Section 196, Income-tax Act 2025: Tax on short-term capital gains in certain cases

What was Section 111A, and where did it go in the 2025 Act?

Section 111A of the Income-tax Act 1961 is the provision that taxes short-term gains on listed equity at a special flat rate. The Income-tax Act 2025 carries it forward and re-addresses it as Section 196, titled "Tax on short-term capital gains in certain cases". The tax itself does not change: the same 20% rate, the same 12-month holding test and the same STT condition move across intact. Only the number on the door is new.

One thing did change recently, and it was a rate hike rather than a renumbering. For years Section 111A charged 15%. Budget 2024 raised it to 20% for every transfer on or after 23 July 2024, and Section 196 inherits that 20%. So the headline figure many investors still carry in their heads, 15%, is out of date: a listed share sold today is taxed at 20% on the gain.

The 2025-Act number (196) and its title are cross-checked against multiple published copies of the enacted Act.†

Which shares and funds does Section 196 cover?

Three asset types, and only when Securities Transaction Tax has been paid on the sale. The flat 20% rate is reserved for trading on a recognised Indian stock exchange, so the STT charged on that trade is what buys you into Section 196. An off-market transfer that skips STT does not get the 20% rate; it is taxed at your slab rate instead.

The section applies to a short-term gain on:

• Equity shares in a company listed on a recognised Indian stock exchange, where STT was paid on the sale.
• Units of an equity-oriented mutual fund (a fund that holds at least 65% in domestic equity), where STT was paid on the sale.
• Units of a business trust (a REIT or an InvIT), where STT was paid on the sale.

One carve-out relaxes the STT rule: a transfer on a recognised stock exchange in an International Financial Services Centre (IFSC), settled in foreign currency, gets the 20% rate even though STT is not charged there.†

What makes a gain short-term, and which date sets the rate?

A listed share, an equity-fund unit or a business-trust unit is short-term when you hold it for 12 months or less. Sell on day 366 or later and the gain is long-term, taxed under Section 198 (old Section 112A) at 12.5% with a ₹1.25 lakh yearly exemption. That 12-month line is the single switch between the two regimes for these assets.

The date that fixes your rate is the date of sale, not the date you bought. Because Budget 2024 changed the rate mid-year, a sale on 22 July 2024 was taxed at 15% and the very next day's sale at 20%, whenever either holding was purchased. For any sale in TY 2026-27 the rate is simply 20%.

Count the holding period from the day after purchase to the date of transfer. For shares bought in tranches, each lot has its own clock, and brokers apply first-in-first-out when you sell only part of a holding.

How much tax: 20%, plus 4% cess, with the surcharge capped at 15%

20% on the whole short-term gain, plus 4% health-and-education cess, plus surcharge if your income is high enough. There is no tax-free slice to subtract first: unlike a long-term gain, every rupee of a Section 196 gain is taxed. The table sets the current rate against the pre-2024 one so you can read a past sale correctly too.

Surcharge on Section 196 gains is capped at 15%, even for incomes above ₹2 crore where other income would attract 25%. The enhanced 25% and old-regime 37% surcharge rates never apply to these gains, which holds the all-in top rate at about 23.9% (20%, plus a 15% surcharge, plus 4% cess).

Why there is no ₹1.25 lakh exemption on short-term gains

The ₹1.25 lakh annual exemption belongs to long-term equity gains under Section 198, not to short-term gains under Section 196. People mix the two up constantly. If you sold within 12 months, none of your gain is sheltered by that allowance, and the 20% applies from the first rupee of gain.

That absence is the real cost of selling early. On a ₹2,00,000 gain, a long-term seller pays 12.5% on ₹75,000 (the balance after the ₹1.25 lakh exemption), which is ₹9,375; a short-term seller pays 20% on the whole ₹2,00,000, which is ₹40,000. Same gain, more than four times the tax, purely because the holding was under 12 months.

The only relief that can shrink a short-term gain is the resident basic-exemption absorption in the next section, and it helps only when your other income is below the basic exemption limit.

How a resident's basic exemption limit can absorb your STCG

A resident individual or HUF can dip into any unused basic exemption limit to reduce these gains. If your other income does not fill the basic exemption (₹4,00,000 under the new regime for TY 2026-27, ₹2,50,000 under the old regime for those below 60), the shortfall is knocked off your short-term gain before the 20% is applied. This is written into Section 196(2)†, and it is a resident-only benefit: a non-resident pays 20% on the full gain with no absorption.

Say your only other income for the year is ₹2,50,000 of interest and you booked a ₹3,00,000 short-term equity gain, all under the new regime. Your other income sits ₹1,50,000 below the ₹4,00,000 exemption, so ₹1,50,000 of the gain is absorbed and only the remaining ₹1,50,000 is taxed at 20%, giving ₹30,000 plus ₹1,200 cess. Without this rule the whole ₹3,00,000 would have been taxed.

Order matters: your normal income uses the basic exemption first, and only what is left over can shelter the capital gain. If salary or business income already exceeds the exemption, there is nothing left to absorb.

How to calculate the tax, step by step

For each sale, then for the year as a whole:

• Confirm the holding period is 12 months or less and STT was paid on the sale, so the gain falls under Section 196 and not your slab.
• Gain on the sale = sale value, less the purchase cost, less the brokerage and transaction charges the rules allow. The STT itself is not deductible.
• Add up every such short-term gain and loss for the year. A short-term loss on one trade nets against a short-term gain on another.
• If you are a resident and your other income is below the basic exemption limit, reduce the net gain by that shortfall (Section 196(2)†).
• Tax the balance at 20%, add the 4% cess, and add surcharge (capped at 15%) if your income crosses the surcharge thresholds.

Chapter VIII deductions (the new-Act home of 80C, 80D and the rest) cannot be set against this gain, and the Section 87A rebate cannot wipe out the 20%. Both points are covered below.

Short-term gains that fall outside Section 196 (and pay slab rates instead)

Section 196 is narrow: it covers only STT-paid listed equity, equity mutual funds and business-trust units. Every other short-term capital gain is added to your income and taxed at your normal slab rate, which for many people is higher than 20%. This is where the 20% headline misleads, because it does not cover most assets.

Taxed at slab rates as short-term gains, not at the 20% flat rate:

• Listed shares or equity-fund units sold off-market, where no STT was paid on the sale.
• Unlisted shares and shares of private companies (short-term if held for 24 months or less).
• Property, land and buildings (short-term if held for 24 months or less).
• Gold, jewellery and other physical assets (short-term if held for 24 months or less).
• Debt mutual funds bought on or after 1 April 2023, whose gains are always treated as short-term and taxed at slab rates whatever the holding period.

So a 30%-slab taxpayer pays 30% on a short-term property, gold or debt-fund gain, but only 20% on an STT-paid listed-equity gain. The concessional 20% is reserved for on-exchange equity.

No Chapter VIII deductions, and no 87A rebate, against these gains

Two familiar tax-savers do not work on a Section 196 gain. First, deductions under Chapter VIII of the 2025 Act (the new home of 80C, 80D, 80CCD and the rest) are allowed only against your other income, not against this gain. Section 196(4)† provides that the deductions come out of the gross total income as reduced by these capital gains, so a full ₹1.5 lakh 80C basket cannot shave a rupee off the 20% due on your shares.

Second, the Section 87A rebate (whose 2025-Act successor is Section 156) does not apply to this tax. The rebate can zero the tax on ordinary income up to ₹12 lakh under the new regime, but the Finance Act 2025 made explicit that it is computed on normal income only and cannot be set against special-rate income. Short-term gains under Section 196 are special-rate income, so the rebate leaves them untouched.

The result trips people up. Suppose your salary after the standard deduction is ₹7,00,000 and you also booked a ₹2,00,000 short-term equity gain under the new regime. Your total income is ₹9,00,000, comfortably inside the ₹12 lakh rebate limit, so your salary tax is fully rebated to zero. The gain is not: ₹2,00,000 at 20% is ₹40,000, plus ₹1,600 cess, ₹41,600 payable. Worked example 3 runs this end to end.

Section 156 is the 2025-Act home of the 87A rebate.†

Setting off and carrying forward a short-term capital loss

A short-term capital loss is the flexible one. It can be set off against both short-term and long-term capital gains in the same year, so a short-term loss on shares can reduce a long-term property gain or a long-term equity gain, as well as another short-term gain. It cannot be set against salary, business income, interest or rent: capital losses stay inside the capital-gains box.

Whatever you cannot use this year carries forward for up to eight tax years, and a carried-forward short-term loss still sets off against any capital gain, short-term or long-term. The catch that costs people the benefit: you must file your return by the due date to carry a loss forward. File late and the loss is gone, even though the return went in. This is the basis of tax-loss harvesting, where you book a loss before 31 March to shelter gains realised the same year.

The asymmetry to remember: a short-term loss offsets any capital gain, but a long-term loss offsets only long-term gains, so a short-term loss is the more valuable one to carry.

Which ITR form, and how to report each sale

You cannot report a Section 111A short-term gain on the simple ITR-1 or ITR-4. Those forms take salary, one house property and presumptive business income; a capital gain pushes you to ITR-2 (no business income) or ITR-3 (with business or professional income). The small relaxation added from AY 2025-26 is for long-term equity gains only, up to ₹1.25 lakh under Section 112A, so it does not rescue a short-term gain.

Report each sale in Schedule CG of the return, in the 111A block, entering the sale value, the purchase cost and the allowable expenses. The portal applies the 20% rate and the resident basic-exemption absorption for you, and pulls your trades into the pre-filled data from the AIS.

Reconcile Schedule CG against your broker's capital-gains statement and the AIS before filing; securities mismatches are a common trigger for notices.

Should you hold on past 12 months to convert STCG into LTCG?

Often yes, if you are close to the 12-month line and do not need the money now. Crossing from short-term to long-term drops the rate from 20% to 12.5% and brings the ₹1.25 lakh yearly exemption into play, a double saving. On a ₹5,00,000 gain, selling at month 11 costs 20% of ₹5,00,000, which is ₹1,00,000; waiting past month 12 costs 12.5% of ₹3,75,000 (after the ₹1.25 lakh exemption), which is ₹46,875. Holding a few extra weeks can more than halve the tax.

The trade-off is market risk: a stock can fall further in those weeks than the tax you would save, so never let the tax tail wag the investment dog. Two other levers are worth using each year. If you are sitting on short-term gains, realise any short-term losses before 31 March to net them off. And if your other income is below the basic exemption limit, a resident can book a short-term gain up to the shortfall and pay nothing on it. Run your own figures in the income-tax calculator before acting.

Worked examples

Section 196 FAQs

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