Section 198: tax on long-term capital gains in certain cases

When this section applies instead of Section 197

Irrespective of section 197, this section's tax computation applies where all of the following are satisfied:

• The total income includes capital gains chargeable under the head "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 under Chapter VII of the Finance (No. 2) Act, 2004 has been paid - on both acquisition and transfer, for an equity share; or on transfer alone, for a unit of an equity oriented fund or business trust.

The rate

Where these conditions are met, the tax payable on the total income is the aggregate of:

• Income-tax at 12.5% on the long-term capital gains that exceed ₹1,25,000; and
• Income-tax on the total income as reduced by these long-term capital gains, as if that reduced amount were the total income.

Shortfall benefit and other rules

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 gains are reduced by the shortfall before the 12.5% rate is applied to the balance.

The requirement that STT be paid on acquisition (for equity shares) 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.

The Central Government may notify categories of acquisition to which the STT-on-acquisition requirement does not apply.

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

Where the total income includes such long-term capital gains, the rebate under section 156 is allowed from the income-tax on the total income as reduced by the tax payable on these capital gains.

What counts as an "equity oriented fund"

For this section, an equity oriented fund is a fund set up under a mutual fund scheme specified in Schedule VII (Sl. No. 20 or 21) or a non-exempt unit linked insurance policy scheme, meeting minimum equity-investment thresholds:

• Where the fund invests in units of another fund traded on a recognised stock exchange: at least 90% of the fund's proceeds must go into that other fund, and that other fund must in turn invest at least 90% of its proceeds in equity shares of domestic companies listed on a recognised stock exchange.
• In any other case: at least 65% of the fund's proceeds must be invested in equity shares of domestic companies listed on a recognised stock exchange.
• The equity shareholding/unit-holding percentage is computed with reference to the annual average of the monthly averages of opening and closing figures; for a unit linked insurance policy scheme, the 90%/65% threshold must be satisfied throughout the term of the policy.

Frequently asked questions