Section 198 — STT Listed Equity LTCG | ITA 2025

Section 198 — - LTCG ON STT-PAID LISTED EQUITY / EQUITY-MF / BUSINESS-TRUST

Section 198 is the substantive equivalent of 1961 s. 112A -- the SPECIAL CONCESSIONAL LTCG REGIME for STT-paid listed equity / equity-MF / business-trust units, perhaps the most-used provision in retail investor tax planning. FA 2018 introduced the regime (replacing the long-standing pre-2018 LTCG exemption under 1961 s. 10(38)); FA 2024 SIGNIFICANTLY ENHANCED both the rate and exemption: rate increased from 10% to 12.5%; ANNUAL EXEMPTION threshold increased from INR 1 LAKH to INR 1.25 LAKH effective 23-Jul-2024. ARCHITECTURE: Total income = LTCG-portion (s. 198 chargeable) + balance income (regular). Tax = aggregate of 12.5% on (LTCG - INR 1.25L) + regular tax on balance. Pre-1-Feb-2018 grandfathering preserved via s. 90(7)-(8) cost-determination -- 31-Jan-2018 FMV / actual cost protection. Practitioner-grade rule: every retail equity / equity-MF investor must understand s. 198 mechanics; family-level INR 1.25L exemption planning saves substantial tax.

Statutory text — Income-tax Act, 2025

Marginal note -- Tax on long-term capital gains in certain cases

(1) Irrespective of anything contained in section 197, the tax payable by an assessee on his total income shall be determined as per the provisions of sub-section (2), if—

(a) the total income includes any income chargeable under the head “Capital gains”;

(b) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(c) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has—

(i) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(ii) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

(2) The tax payable by the assessee on the total income referred to in sub-section

(1) shall be the aggregate of—

(a) income-tax calculated on such long-term capital gains exceeding ` 125000 at the rate of 12.5%; and

(b) income-tax payable on the total income as reduced by long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee.

(3) In the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by long-term capital gains computed under sub-section

(1) is below the maximum amount which is not chargeable to income-tax, then,—

(a) such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax; and

(b) the tax on the balance of such long-term capital gains shall be computed at the rate as referred to in sub-section (2).

(4) The condition specified in sub-section (1)(c) shall not apply to a transfer under- taken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

(5) The Central Government may, by notification, specify the nature of acquisition in respect of which the provisions of sub-section (1)(c)(i) shall not apply.

(6) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VIII shall be allowed from the gross total income as reduced by such capital gains.

(7) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 156 shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

(8) For the purposes of this section, the expression “equity oriented fund” means a fund set up under a scheme of a mutual fund specified in Schedule VII (Table: Sl. No. 20 or 21) or under a scheme of an insurance company comprising unit linked insurance policies to which exemption in Schedule II (Table: Sl. No. 2) does not apply and—

(i) in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,—

(A) a minimum of 90% of the total proceeds of such fund is invested in the units of such other fund; and

(B) such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and

(ii) in any other case, a minimum of 65% of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange, and, for the purposes of this clause,—

(I) the percentage of equity shareholding or unit held in respect of the fund, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;

(II) in case of a scheme of an insurance company comprising unit linked insurance policies to which exemption in Schedule II (Table: Sl. No. 2) does not apply, the minimum requirement of 90% or 65%, as the case may be, is required to be satisfied throughout the term of such insurance policy. C.—New tax regime Tax on income of certain manufacturing domestic companies.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 198	INCOME-TAX ACT, 1961 -- s. 112A
Sub-s. (1) -- STT-paid listed equity / equity-MF / business-trust LTCG	1961 s. 112A(1) [FA 2018]
12.5% rate post 23-Jul-2024 (was 10% pre)	1961 s. 112A(1) [FA 2024]
INR 1,25,000 annual exemption post 23-Jul-2024 (was INR 1L pre)	1961 s. 112A(2) Proviso [FA 2024]
FA 2018 grandfathering link (cost via s. 90(7)-(8))	1961 s. 112A(2) read with s. 55(2)(ac)
Sub-s. (2) -- aggregate-tax computation	1961 s. 112A(1) main
Sub-s. (3) -- equity-MF chargeable to STT	1961 s. 112A(1)(c)
Sub-s. (4) -- Conditions for sale-of-listed-equity STT proviso	1961 s. 112A(1) Proviso

STATUTORY ARCHITECTURE

ELIGIBILITY (sub-s. 1): LTCG arising from transfer of: (a) EQUITY SHARE in company chargeable to STT on transfer (acquisition AND transfer must be on recognised stock exchange in India with STT paid -- Rule 8AC equivalent for grandfathering exceptions where pre-listing acquisition); (b) UNIT of EQUITY-ORIENTED MUTUAL FUND (>=65% equity per Sch. V definition); transfer chargeable to STT (off-market sale / redemption-to-AMC subject to MF route also covered); (c) UNIT of BUSINESS TRUST (REIT / InvIT under s. 198 / 1961 s. 2(13A) definition; SEBI-recognised). HOLDING PERIOD: > 12 MONTHS for LTCG character (s. 2(101) of 2025 Act / 1961 s. 2(42A) -- 12 month threshold for listed securities). INR 1,25,000 ANNUAL EXEMPTION (FA 2024): the FIRST INR 1.25L of aggregate s. 198-eligible LTCG in tax year is EXEMPT; balance taxed at 12.5% flat. Per assessee per tax year. WORKED EXAMPLES: (i) A has STT-paid listed equity LTCG INR 5L: tax = 12.5% × (5L - 1.25L) = 12.5% × 3.75L = INR 46,875. (Plus surcharge / cess.) (ii) A has equity LTCG INR 1L only: ENTIRE INR 1L exempt; NIL tax. (iii) A has equity LTCG INR 50L + balance other income INR 12L: special tax 12.5% × (50L - 1.25L) = INR 6,09,375; regular tax on INR 12L (per s. 202 new regime); aggregate. PRE-1-FEB-2018 GRANDFATHERING (sub-s. via s. 90(7)-(8)): cost of pre-1-Feb-2018 acquired listed equity / equity-MF / business-trust units determined per: HIGHER OF (a) actual cost; AND (b) LOWER OF (i) FMV-on-31-Jan-2018 (or last-traded-day-before for non-traded scrips), AND (ii) full value of consideration on transfer. Effect: pre-FA 2018 unrealised gains protected; post-FA 2018 gains chargeable. Critical for legacy equity portfolios held since pre-2018.

PRE-FA 2018 LANDSCAPE (1961 s. 10(38)) AND TRANSITION

Pre-FA 2018: STT-paid listed equity LTCG was FULLY EXEMPT under 1961 s. 10(38) -- a 14-year-long-running concession (FA 2004 introduction tied to STT regime). FA 2018 introduced 10% rate (above INR 1L exemption) with 31-Jan-2018 grandfathering protection. FA 2024 enhanced to 12.5% / INR 1.25L. GRANDFATHERING MECHANICS (key for legacy investors): for share / unit acquired BEFORE 1-FEB-2018 with FMV 31-Jan-2018 = INR 1500 (high) and actual cost = INR 100 (low) and sold post-Feb-2018 at INR 2000: Cost for s. 198 = HIGHER OF [INR 100; LOWER OF [INR 1500 FMV; INR 2000 FVOC] = INR 1500] = INR 1500. LTCG = 2000 - 1500 = INR 500 chargeable. Effectively: pre-2018 unrealised gain (INR 1500-100 = INR 1400) PROTECTED; post-2018 gain (INR 500) chargeable.

STT-EQUITY ACQUISITION CARVE-OUTS

Post-FA 2018 fix (Rule 8AC equivalent / 1961 s. 112A Proviso): the STT-on-acquisition requirement carries CARVE-OUTS for genuine non-STT-paid acquisitions: (a) IPO / FPO acquisition (pre-listing); (b) Bonus / rights / amalgamation / demerger; (c) Inheritance / will / gift; (d) IBC resolution-plan share allotments; (e) Pre-listing private placements; (f) Specified family trusts. Where assessee acquired pre-listing / non-STT, but TRANSFERS later on STT-paid recognised stock exchange, s. 198 still applies. CBDT Notification specifies eligible carve-outs to prevent disqualification of legitimate non-STT-acquisition pathways.

PLANNING NOTES (TEN AREAS)

(i) ANNUAL EXEMPTION OPTIMISATION -- INR 1.25L threshold per assessee per tax year; family members may each utilise own threshold; consider strategic gift-to-family planning. (ii) LTCG REALISATION TIMING -- partial realisation each year up to INR 1.25L = NIL tax; deferred realisation post 23-Jul-2024 = 12.5% (vs 10% pre); model timing carefully. (iii) FA 2018 GRANDFATHERING -- collect 31-Jan-2018 prices for ALL pre-1-Feb-2018 holdings; bhav-copy / NSE-historical-price; document carefully. (iv) HOLDING-PERIOD MANAGEMENT -- 12-month threshold; holding past anniversary converts STCG (s. 196 20% post FA 2024) to LTCG (s. 198 12.5% with INR 1.25L exemption) -- significant tax saving. (v) STT VERIFICATION -- broker contract notes; off-market sale loses concession; check Rule 8AC carve-outs for non-STT acquisition. (vi) BUSINESS-TRUST UNITS -- REIT / InvIT units; document SEBI registration. (vii) INDIA-MAURITIUS / SINGAPORE NR -- post-2017 amended treaties tax NR's listed-equity CG in India; s. 198 12.5% with INR 1.25L exemption applies; verify TRC / Form 10F. (viii) SET-OFF -- s. 198 LTCG can absorb (set-off) LTCL from same / other categories; INR 1.25L exemption applied AFTER set-off. (ix) FAMILY MEMBER PLANNING -- spouse / children / parents -- each their own INR 1.25L threshold; gift-and-realise across family efficient. (x) DOCUMENTATION -- broker contract notes (STT separately shown); CDSL/NSDL DP statement; FA 2018 grandfathering prices.

CROSS-REFERENCES

Section 67 -- CG charge.
Section 72 -- Mode of computation (no indexation under s. 198).
Section 90(7)-(8) -- Pre-1-Feb-2018 grandfathering for cost.
Section 196 -- STCG rates (parallel for short-term; 20% post FA 2024).
Section 197 -- LTCG general rates (other assets; 12.5% / 20% indexed for land-building).
Section 76 -- Forced-STCG (debt MFs / unlisted bonds outside s. 198 ambit).
Schedule V -- Equity-oriented fund definition (65% equity).
Section 159 -- DTAA framework (NR investor coordination).
Finance (No. 2) Act 2004 Chapter VII -- STT framework.
SEBI REIT / InvIT Regulations -- business trust framework.
Income-tax Rules, 2026 r. 8AC equivalent -- non-STT acquisition carve-outs.
CBDT Notifications -- carve-out specifications.

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