Direct and Indirect Taxation · Capital Gains

Capital Gains Tax Rates: Short-Term and Long-Term

Updated 10 October 2026 · Fact-checked

Capital gains are taxed by rate depending on the asset and holding period. Under the Income-tax Act, 2025, listed equity with STT pays 20% on short-term gains (section 196) and 12.5% on long-term gains above ₹1,25,000 (section 198). Other long-term gains pay 12.5% (section 197). Losses are set off and carried forward under section 111.

Understand Other Capital Gains Exemptions and Tax Rates

Capital gains tax has two questions. First, is the gain short-term or long-term? That depends on the asset and how long you held it. Second, which rate applies? Most gains are taxed at special rates, not at slab rates.

The Act gives three special-rate sections. Section 196 covers short-term gains on listed equity shares, units of an equity oriented fund and units of a business trust, where the sale is chargeable to securities transaction tax (STT). The rate is 20%. Other short-term gains are not covered by this section. They are added to total income and taxed at the normal rates.

Section 198 covers long-term gains on the same three assets, where STT has been paid. For shares, STT must have been paid on both acquisition and transfer. For units, STT on transfer is enough. Long-term gains up to ₹1,25,000 are not taxed at the special rate. Only the excess is taxed at 12.5%. The Central Government can notify acquisitions where the STT-on-acquisition condition does not apply, and the STT condition is relaxed for transfers on a recognised stock exchange in an International Financial Services Centre where consideration is in foreign currency.

Section 197 is the general long-term rate. It applies to long-term gains not covered by section 198, for example unlisted shares, or listed shares where STT conditions are not met. The rate is 12.5% with no ₹1,25,000 limit. For a resident individual or HUF who sold land or building acquired before 23 July 2024, compute two figures: A, the tax at 12.5% on the gain, and B, the tax at 20% on the gain computed with indexed cost of acquisition and indexed cost of improvement. If A is more than B, the excess A − B is ignored, so the tax is effectively the lower of A and B.

There is one relief for resident individuals and HUFs. Take the total income reduced by the gain. If it is below the basic exemption limit, the shortfall reduces the gain first. The special rate is then applied to the balance. For section 198, the ₹1,25,000 comes after this step: 12.5% applies only to the balance of the gain that exceeds ₹1,25,000.

Chapter VIII deductions are allowed only from gross total income reduced by these capital gains. They are not allowed against the gains themselves. Losses are handled by sections 108 and 111: a long-term loss is set off only against long-term gains, and unabsorbed losses are carried forward for up to eight tax years.

Key rules to remember

Short-term gain on STT-paid listed equity (section 196): Tax = 20% × STCG + normal tax on the balance of total income; Applies to equity shares, units of equity oriented fund and units of business trust where the sale is chargeable to STT.
Long-term gain on STT-paid listed equity (section 198): Tax = 12.5% × (LTCG under section 198 − ₹1,25,000) + normal tax on (total income − LTCG); STT must be paid on acquisition and transfer for shares; on transfer only for units. Deduct ₹1,25,000 only from the net long-term gain that qualifies under section 198, not from section 197 gains. If that gain is below ₹1,25,000, there is no tax at the special rate.
General long-term rate (section 197): Tax = 12.5% × LTCG + normal tax on (total income − LTCG); No ₹1,25,000 limit. Applies to long-term gains not covered by section 198.
Basic exemption adjustment for resident individual/HUF: Adjusted gain = Gain − (Basic exemption limit − (Total income − Gain)), only if (Total income − Gain) is below the limit; Applies in sections 196, 197 and 198. The shortfall reduces the gain first. Then tax the balance at the special rate. For section 198, apply 12.5% to the balance exceeding ₹1,25,000.
Land or building acquired before 23 July 2024 (section 197(3)): E = A − B, ignored only if A > B. A = tax at 12.5% on the gain. B = tax at 20% on the gain using indexed cost of acquisition and indexed cost of improvement.; Only for resident individual or HUF. If A is more than B, the excess E is ignored, so tax is effectively the lower of A and B. If A is not more than B, no excess arises and tax is A.
Carry forward of capital loss (section 111): STCL: set off against any capital gain. LTCL: set off against long-term gains only. Carry forward up to 8 tax years.; Loss must first be set off in the same year under section 108.
Equity oriented fund test (section 198(8)): At least 65% in listed domestic equity shares, or 90% in units of another such fund; The percentage is measured using the annual average of monthly averages of opening and closing figures.

How to solve Other Capital Gains Exemptions and Tax Rates questions

Use this order for any capital gains rate question. It keeps each gain in its right bucket.

1Classify each asset and holding period as short-term or long-term.
2For each gain, check if it is listed equity, an equity oriented fund unit or a business trust unit, and whether STT conditions are met.
3Pick the section: 196 for STT short-term, 198 for STT long-term, 197 for other long-term. Other short-term gains go to normal rates.
4Set off current-year losses under section 108, then add brought-forward losses allowed under section 111. A long-term loss can only reduce long-term gains.
5For a resident individual or HUF, check whether total income reduced by the gain is below the basic exemption limit. If it is, reduce the gain by the shortfall first.
6For section 198, then deduct ₹1,25,000 only from the net long-term gain that qualifies under section 198, not from section 197 gains, and apply 12.5% to the balance.
7Compute tax on the remaining total income at normal rates. Add the special-rate tax to the normal tax. Then apply cess as the question requires. For section 198 gains, the rebate under section 156 is allowed on the tax on total income reduced by the tax on those gains.
8Write the final tax with a clear working note for each bucket.

Quickest way: Three-bucket method

When to use it: Use when a question gives several sales and asks for tax on total income.

Make three buckets: STT-paid listed equity STCG (20%), LTCG at 12.5%, and gains taxed at normal rates.
Net the losses within each permitted bucket first. Long-term loss goes only against long-term gains.
Deduct ₹1,25,000 once, only from the net long-term gain that qualifies under section 198, not from section 197 gains.
Tax each bucket and add normal tax on the remaining income.

Common mistakes in Other Capital Gains Exemptions and Tax Rates

Applying the ₹1,25,000 limit to all long-term gains.
Students remember it as a general LTCG exemption.
Fix: The limit is in section 198 only. Section 197 gains such as unlisted shares are taxed at 12.5% from the first rupee.
Taxing all short-term gains at 20%.
The 20% rate is the one that gets remembered.
Fix: Only short-term gains on STT-paid equity, equity fund units and business trust units go to 20%. Others are taxed at normal rates.
Treating listed shares as eligible under section 198 without checking STT on acquisition.
Students check STT only on sale.
Fix: For shares, STT must be paid on both acquisition and transfer, unless a notified exception applies.
Setting off a long-term capital loss against a short-term gain.
Students assume losses can offset any gain.
Fix: A long-term loss can be set off only against long-term gains. A short-term loss can be set off against both.
Ignoring the basic exemption adjustment for resident individuals.
Students apply the special rate on the whole gain.
Fix: If other income is below the exemption limit, reduce the gain by the shortfall before applying the rate.
Claiming Chapter VIII deductions against capital gains taxed at special rates.
Students deduct from total income without separating the gains.
Fix: Reduce gross total income by those gains first, then allow the deduction on the remaining income.

Worked examples

Example 1

Meera, a resident individual, sold listed equity shares on which STT was paid on purchase and sale. Short-term gain is ₹80,000 and long-term gain is ₹3,25,000. Her other taxable income is ₹9,00,000, and the basic exemption limit is lower than that income. Compute tax on the capital gains only (ignore cess and rebate).

Show the solution

The short-term gain falls under section 196 at 20%: 20% × ₹80,000 = ₹16,000.
The long-term gain falls under section 198, as STT was paid on acquisition and transfer.
Taxable long-term gain is ₹3,25,000 − ₹1,25,000 = ₹2,00,000.
Tax at 12.5% = ₹25,000.
Her other income of ₹9,00,000 is above the basic exemption limit here, so no adjustment applies.
Total tax on capital gains = ₹16,000 + ₹25,000 = ₹41,000.

Answer: Tax on capital gains is ₹41,000.

Example 2

Ravi, a resident individual, has an unlisted-share long-term capital gain of ₹4,00,000 and a long-term capital loss of ₹1,50,000 from another long-term asset. He also has a short-term capital loss of ₹60,000 from STT-paid equity. He has no short-term gains. Compute the tax on his long-term gain at the section 197 rate, assuming his other income is above the basic exemption limit.

Show the solution

Both losses are set off in the current year under section 108.
The long-term loss ₹1,50,000 can be set off against the long-term gain: ₹4,00,000 − ₹1,50,000 = ₹2,50,000.
The short-term loss ₹60,000 can be set off against any capital gain, including long-term gain: ₹2,50,000 − ₹60,000 = ₹1,90,000.
Unlisted shares fall under section 197, so no ₹1,25,000 limit applies.
Tax = 12.5% × ₹1,90,000 = ₹23,750.

Answer: Net long-term gain is ₹1,90,000 and tax at 12.5% is ₹23,750.

Exam tips

In numericals, label each gain with its section (196, 197 or 198) before computing. Step marks follow the label.
Check the STT condition in the facts. Many questions are built around its absence.
Write the ₹1,25,000 deduction as a separate line, applied to STT-paid long-term equity gains only.
For losses, state the rule in one line: long-term loss only against long-term gain, carry forward up to eight tax years.
Section A's 15 MCQs are compulsory and there is no negative marking, so attempt every MCQ.

Practice questions from Capital Gains

Other Capital Gains Exemptions and Tax Rates in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Other Capital Gains Exemptions and Tax Rates: frequently asked questions

What is the tax rate on short-term capital gains on listed shares?

Under section 196, short-term gains on STT-paid listed equity shares, equity oriented fund units and business trust units are taxed at 20%. Short-term gains on other assets are taxed at normal rates.

What is the exemption limit on long-term gains from listed equity?

Under section 198, long-term gains up to ₹1,25,000 are not taxed at the special rate. Only the excess is taxed at 12.5%. This applies when the STT conditions are met.

Can a long-term capital loss be set off against short-term capital gains?

No. A long-term loss can be set off only against long-term capital gains. A short-term loss can be set off against both short-term and long-term gains.

For how long can a capital loss be carried forward?

Under section 111, unabsorbed capital loss is carried forward for up to eight tax years after the tax year in which it was first computed. Short-term and long-term rules differ on what it can be set off against.

What happens if my other income is below the basic exemption limit?

If you are a resident individual or HUF and your total income reduced by the gain is below the basic exemption limit, the shortfall is deducted from the gain first. The special rate is then applied to the balance. For section 198, 12.5% applies only to the balance exceeding ₹1,25,000.