Section 197 — Tax on long-term capital gains. Successor to s.112 of the 1961 Act.
Section 197 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
Sub-section (1) splits the computation where total income includes long-term capital gains chargeable under "Capital gains": tax is the aggregate of income-tax on the total income as reduced by those gains, computed as if the reduced figure were the total income, and income-tax on the gains at the rate of 12.5%. This is subject to sub-sections (2), (3) and (4).
Sub-section (2) protects the unused basic exemption of a resident individual or Hindu undivided family: where the total income as reduced by the gains falls below the maximum amount not chargeable to income-tax, the gains are reduced by that shortfall and the balance taxed at the rate in sub-section (1).
Sub-section (3) gives a resident individual or Hindu undivided family a comparison for land or building, or both, acquired before 23 July 2024: the excess income-tax E = A – B is ignored, A being the tax under sub-section (1)(b) and B the tax under that clause taking the rate as 20% with the gains computed using indexed cost of acquisition and indexed cost of improvement.
Sub-section (4) provides that for a non-resident who is not a company, or a foreign company, long-term capital gains on unlisted securities or shares of a company in which the public are not substantially interested are computed without giving effect to section 72(6). Sub-section (5) requires gross total income to be reduced by the long-term capital gains before Chapter VIII deductions are allowed. Sub-section (6) defines "securities", "listed securities" and "unlisted securities", and takes "indexed cost of acquisition" and "indexed cost of improvement" from section 72.
Long-term capital gains are taxed at a flat rate rather than at slab rates, so the section separates them from the rest of the total income before either rate is applied and then puts the two figures back together. Sub-section (2) prevents the flat rate taxing income that would have fallen within the basic exemption. Sub-section (3) is a transitional protection for land and building bought before 23 July 2024.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Rate of tax on long-term capital gains | 12.5% | On the long-term capital gains included in total income, the rest of the income being taxed as if the reduced figure were the total income | Sub-section (1)(b) |
| Comparison rate for the excess to be ignored | 20% | Applied to gains computed with indexed cost of acquisition and indexed cost of improvement; only for a resident individual or HUF, and only for land or building, or both, acquired before 23 July 2024 | Sub-section (3), item B |
| Cut-off date for the sub-section (3) comparison | Acquired before the 23rd July, 2024 | The long-term capital asset must be land or building, or both, and the assessee a resident individual or Hindu undivided family | Sub-section (3) |
| Relief where other income is below the exemption limit | The amount by which the reduced total income falls short of the maximum amount not chargeable to income-tax | Resident individual or Hindu undivided family; the shortfall is set against the long-term capital gains before the rate is applied | Sub-section (2)(a) |
Sub-section (3) is a ceiling, not an alternative rate: the tax is still computed at 12.5% without indexation, and only the excess over what 20% with indexation would have produced is ignored, so where the indexed computation gives the higher figure nothing is ignored. It reaches only a resident individual or Hindu undivided family and only land or building acquired before 23 July 2024. The shelter in sub-section (2) likewise works only for a resident individual or HUF. Sub-section (5) matters at the end: Chapter VIII deductions are allowed after the gains have been taken out of gross total income.
A resident individual with other income of Rs. 2 lakh transfers land acquired in 2015 for a long-term gain of Rs. 30 lakh computed without indexation. Sub-section (2) first sets the shortfall in his other income against the gain, and the balance is taxed at 12.5%. Because the land was acquired before 23 July 2024, sub-section (3) requires the same tax to be worked out at 20% on the indexed gain, and if that is lower the difference is ignored — so he effectively pays the lower of the two.
You meet this section in the tax computation in your own return whenever a long-term capital gain is reported, and in an intimation or assessment order recomputing the split between slab-rate income and the 12.5% gain.
income-tax calculated on such long-term capital gains at the rate of 12.5%
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"
See the full 1961 to 2025 concordance.
See the circulars index.