Section 198, Income-tax Act 2025: Tax on long-term capital gains in certain cases

What was Section 112A, and where did it go in the 2025 Act?

Section 112A of the Income-tax Act 1961 is the provision that taxes long-term gains on listed equity. The Income-tax Act 2025 carries it forward without changing a single number and re-addresses it as Section 198, titled "Tax on long-term capital gains in certain cases". If you have read anything about a 12.5% rate or a ₹1.25 lakh exemption on shares, that is this section.

It helps to know the history, because two dates still drive the tax you pay. Until 31 January 2018, long-term gains on listed shares were fully exempt under the old Section 10(38). Budget 2018 ended that exemption and brought in Section 112A: 10% on yearly gains above ₹1 lakh, with everything gained up to 31 January 2018 grandfathered out. Budget 2024 then raised the rate to 12.5% and the exemption to ₹1.25 lakh for sales on or after 23 July 2024. Section 198 inherits all of it.

The 2025-Act number (198) and its title are confirmed from two independent published sources (eztax.in and indiankanoon.org). The full sub-section wording is still being checked against the Gazette copy of the Act before launch.†

Which shares and funds does Section 198 cover?

Three asset types, and only when Securities Transaction Tax has been paid. The concessional 12.5% rate and the ₹1.25 lakh exemption are a reward for trading on a recognised Indian stock exchange, so an off-market transfer that skips STT does not get them.

The section applies to a long-term gain on:

• Equity shares in a company listed on a recognised Indian stock exchange, where STT was paid on both the purchase and 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.

Two carve-outs relax the STT-on-purchase rule: shares bought before STT existed or through routes the government has notified (IPOs, bonus and rights issues, ESOPs and similar), and transfers on a recognised exchange in an IFSC settled in foreign currency. Placement of these provisos in Section 198 is pending CA verification against the Gazette text.†

What are the rate, the exemption and the holding period?

12.5% on gains above ₹1.25 lakh a year, on assets held more than 12 months, with no indexation. Budget 2024 changed two of those numbers from 23 July 2024; the table shows the before and after so you can price a sale on either side of that date.

The date that matters is the date of sale, not the date you bought. A share bought in 2019 and sold on 1 August 2024 is taxed at 12.5% with the ₹1.25 lakh exemption.

How does the ₹1.25 lakh exemption actually work?

The first ₹1.25 lakh of long-term equity gain in a tax year is tax-free; only the excess is taxed at 12.5%. The exemption is a yearly allowance for the whole of your Section 198 gains added together, not a per-share or per-fund figure, and it resets on 1 April each year.

So if your listed-equity long-term gains for the year total ₹4,00,000, you subtract ₹1,25,000 and pay 12.5% on ₹2,75,000, which is ₹34,375. If your gains for the year are ₹1,20,000, you pay nothing, and the unused part of the allowance does not carry into next year. The exemption sits only in this bucket: it does not shelter short-term gains, interest, salary or property gains.

How do you calculate the tax, step by step?

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

• Confirm the holding period is more than 12 months and STT was paid, so the gain falls under Section 198.
• Work out the cost of acquisition. For anything bought after 31 January 2018 this is simply what you paid. For older holdings, apply the grandfathering rule in the next section.
• Gain on the sale = sale value, less that cost, less any brokerage and STT on the sale that the rules allow. Add up every such long-term gain and loss for the year.
• Subtract the ₹1.25 lakh annual exemption from the net long-term gain.
• Tax the balance at 12.5%, then add the 4% health-and-education cess. Surcharge on these gains is capped at 15%, unlike the higher slabs on other income.

A resident whose other income falls below the basic exemption limit can use the shortfall to reduce these gains first; the FAQs cover how.

How the 31 January 2018 grandfathering rule protects older gains

For assets bought on or before 31 January 2018, the law lets you treat their 31 January 2018 value as the cost, so the run-up before that date is not taxed. This is grandfathering, and it exists because gains were tax-exempt until then. It applies only to holdings acquired on or before 31 January 2018; anything bought later uses its actual purchase price.

The deemed cost of acquisition is worked out in a set order:

• Take the fair market value (FMV) on 31 January 2018. For a listed share this is the highest price quoted on the exchange that day (not the closing price); if the share did not trade that day, the highest price on the most recent earlier trading day. For a mutual-fund unit it is the net asset value on that date.
• Compare that FMV with your actual sale value and take the lower of the two. This step stops you from booking an artificial loss when you sell below the 2018 value.
• Compare the result with your actual purchase cost and take the higher of the two. That figure is your cost of acquisition.

In short: cost = higher of (actual cost) and (lower of 31 January 2018 FMV and sale value). Worked example 2 below runs the arithmetic end to end.

Why equity long-term gains get no indexation

Listed-equity long-term gains have never had indexation, and Section 198 keeps it that way. Indexation, which inflates your purchase cost by a government index before computing the gain, used to soften the tax on assets like property, gold, debt funds and unlisted shares. Budget 2024 removed indexation there too and set most of those at 12.5% as well, so the gap between equity and other assets narrowed.

The trade-off for no indexation on equity is the low flat rate and the ₹1.25 lakh yearly exemption. The 2024 move from 10% to 12.5% is a real increase, but on a ₹5,00,000 gain it adds ₹31,875 of tax (12.5% of ₹3,75,000 after the exemption) against ₹40,000 under the old 10%-above-₹1-lakh rule, so the bigger exemption offsets part of the higher rate for smaller gains.

Setting off and carrying forward a long-term capital loss

A long-term capital loss can be set off only against a long-term capital gain, never against salary, business income or short-term gains. That is the mirror of the ring-fence around the 12.5% rate. A short-term capital loss is more flexible: it can be set off against either short-term or long-term gains.

What you cannot use this year, you carry forward for up to eight tax years, and a carried-forward long-term loss still sets off only against future long-term gains. The catch that trips people up: you must file your return by the due date to carry a loss forward. Miss the deadline and the loss is gone, even though you filed. This is the basis of tax-loss harvesting, where you realise a loss before 31 March to shelter gains booked the same year.

Why the 87A rebate will not wipe out your capital-gains tax

The Section 87A rebate (its 2025-Act successor is Section 156) can zero your tax on ordinary income up to ₹12 lakh under the new regime, but it does not apply to income taxed at special rates, and Section 198 gains are special-rate income. The Finance Act 2025 made this explicit after years of dispute: the rebate is computed on your normal income only, and it cannot be set against the 12.5% due on your equity gains.

The practical result surprises people. Suppose your salary income after the standard deduction is ₹8,00,000 and you also booked a ₹2,00,000 long-term equity gain. Your salary tax is fully rebated, yet ₹75,000 of the gain (after the ₹1.25 lakh exemption) is still taxed at 12.5%, so ₹9,375 plus cess is payable. The rebate checker linked below shows this split for your own figures.

Section 156 is the 2025-Act home of the 87A rebate; its number is pending CA verification against the Gazette text.†

Which ITR form do you file, and how do you report each sale?

Most people with these gains file ITR-2 (salaried, no business income) or ITR-3 (with business or professional income), and report each sale in Schedule 112A. That schedule is scrip-by-scrip: for every share or fund lot you enter the buy value, the sale value, and, for pre-2018 holdings, the 31 January 2018 fair market value so the portal computes the grandfathered cost for you.

There is one shortcut. For returns filed for AY 2025-26 onwards, the simpler ITR-1 and ITR-4 now accept a small long-term equity gain, up to ₹1.25 lakh, so a salaried investor whose only capital gain is within the exemption need not move to ITR-2. The moment your gain crosses ₹1.25 lakh, or you have any capital loss to carry forward, you are back on ITR-2 or ITR-3.

Reconcile Schedule 112A against your broker's capital-gains statement and the AIS before filing; mismatches on securities data are a common trigger for notices.

Should you book gains up to ₹1.25 lakh every year?

Often yes, if you would otherwise let large unrealised gains pile up. Selling enough each year to realise about ₹1.25 lakh of long-term gain, then buying back if you still want the holding, uses an allowance that does not carry forward and resets your cost base higher, which shrinks the taxable gain when you finally exit. India has no wash-sale rule that blocks an immediate re-purchase.

Weigh it against the friction: brokerage and STT on the round trip, a fresh 12-month clock on the re-bought units, and the ₹1.25 lakh being a single allowance you might want for a planned sale elsewhere. Harvesting is a rule of thumb, not a reason to churn a portfolio you would otherwise hold. Run the numbers in the income-tax calculator before acting.

Worked examples

Section 198 FAQs

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