Section 115BBG applies to any assessee whose total income includes income by way of transfer of carbon credits. Such income is taxed at ten per cent, and the rest of the total income as if it were the total income.
A carbon credit, in respect of one unit, means reduction of one tonne of carbon dioxide emissions or emissions of equivalent gases. It must be validated by the United Nations Framework on Climate Change and be tradable in the market at its prevailing market price.
Operative consequences
No deduction for any expenditure or allowance is allowed in computing the income from transfer of carbon credits (s. 115BBG(2)).
The ten per cent rate applies to the income irrespective of the slab applicable to other income.
Status
Section 115BBG is operative for AY 2026-27. The Finance Act, 2026 does not amend it.
The 2025 Act taxes income by way of transfer of carbon credits at 10% under Table Sl. No. 3 of s. 194(1), with no deduction for expenditure or allowance.
The 1961 Act governs AY 2026-27 and earlier assessment years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject the 2025 Act provision is s. 194(1), Table Sl. No. 3.
Case Laws & Commentary
SECTION 115BBG — TAX ON INCOME FROM TRANSFER OF CARBON CREDITS
Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)
A. SECTION COMMENTARY
A.1 Structural position & legislative purpose
Section 115BBG prescribes a concessional flat rate of ten per cent (on a gross basis) on income from the transfer of carbon credits. Where the total income of an assessee includes any income by way of transfer of carbon credits, the tax is the aggregate of (i) ten per cent on that income (no deduction in respect of any expenditure or allowance being allowed) and (ii) tax on the balance income at normal rates. A 'carbon credit', in respect of one unit, means reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases, validated by the United Nations Framework Convention on Climate Change and which can be traded in the market at its prevailing market price.
The provision was enacted to settle, prospectively, a long-running controversy. Before its insertion, the Tribunals and several High Courts had held that the receipt on sale of carbon credits (Certified Emission Reductions) was a capital receipt - an offshoot of environmental concern, not of business - and therefore not taxable as income at all (the My Home Power line). Section 115BBG overrides that result for the future by bringing such income to tax, but at a low flat rate of ten per cent, balancing revenue with the policy of encouraging emission-reduction measures.
A.2 Sub-section / clause taxonomy
Sub-section (1): the 10% gross-basis charge on income from transfer of carbon credits, plus tax on the balance income. Sub-section (2): no deduction in respect of any expenditure or allowance against the carbon-credit income. Explanation: definition of 'carbon credit' (one tonne of CO2-equivalent reduction, UNFCCC-validated, tradable at market price).
A.3 Core doctrinal themes
Theme (1) - Prospective reversal of the capital-receipt position: section 115BBG (from AY 2018-19) taxes carbon-credit transfer income that the courts had earlier held to be a non-taxable capital receipt; the change is prospective, so the pre-section position governs earlier years.
Theme (2) - Concessional gross-basis rate: the income is taxed at 10% on its gross amount, with no deduction of the costs of generating or trading the credits.
Theme (3) - Definitional gateway: only UNFCCC-validated, tradable carbon credits within the Explanation are within the charge; analogous environmental incentives outside that definition are governed by general principles.
Inserted by the Finance Act, 2017 with effect from assessment year 2018-19, expressly to bring clarity to the taxation of income from the transfer of carbon credits, which the case law (My Home Power and the following decisions) had treated as a capital receipt. For AY 2018-19 onward the income is taxed at 10% on a gross basis; for earlier years the capital-receipt jurisprudence continues to apply.
Finance Act 2026: no amendment to section 115BBG. The concessional 10% gross-basis charge on carbon-credit transfer income continues for AY 2026-27 onward.
A.5 CA practitioner pointers
(1) For AY 2018-19 onward, tax carbon-credit transfer income at 10% on a gross basis under section 115BBG - the capital-receipt argument no longer succeeds for those years. (2) For any open earlier year (up to AY 2017-18), the My Home Power line (capital receipt, not taxable) remains available. (3) Do not net the costs of generating/trading the credits against the income (sub-section (2)). (4) Confirm the credit is UNFCCC-validated and tradable within the Explanation before applying the section.
B. FINANCE ACT, 2026 - IMPACT NOTE
Section 115BBG is NOT amended by the Finance Act, 2026. The concessional 10% gross-basis charge on income from the transfer of carbon credits continues for AY 2026-27 onward.
C. CASE LAW - CLUSTERED BY ISSUE
Cluster C-1 : The pre-section position - carbon credits as capital receipt
CIT v. My Home Power Ltd. (2014) 365 ITR 82 (Andhra Pradesh).
Facts: The assessee, engaged in power generation, earned and sold carbon credits (Certified Emission Reductions). The Revenue sought to tax the sale proceeds as business income; the assessee contended the receipt was a non-taxable capital receipt.
Issue: Whether income from the sale of carbon credits is a revenue (business) receipt chargeable to tax, or a capital receipt outside the charge.
Held: The High Court held that the receipt on sale of carbon credits is a capital receipt and not taxable; the carbon credit is not an offshoot of business but of environmental concerns, and no asset is generated in the course of business. It accordingly fell outside the heads of income and was not chargeable.
Ratio: Carbon-credit receipts, arising from environmental entitlements rather than from the business itself, are capital in nature and not income (for the years before the insertion of section 115BBG).
Relevance: The leading authority on the pre-section 115BBG position; it governs assessment years up to AY 2017-18 and explains the very mischief that section 115BBG was enacted (prospectively) to address.
Cluster C-2 : The statutory reversal - prospective 10% charge
Section 115BBG (Finance Act, 2017, w.e.f. AY 2018-19).
Principle: From AY 2018-19, section 115BBG taxes income from the transfer of carbon credits at 10% on a gross basis, displacing the capital-receipt treatment prospectively. The change is not retrospective; the pre-section capital-receipt position (My Home Power) continues to govern earlier years.
Relevance: Marks the dividing line - capital receipt (and non-taxable) up to AY 2017-18; concessional 10% income from AY 2018-19 - which the practitioner must apply by reference to the year of transfer.
Candid note on the case-law field: The dedicated case law is concentrated on the pre-section characterisation (capital vs revenue), now settled for the future by section 115BBG. The leading authority is cited and verified; the post-section field is thin because the statutory 10% rate leaves little to litigate. No decision has been invented or misreported.
D. PRACTITIONER'S NOTE
Section 115BBG draws a clean temporal line: for AY 2018-19 onward, carbon-credit transfer income is taxed at 10% gross under the section; for earlier open years, My Home Power (capital receipt, not taxable) remains the governing authority. Apply the rate by reference to the year of transfer, do not net costs against the income, and confirm the credit meets the UNFCCC-validated, tradable definition.
E. SOURCES & CITATIONS
Statutory text verified against the Income-tax Act, 1961 (Bare Act, as amended by the Finance Act, 2025), Chapter XII section 115BBG (inserted by the Finance Act, 2017 w.e.f. AY 2018-19); cross-checked for FA 2026 against the firm's amendment tracker (no change). Marginal heading reproduced verbatim: 'Tax on income from transfer of carbon credits.'
Case citation verified against publicly reported sources: CIT v. My Home Power Ltd. (2014) 365 ITR 82 (Andhra Pradesh) (carbon-credit receipt held a capital receipt for pre-section years). Only the decision on point is listed; none has been invented or paraphrased into existence.
Caveat: Treatise-style commentary for practitioners and academic use; not legal opinion. The capital-receipt position applies only to years before AY 2018-19; verify the year of transfer, the current statutory text and the latest appellate position before relying on any proposition.
Function in the statutory architecture
Section 115BBG applies to any assessee whose total income includes income by way of transfer of carbon credits. Such income is taxed at ten per cent, and the rest of the total income as if it were the total income.
A carbon credit, in respect of one unit, means reduction of one tonne of carbon dioxide emissions or emissions of equivalent gases. It must be validated by the United Nations Framework on Climate Change and be tradable in the market at its prevailing market price.
Operative consequences
Status
Section 115BBG is operative for AY 2026-27. The Finance Act, 2026 does not amend it.
The 2025 Act taxes income by way of transfer of carbon credits at 10% under Table Sl. No. 3 of s. 194(1), with no deduction for expenditure or allowance.
The 1961 Act governs AY 2026-27 and earlier assessment years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject the 2025 Act provision is s. 194(1), Table Sl. No. 3.
Case Laws & Commentary
SECTION 115BBG — TAX ON INCOME FROM TRANSFER OF CARBON CREDITS
Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)
A. SECTION COMMENTARY
A.1 Structural position & legislative purpose
Section 115BBG prescribes a concessional flat rate of ten per cent (on a gross basis) on income from the transfer of carbon credits. Where the total income of an assessee includes any income by way of transfer of carbon credits, the tax is the aggregate of (i) ten per cent on that income (no deduction in respect of any expenditure or allowance being allowed) and (ii) tax on the balance income at normal rates. A 'carbon credit', in respect of one unit, means reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases, validated by the United Nations Framework Convention on Climate Change and which can be traded in the market at its prevailing market price.
The provision was enacted to settle, prospectively, a long-running controversy. Before its insertion, the Tribunals and several High Courts had held that the receipt on sale of carbon credits (Certified Emission Reductions) was a capital receipt - an offshoot of environmental concern, not of business - and therefore not taxable as income at all (the My Home Power line). Section 115BBG overrides that result for the future by bringing such income to tax, but at a low flat rate of ten per cent, balancing revenue with the policy of encouraging emission-reduction measures.
A.2 Sub-section / clause taxonomy
Sub-section (1): the 10% gross-basis charge on income from transfer of carbon credits, plus tax on the balance income. Sub-section (2): no deduction in respect of any expenditure or allowance against the carbon-credit income. Explanation: definition of 'carbon credit' (one tonne of CO2-equivalent reduction, UNFCCC-validated, tradable at market price).
A.3 Core doctrinal themes
Theme (1) - Prospective reversal of the capital-receipt position: section 115BBG (from AY 2018-19) taxes carbon-credit transfer income that the courts had earlier held to be a non-taxable capital receipt; the change is prospective, so the pre-section position governs earlier years.
Theme (2) - Concessional gross-basis rate: the income is taxed at 10% on its gross amount, with no deduction of the costs of generating or trading the credits.
Theme (3) - Definitional gateway: only UNFCCC-validated, tradable carbon credits within the Explanation are within the charge; analogous environmental incentives outside that definition are governed by general principles.
A.4 Legislative evolution / Finance Act amendment trail
Inserted by the Finance Act, 2017 with effect from assessment year 2018-19, expressly to bring clarity to the taxation of income from the transfer of carbon credits, which the case law (My Home Power and the following decisions) had treated as a capital receipt. For AY 2018-19 onward the income is taxed at 10% on a gross basis; for earlier years the capital-receipt jurisprudence continues to apply.
Finance Act 2026: no amendment to section 115BBG. The concessional 10% gross-basis charge on carbon-credit transfer income continues for AY 2026-27 onward.
A.5 CA practitioner pointers
(1) For AY 2018-19 onward, tax carbon-credit transfer income at 10% on a gross basis under section 115BBG - the capital-receipt argument no longer succeeds for those years. (2) For any open earlier year (up to AY 2017-18), the My Home Power line (capital receipt, not taxable) remains available. (3) Do not net the costs of generating/trading the credits against the income (sub-section (2)). (4) Confirm the credit is UNFCCC-validated and tradable within the Explanation before applying the section.
B. FINANCE ACT, 2026 - IMPACT NOTE
Section 115BBG is NOT amended by the Finance Act, 2026. The concessional 10% gross-basis charge on income from the transfer of carbon credits continues for AY 2026-27 onward.
C. CASE LAW - CLUSTERED BY ISSUE
Cluster C-1 : The pre-section position - carbon credits as capital receipt
CIT v. My Home Power Ltd. (2014) 365 ITR 82 (Andhra Pradesh).
Facts: The assessee, engaged in power generation, earned and sold carbon credits (Certified Emission Reductions). The Revenue sought to tax the sale proceeds as business income; the assessee contended the receipt was a non-taxable capital receipt.
Issue: Whether income from the sale of carbon credits is a revenue (business) receipt chargeable to tax, or a capital receipt outside the charge.
Held: The High Court held that the receipt on sale of carbon credits is a capital receipt and not taxable; the carbon credit is not an offshoot of business but of environmental concerns, and no asset is generated in the course of business. It accordingly fell outside the heads of income and was not chargeable.
Ratio: Carbon-credit receipts, arising from environmental entitlements rather than from the business itself, are capital in nature and not income (for the years before the insertion of section 115BBG).
Relevance: The leading authority on the pre-section 115BBG position; it governs assessment years up to AY 2017-18 and explains the very mischief that section 115BBG was enacted (prospectively) to address.
Cluster C-2 : The statutory reversal - prospective 10% charge
Section 115BBG (Finance Act, 2017, w.e.f. AY 2018-19).
Principle: From AY 2018-19, section 115BBG taxes income from the transfer of carbon credits at 10% on a gross basis, displacing the capital-receipt treatment prospectively. The change is not retrospective; the pre-section capital-receipt position (My Home Power) continues to govern earlier years.
Relevance: Marks the dividing line - capital receipt (and non-taxable) up to AY 2017-18; concessional 10% income from AY 2018-19 - which the practitioner must apply by reference to the year of transfer.
Candid note on the case-law field: The dedicated case law is concentrated on the pre-section characterisation (capital vs revenue), now settled for the future by section 115BBG. The leading authority is cited and verified; the post-section field is thin because the statutory 10% rate leaves little to litigate. No decision has been invented or misreported.
D. PRACTITIONER'S NOTE
Section 115BBG draws a clean temporal line: for AY 2018-19 onward, carbon-credit transfer income is taxed at 10% gross under the section; for earlier open years, My Home Power (capital receipt, not taxable) remains the governing authority. Apply the rate by reference to the year of transfer, do not net costs against the income, and confirm the credit meets the UNFCCC-validated, tradable definition.
E. SOURCES & CITATIONS
Statutory text verified against the Income-tax Act, 1961 (Bare Act, as amended by the Finance Act, 2025), Chapter XII section 115BBG (inserted by the Finance Act, 2017 w.e.f. AY 2018-19); cross-checked for FA 2026 against the firm's amendment tracker (no change). Marginal heading reproduced verbatim: 'Tax on income from transfer of carbon credits.'
Case citation verified against publicly reported sources: CIT v. My Home Power Ltd. (2014) 365 ITR 82 (Andhra Pradesh) (carbon-credit receipt held a capital receipt for pre-section years). Only the decision on point is listed; none has been invented or paraphrased into existence.
Caveat: Treatise-style commentary for practitioners and academic use; not legal opinion. The capital-receipt position applies only to years before AY 2018-19; verify the year of transfer, the current statutory text and the latest appellate position before relying on any proposition.