Section 196 — Tax on short-term capital gains in certain cases. Successor to s.111A of the 1961 Act.
Section 196 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
Sub-section (1) applies where 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 the sale of that share or unit is chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004. In that case the tax payable is the aggregate of income-tax on those short-term capital gains at 20% and income-tax on the balance of total income computed as if that balance were the total income.
Sub-section (2) protects the basic exemption for a resident individual or Hindu undivided family. Where total income as reduced by those short-term capital gains falls below the maximum amount not chargeable to income-tax, the gains are reduced by the shortfall and only the balance is taxed at the rate in sub-section (1)(i). Sub-section (3) disapplies the securities transaction tax condition in sub-section (1)(b) for a transaction on a recognised stock exchange located in an International Financial Services Centre where the consideration is paid or payable in foreign currency. Sub-section (4) requires Chapter VIII deductions to be allowed from gross total income as reduced by these short-term capital gains. Sub-section (5) takes "equity oriented fund" from section 198.
Listed equity gains on which securities transaction tax has already been paid are taxed at a single flat rate rather than at slab rates, so the computation has to be split: the gains at 20% and everything else at the ordinary rates. Sub-sections (2) and (4) then stop that split working unfairly — one preserves the basic exemption for a resident individual or HUF with little other income, the other prevents Chapter VIII deductions being absorbed against income taxed at the flat rate.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Rate on the short-term capital gains | 20% | Gains on an equity share, unit of an equity oriented fund or unit of a business trust, the sale being chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 | Sub-section (1)(i) |
| Rate on the rest of the income | As if the balance amount were the total income of the assessee | The balance of total income after removing the short-term capital gains; the section states no separate rate | Sub-section (1)(ii) |
| Relief where other income is below the exemption limit | The gains are reduced by the amount of the shortfall | Only for a resident individual or Hindu undivided family, and only where total income as reduced by these gains is below the maximum amount not chargeable to income-tax | Sub-section (2) |
The 20% is a flat rate on a carved-out slice, not a rate on total income, and the carve-out has consequences on both sides of the computation. Sub-section (4) requires Chapter VIII deductions to be taken from gross total income reduced by these gains, so an assessee whose income is mostly such gains cannot use those deductions against them. Sub-section (2) works the other way but only for a resident individual or Hindu undivided family: the unused part of the basic exemption is set against the gains before the 20% is applied, and a non-resident or a firm gets no such adjustment. Sub-section (3) is easy to miss — for an International Financial Services Centre trade settled in foreign currency, the section applies even though no securities transaction tax has been paid, because the condition in sub-section (1)(b) is switched off rather than deemed satisfied.
A resident individual has short-term capital gains of Rs. 6 lakh on listed equity shares on which securities transaction tax was paid, and other income of Rs. 1 lakh. If the maximum amount not chargeable to income-tax is Rs. 4 lakh, the other income falls short by Rs. 3 lakh, so sub-section (2) reduces the gains to Rs. 3 lakh and only that is taxed at 20%, giving Rs. 60,000. Had the same gains been earned by a firm or a non-resident, the whole Rs. 6 lakh would bear 20%, because sub-section (2) is confined to a resident individual or Hindu undivided family.
A taxpayer meets this section on the special-rate income schedule of the return of income and in the tax computation of a processing intimation, where equity short-term gains are separated from the rest of total income before the rates are applied.
income-tax calculated on such short-term capital gains at the rate of 20%
the deduction under Chapter VIII shall be allowed from the gross total income as reduced by such capital gains
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
See the circulars index.