and tax at 12.5% is computed on ₹8,50,000, i.e. ₹1,06,250 before surcharge and cess.
Need help applying this provision to your situation?
Plan your long-term capital gains tax with our tax teamLast updated 9 October 2026