Section 198 Income Tax Act 2025: Is Equity LTCG Above Rs. 1.25 Lakh Taxable?

Section 198 sets out a special 12.5% income-tax rate for qualifying long-term capital gains (LTCG) from equity shares, equity-oriented funds and business trust units, but only on the aggregate qualifying gains exceeding Rs. 1,25,000 in a tax year.

Legal position: The Income-tax Act, 2025 applies from 1 April 2026. Section 198 broadly replaces Section 112A of the Income-tax Act, 1961. The 12.5% rate excludes applicable surcharge and health and education cess. Eligibility and other provisions must be checked for the relevant tax year.

Which investments are covered by Section 198?

Section 198 applies when the assessee has long-term capital gains chargeable under the head Capital gains from the transfer of any of the following qualifying long-term capital assets:

Equity shares in a company;
Units of an equity-oriented fund; or
Units of a business trust.

The transaction must also meet the applicable securities transaction tax (STT) requirements, unless a statutory exception applies. The holding period and the computation of capital gains are determined under the other relevant provisions of the Act.

What is the tax rate and the Rs. 1,25,000 threshold?

Under Section 198(2), tax is calculated at 12.5% on qualifying LTCG exceeding Rs. 1,25,000. Tax on other income is calculated separately under the applicable provisions. The Rs. 1,25,000 threshold is an aggregate annual threshold for qualifying gains, not a separate allowance for each share, mutual fund, transaction or demat account.

Important: The threshold applies to qualifying gains; it is not an exemption for the entire sale proceeds. The special-rate calculation is subject to the rules on losses, basic exemption adjustments and other applicable provisions.

What are the STT conditions and exceptions?

Equity shares: STT must ordinarily have been paid both on acquisition and on transfer, subject to notified acquisition exceptions under Section 198(5).
Equity-oriented fund or business trust units: STT must ordinarily have been paid on transfer.
IFSC transactions: Under Section 198(4), the STT condition does not apply to qualifying transfers on a recognised stock exchange in an International Financial Services Centre when consideration is received or receivable in foreign currency.

Explanation of Section 198(1) to 198(8)

Section 198(1): Applicability

Overrides the general LTCG taxation provision in Section 197 for eligible equity shares, equity-oriented fund units and business trust units, subject to the stated STT requirements.

Section 198(2): Computation of tax

Charges 12.5% on qualifying LTCG exceeding Rs. 1,25,000, in addition to tax calculated on income other than those gains.

Section 198(3): Basic exemption adjustment

For a resident individual or resident Hindu undivided family (HUF), a shortfall between other taxable income and the applicable basic exemption limit may reduce the qualifying gains considered for special-rate taxation. The provision must be applied with the relevant rate regime and computation rules.

Section 198(4): IFSC relaxation

Provides an exception to the STT condition for specified transfers on recognised stock exchanges in an IFSC where consideration is received or receivable in foreign currency.

Section 198(5): Notified acquisition exceptions

Authorises the Central Government to notify acquisitions of equity shares for which the acquisition-side STT requirement need not apply.

Section 198(6): Chapter VIII deductions

Deductions under Chapter VIII are allowed against gross total income after excluding the qualifying LTCG covered by Section 198(1); such deductions cannot be claimed against those gains.

Section 198(7): Rebate under Section 156

Any eligible rebate under Section 156 is calculated without reducing the tax attributable to the qualifying LTCG covered by Section 198.

Section 198(8): Equity-oriented fund

Defines qualifying equity-oriented funds, including prescribed mutual fund schemes and certain non-exempt unit-linked insurance policy schemes, with equity investment percentage tests.

Relevant statutory definitions and concepts

Long-term capital asset: A capital asset that qualifies as long-term under the applicable holding-period rules. For commonly traded listed equity shares and equity-oriented mutual fund units, a holding period exceeding 12 months is generally relevant.

Securities Transaction Tax (STT): A transaction tax levied under Chapter VII of the Finance (No. 2) Act, 2004 on specified securities transactions.

Equity-oriented fund: Section 198(8) generally requires at least 65% investment in listed domestic equity shares for directly investing qualifying funds. For qualifying fund-of-funds structures, a 90% investment test applies at both prescribed levels. The statutory averaging and insurance-policy conditions also apply.

Business trust: A trust meeting the applicable statutory definition, generally encompassing eligible real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).

International Financial Services Centre (IFSC): A centre within the meaning of the Special Economic Zones Act, 2005, relevant to the exception in Section 198(4).

Illustration: How much tax is payable?

Suppose a taxpayer has Rs. 3,25,000 of qualifying long-term capital gains on listed equity shares in a tax year, with the statutory conditions satisfied and no relevant capital loss or basic exemption adjustment.

Illustrative LTCG computation
Qualifying LTCG	Rs. 3,25,000
Less: annual threshold	Rs. 1,25,000
Gains taxable at 12.5%	Rs. 2,00,000
Tax before cess and surcharge	Rs. 25,000

Any applicable surcharge and cess are additional. Actual liability may differ due to the taxpayer's circumstances and other statutory provisions.

Frequently asked questions

Is the first Rs. 1.25 lakh of equity LTCG tax-free?

For qualifying gains under Section 198, the special 12.5% tax applies only to the aggregate amount exceeding Rs. 1,25,000 in the tax year, subject to the other statutory rules.

Is the tax rate 12.5% or 20%?

Section 198 prescribes 12.5% for qualifying long-term capital gains. Section 196 separately governs certain qualifying short-term capital gains at 20%.

Does the threshold apply separately to each mutual fund?

No. It is an aggregate threshold across gains qualifying under Section 198 for the relevant tax year.

Can Chapter VIII deductions reduce these gains?

No. Section 198(6) excludes qualifying gains from the income against which Chapter VIII deductions are allowed.

Which provision applied before the Income-tax Act, 2025?

Section 112A of the Income-tax Act, 1961 broadly covered this subject. Section 198 is the corresponding provision under the Income-tax Act, 2025.

Statutory text and official resources

Income-tax Act, 2025 (official PDF)Income Tax Department: Sale of shares Earlier Section 112A

Last reviewed: 10 November 2026. This is a general explanation; check the applicable law, notifications and facts of the transaction before filing a return.