Taxation · Income Tax Liability - Computation and Optimisation

Special Rate Income and Capital Gains Tax Rates

Updated 4 October 2026 · Fact-checked

Special rate income is income taxed at a fixed rate instead of normal slab rates, such as short-term and long-term capital gains and lottery or online game winnings. Compute normal income first, apply the slab, then tax each special income at its own rate. A resident's unused basic exemption can reduce capital gains, but not winnings.

Understand Special Rate Income and Capital Gains Tax Rates

Most income is taxed at slab rates. Some income is taxed at a flat special rate. You compute tax on this income separately, at its own rate. It does not move through the slabs.

The main special rate incomes in this topic are:

Short-term capital gain on listed equity shares and units of equity-oriented funds, where securities transaction tax (STT) is paid: 20%.
Long-term capital gain on the same assets: 12.5% on the gain above ₹1,25,000 in the tax year.
Other long-term capital gains: generally 12.5%, with no indexation.
Winnings from lotteries, crossword puzzles, races, card games, other games and online games: 30%.

Other short-term gains, such as those on assets not covered above, are taxed at normal slab rates. They are not special rate income.

Cess at 4% on tax is added at the end. Ignore surcharge unless the question gives income high enough to attract it.

Now the basic exemption limit. For a resident individual or HUF, if normal income (income other than special rate income) is less than the basic exemption limit, the shortfall is adjusted against special rate income. Only the balance of the special rate income is taxed at the special rate. A non-resident gets no such adjustment.

There is one big exception. Winnings from lotteries, games and similar sources are taxed at 30% on the full amount. No deduction for expenses is allowed, and the shortfall in the basic exemption limit is not adjusted against them. Do not mix these two rules up. The questions below test exactly this.

The 4% cess applies on the tax. Check the rate table in your latest ICAI material for the tax year 2026-27 before the exam.

Key rules to remember

Short-term capital gain on listed equity (STT paid): Tax = 20% × STCG (after any basic exemption adjustment); Applies to listed equity shares and units of equity-oriented funds where STT is paid. Other short-term gains go to normal slabs.
Long-term capital gain on listed equity (STT paid): Tax = 12.5% × (LTCG − ₹1,25,000); The ₹1,25,000 limit is for the whole tax year across all such gains. No tax if the gain is ₹1,25,000 or less. No indexation.
Other long-term capital gains: Tax = 12.5% × LTCG (no indexation); A resident individual or HUF may choose 20% with indexation on land or building acquired before 23 July 2024. Use this only when the question gives that option.
Winnings from lotteries, games, online games: Tax = 30% × winnings; No deduction for expenses or losses. No basic exemption adjustment.
Basic exemption adjustment: Shortfall = Basic exemption limit − Normal income (if positive); For resident individual or HUF only. Reduce special rate capital gains by the shortfall, then tax the balance. Not available against winnings.
Total tax payable: (Tax on normal income + Tax on each special income) × 1.04; The 1.04 adds 4% health and education cess. Add surcharge first if the question gives it.

How to solve Special Rate Income and Capital Gains Tax Rates questions

Use this order for any question mixing normal income and special rate income.

1Compute income under each head and keep normal income separate from special rate income.
2Note the assessee's status. Check if the person is a resident individual or HUF, because only then does the basic exemption adjustment apply.
3Compute taxable capital gains. For listed equity LTCG, deduct the ₹1,25,000 limit first.
4Find the shortfall: basic exemption limit minus normal income. If normal income is above the limit, the shortfall is nil.
5Adjust the shortfall against capital gains taxed at special rates. Adjust the higher-rate gain first, since that saves the most tax. Do not adjust it against winnings.
6Apply the slab rates to normal income. Apply 20%, 12.5% or 30% to each special rate income separately.
7Add the taxes, add 4% cess, and round off if the question asks you to.
8Show each rate and each adjustment on a separate line so the examiner can award step marks.

Quickest way: Three-column tax table

When to use it: Use this for MCQs and for written answers with two or more income types.

Draw three columns: Normal income, Capital gains at special rate, Winnings at 30%.
Put the amounts in. Winnings never get adjusted. Capital gains may reduce by the shortfall.
MCQ trick: if normal income is above the basic exemption limit, the shortfall is nil and you can ignore the adjustment.
MCQ trick: if the question says the person is a non-resident, skip the adjustment at once.
Check the four options: a wrong option usually misses the ₹1,25,000 limit, uses 30% on gains, or adjusts the shortfall against winnings.
In the written answer, put the working notes first and the tax computation last. Each rate and each adjustment earns its own marks.

Common mistakes in Special Rate Income and Capital Gains Tax Rates

Adjusting the basic exemption shortfall against lottery or online game winnings.
Students remember that the shortfall can be adjusted against special rate income and treat all special rate income alike.
Fix: Winnings are taxed at 30% on the full amount with no adjustment. The adjustment is only for capital gains, and only for residents.
Taxing the whole listed equity LTCG at 12.5% without deducting ₹1,25,000.
Students remember the 12.5% rate but forget the annual limit.
Fix: Deduct ₹1,25,000 first, once per tax year across all such gains, then apply 12.5% to the balance.
Adjusting the shortfall against the lower-rate gain first.
Students follow the order in which the gains appear in the question.
Fix: Adjust against the gain taxed at the higher rate first (20% before 12.5%). This gives the lowest tax.
Treating all short-term capital gains as taxed at 20%.
Students link 'short-term' with 20% without checking the asset.
Fix: 20% applies to listed equity shares and equity-oriented fund units where STT is paid. Other short-term gains are added to normal income and taxed at slab rates.
Deducting expenses from lottery or game winnings.
Students treat winnings like a normal income head.
Fix: No expense, allowance or set-off of loss is allowed against these winnings. Tax the gross winnings at 30%.
Forgetting the 4% cess at the end.
Students stop after computing tax.
Fix: Always write a final line adding 4% cess on the total tax.

Worked examples

Example 1

Mr. Ravi, a resident individual under the default regime, has taxable salary of ₹2,50,000, short-term capital gain on listed equity shares (STT paid) of ₹1,00,000, and long-term capital gain on listed equity shares (STT paid) of ₹2,75,000. Assume a basic exemption limit of ₹4,00,000 and ignore rebate. Compute his tax liability for the tax year 2026-27.

Show the solution

Normal income = ₹2,50,000 (salary). This is below ₹4,00,000.
Shortfall = ₹4,00,000 − ₹2,50,000 = ₹1,50,000.
Taxable LTCG before adjustment = ₹2,75,000 − ₹1,25,000 = ₹1,50,000.
Adjust the shortfall against STCG first (taxed at 20%): ₹1,00,000 is fully absorbed. STCG taxable = nil.
Balance shortfall = ₹1,50,000 − ₹1,00,000 = ₹50,000. Adjust against LTCG: ₹1,50,000 − ₹50,000 = ₹1,00,000.
Tax on normal income = nil. Tax on STCG = nil. Tax on LTCG = 12.5% × ₹1,00,000 = ₹12,500.
Cess = 4% × ₹12,500 = ₹500.
Total tax = ₹12,500 + ₹500 = ₹13,000.

Answer: Tax liability = ₹13,000 (tax ₹12,500 plus cess ₹500).

Example 2

Ms. Meera, a resident individual under the default regime, has taxable salary of ₹1,50,000 and wins ₹3,00,000 in a lottery. Assume a basic exemption limit of ₹4,00,000 and ignore rebate. Compute her tax liability for the tax year 2026-27.

Show the solution

Normal income = ₹1,50,000. This is below ₹4,00,000. Tax on it is nil.
Shortfall = ₹4,00,000 − ₹1,50,000 = ₹2,50,000.
Lottery winnings cannot be reduced by this shortfall. The full ₹3,00,000 is taxed.
Tax on winnings = 30% × ₹3,00,000 = ₹90,000.
Cess = 4% × ₹90,000 = ₹3,600.
Total tax = ₹90,000 + ₹3,600 = ₹93,600.

Answer: Tax liability = ₹93,600 (tax ₹90,000 plus cess ₹3,600).

Exam tips

Read the status of the assessee first. Residents get the basic exemption adjustment; non-residents do not.
Always check the asset and whether STT is paid before choosing between 20%, 12.5% or slab rate.
In a mixed question, show normal income, each capital gain and the winnings in separate rows. Examiners award marks for each.
Look for the exemption limit and the 30% winnings rule in MCQs. They are the most common traps, and wrong MCQ answers have no negative marking, so always attempt every one.
If a question gives a specific limit or rate that differs from your notes, use the question's data and say 'as per the question' in your answer.

Practice questions from Income Tax Liability - Computation and Optimisation

Special Rate Income and Capital Gains Tax Rates: frequently asked questions

How do I adjust the basic exemption limit against special rate income?

First compute normal income. If it is below the basic exemption limit, the difference is the shortfall. For a resident individual or HUF, reduce the capital gains taxed at special rates by this shortfall, higher-rate gain first, and tax only the balance.

Can the basic exemption limit be used against lottery or online game winnings?

No. Winnings are taxed at a flat 30% on the full amount. The shortfall in the basic exemption limit is not adjusted against them, and no expenses are deducted.

What are the capital gains tax rates under the Income-tax Act, 2025?

Short-term gain on listed equity with STT paid is taxed at 20%. Long-term gain on listed equity with STT paid is taxed at 12.5% on the amount above ₹1,25,000. Other long-term gains are generally taxed at 12.5% without indexation. Other short-term gains are taxed at slab rates.

Is cess added to special rate income tax?

Yes. Health and education cess at 4% is added to the total tax, including tax on special rate income. Surcharge applies only if the question gives income at the relevant level.