Section 111A of the Income Tax Act

Section 111A of the Income Tax Act 1961 is the provision that taxed short-term capital gains on equity shares, units of an equity oriented fund, and units of a business trust at a flat rate, provided the sale was chargeable to Securities Transaction Tax (STT). The rate was 20 per cent on transfers from 23 July 2024 and 15 per cent before that. From 1 April 2026 the same charge sits in section 196 of the Income-tax Act 2025 (Act 30 of 2025), at 20 per cent, with the same three asset classes and the same sale-side STT test.

The provision matters to anyone who sells listed shares or equity mutual fund units within 12 months. Those gains are taxed separately from salary and other income at the special rate rather than at slab rates, and they get no annual exemption. A resident individual or Hindu undivided family can absorb part of the gain into an unused basic exemption limit, and no individual pays surcharge above 15 per cent on the tax on those gains. Chapter VIII deductions (Chapter VI-A under the 1961 Act, such as Section 80C) cannot reduce the gain.

Two points are easy to get wrong. Section 196 does not require STT on the purchase leg: that condition belongs to Section 112A , the long-term provision, now section 198. And the income tax return has no “Schedule 111A”; the gains are reported in Schedule CG and taxed through Schedule SI. Both points are set out with their sources below, along with the rate history, the tax year 2026-27 surcharge and cess rules from the Finance Act 2026, five worked computations, and the loss set-off rules.

Status after the Income-tax Act 2025

Section 111A applies to short-term gains arising up to 31 March 2026, and section 196 of the Income-tax Act 2025 applies from tax year 2026-27 onward. The Income-tax Act 2025 came into force on 1 April 2026 and repealed the Income Tax Act 1961 . Its savings clause, section 536(2), keeps liabilities accrued under the old Act intact and continues proceedings for any tax year beginning before 1 April 2026 under the repealed Act. A gain made in February 2026 is therefore a Section 111A gain, reported in the AY 2026-27 return, and a gain made in May 2026 is a section 196 gain.

No clause of section 536 names Section 111A. The carry-over works through the general savings clauses in section 536(2)(a) to (c).

Table: webnotes.in comparison of the two provisions. Sources: Income-tax Act 2025, gazette copy, pp. 220 to 221 (s.196) and ss.2(101), 111 and 536; Memorandum explaining the Finance (No. 2) Bill 2024, p. 34.

The “tax year” of the 2025 Act replaces the 1961 Act’s pairing of a previous year with an assessment year. Tax year 2026-27 runs from 1 April 2026 to 31 March 2027, the same period the old Act called financial year 2026-27.

Text of section 196

Section 196 of the Income-tax Act 2025 has five sub-sections under the marginal heading “Tax on short-term capital gains in certain cases”, in Part B of Chapter XIII (“Special provisions relating to tax on capital gains”). Sub-section (1) imposes the charge and the other four qualify it.

Source: Income-tax Act 2025 (Act 30 of 2025), section 196, gazette copy pp. 220 to 221.

The charge in section 196(1) reads, in its operative part: “the tax payable by the assessee on the total income, subject to the provisions of sub-section (2), shall be the aggregate of (i) income-tax calculated on such short-term capital gains at the rate of 20%; (ii) income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee.” This two-part structure is why short-term equity gains never push salary income into a higher slab, and why slab income never changes the 20 per cent rate on the gain.

Section 196 makes no reference to 23 July 2024 or to a 15 per cent rate. The split between the two rates is a 1961 Act matter, relevant only to returns and revisions for financial years up to 2024-25.

Assets covered

Section 196(1)(a) covers three asset classes, and the gain must arise from a short-term capital asset of one of them.

Equity shares in a company. Listed shares bought and sold on the National Stock Exchange or BSE in the delivery segment are the common case. Unlisted shares qualify only when sold in an offer for sale within an initial public offer, which is chargeable to STT under Chapter VII of the Finance (No. 2) Act 2004; any other sale of unlisted shares is not.

Units of an equity oriented fund. Section 198(8) of the 2025 Act defines the term, and section 196(5) borrows that definition. The fund must be a mutual fund scheme or a unit-linked insurance scheme that does not get the Schedule II exemption, and it must invest:

• at least 65 per cent of its total proceeds in equity shares of domestic companies listed on a recognised stock exchange; or
• if it is a fund of funds investing in an exchange-traded fund, at least 90 per cent of its proceeds in that fund, which must itself hold at least 90 per cent in domestic listed equity.

The percentages are computed on the annual average of the monthly averages of opening and closing holdings, under the same clause. Flexi cap , ELSS , large cap, mid cap, small cap, sectoral and aggressive hybrid schemes usually meet the 65 per cent test. So do arbitrage funds , whose hedged equity positions count towards it. A fund of funds that buys overseas funds, or an index fund tracking a foreign index, does not.

Units of a business trust. Section 2(21) of the 2025 Act defines a business trust as a trust registered as an infrastructure investment trust or a real estate investment trust under the SEBI regulations of 2014. Units of a REIT or an InvIT sold on an exchange within 12 months are taxed at 20 per cent. The Memorandum to the Finance (No. 2) Bill 2024 cut the long-term threshold for listed business trust units from 36 months to 12 from 23 July 2024, which is why they now share the equity holding period.

Holding period

A listed security, a unit of the Unit Trust of India, a unit of an equity oriented fund, or a zero-coupon bond is short-term if held for not more than 12 months immediately before the date of transfer. The rule is in section 2(101)(b) of the Income-tax Act 2025, which substitutes “twelve months” for the 24 months that apply to other capital assets under section 2(101)(a). A share bought on 10 June 2026 and sold on 10 June 2027 is held for exactly 12 months and is short-term; sold on 11 June 2027, it is long-term and moves to section 198.

Each SIP instalment is a separate purchase with its own 12-month clock. A redemption from a three-year-old SIP can produce both section 196 and section 198 gains in the same transaction.

The STT condition

Section 196 applies only where the sale is chargeable to Securities Transaction Tax under Chapter VII of the Finance (No. 2) Act 2004. The text is “the transaction of sale of such equity share or unit is chargeable to securities transaction tax”, which tests the sale and nothing else. A share allotted in an IPO , received as a bonus, or bought off-market and later sold on the exchange qualifies, because the purchase leg is irrelevant to section 196.

The acquisition test belongs to the long-term provision. Section 198(1)(c)(i) requires STT to have been paid on both acquisition and transfer of an equity share, and section 198(5) lets the Central Government notify kinds of acquisition exempt from that requirement. Equity oriented fund units and business trust units need STT on transfer only, even under section 198.

The wording also differs in tense. Section 198 asks whether STT has been paid; section 196 asks whether the sale “is chargeable”. A sale on a recognised Indian exchange in the delivery segment is chargeable, and so is the redemption of an equity oriented fund unit to the mutual fund (STT on equity fund redemptions ).

Sales outside the STT net

Short-term gains that fail section 196(1)(b) are added to total income and taxed at slab rates. Common cases:

• an off-market transfer of listed shares, including a private sale to a relative for consideration;
• a sale of unlisted shares, other than in an offer for sale within an initial public offer;
• a redemption from a scheme that is not an equity oriented fund, such as an international fund of funds, or a debt fund, whose units acquired on or after 1 April 2023 the specified mutual fund rule in section 76(2)(a) (formerly Section 50AA) treats as short-term whatever the holding period.

The IFSC exception

Section 196(3) switches off the STT condition for a transaction “undertaken on a recognised stock exchange located in any International Financial Services Centre” where the consideration is paid or payable in foreign currency. The sub-section keeps a foreign-currency equity sale on an exchange in GIFT City , such as India International Exchange , within the 20 per cent rate even where the trade is not chargeable to STT. Section 198(4) makes the same exception for long-term gains.

Tax rate and its history

The rate under section 196 is 20 per cent, before surcharge and cess. Under Section 111A it was 20 per cent for transfers on or after 23 July 2024 and 15 per cent for transfers up to 22 July 2024.

The 2024 increase came through the Finance (No. 2) Act 2024 , whose Bill was presented with the Union Budget on 23 July 2024. Its Memorandum states that the rate “is proposed to be increased to 20% from the present rate of 15% as the present rate is too low and the benefit from such low rate is flowing largely to high net worth individuals”, with effect from 23 July 2024. The same Bill raised the long-term rate under Section 112A from 10 to 12.5 per cent and the exemption from Rs 1,00,000 to Rs 1,25,000, and raised the non-resident TDS rate on Section 111A gains from 15 to 20 per cent.

For financial year 2024-25 the date of transfer decides the rate, so an AY 2025-26 return can carry Section 111A gains at both rates. Every transfer in financial year 2025-26 falls after 23 July 2024, so the AY 2026-27 return carries them only at 20 per cent. The CBDT’s ITR-2 validation rules for AY 2026-27 (version 1.0, 26 May 2026), rule 581, describe Section 111A income in Schedule SI as “chargeable @ 20%”.

The section’s insertion year, its original rate, and the amending Acts before 2024 could not be confirmed at a primary source for this page, so no figure is stated for them here. The Section 196 text confirms only that the STT the condition refers to is levied under Chapter VII of the Finance (No. 2) Act 2004 (Act 23 of 2004).

Surcharge and cess for tax year 2026-27

Surcharge on section 196 tax is set by the Finance Act 2026 (No. 4 of 2026), not by the Income-tax Act 2025, and for individuals and HUFs it is capped at 15 per cent of the tax on the gain. Section 3(4)(a) of the Finance Act applies Paragraph F of Part I-B of its First Schedule to tax computed under sections 196, 197 and 198. For individuals and HUFs in the default new regime under section 202, section 3(4)(b) applies a separate table, Serial No. 10.

Source: Finance Act 2026 (No. 4 of 2026), section 3(4)(a) and First Schedule Part I-B Paragraph F, Table 1, Serial No. 1 (old regime); section 3(4)(b), Table, Serial No. 10 (new regime). Applies to individuals, HUFs, AOPs other than co-operative societies, BOIs and artificial juridical persons.

The higher rates apply only where income excluding dividends and section 196 to 198 gains crosses Rs 2 crore. On the part of tax computed on those gains, the Act states that the surcharge rate “shall not exceed 15%”. Section 3(15) then levies Health and Education Cess at 4 per cent of income-tax and surcharge together.

The ceiling on the gain’s effective rate is therefore 20 per cent × 1.15 × 1.04 = 23.92 per cent. Up to Rs 50 lakh of total income it is 20 × 1.04 = 20.8 per cent. Companies, firms and other assessees pay surcharge under their own rows of Paragraph F; the 15 per cent cap described here is the one stated for individuals, HUFs, AOPs, BOIs and artificial juridical persons.

Basic exemption shortfall

Section 196(2) lets a resident individual or HUF use an unused basic exemption limit against short-term equity gains. Where total income minus the section 196 gains is below “the maximum amount which is not chargeable to income-tax”, the gains are reduced by the shortfall and only the balance is taxed at 20 per cent. Non-residents, firms and companies get no such adjustment.

Source: Finance Act 2026 (No. 4 of 2026), section 3, table of maximum amounts not chargeable to income-tax, Serial Nos. 1 to 4.

The adjustment matters most to students, retirees and homemakers whose only income is investment income. A resident with Rs 1,00,000 of interest and Rs 3,00,000 of short-term equity gains, in the new regime, has a shortfall of Rs 3,00,000 and pays no tax on the gain.

Deductions and rebate

Chapter VIII deductions cannot be set against section 196 gains. Section 196(4) allows them only “from the gross total income as reduced by such capital gains”. Chapter VIII of the 2025 Act (“Deductions to be made in computing total income”, from section 122) replaces Chapter VI-A of the 1961 Act. The ELSS, provident fund and life insurance deduction formerly in Section 80C, now section 123 with Schedule XV , reduces slab income only, and it is not available at all in the new regime.

The rebate rules differ by regime:

• New regime. Section 156(2) gives a resident individual with total income up to Rs 12,00,000 a rebate of up to Rs 60,000, with marginal relief above that figure. Section 156(3) caps it at “income-tax payable as per the rates provided in section 202(1)”, the slab rates. Tax on section 196 gains is computed at the section 196 rate, so the rebate does not reduce it. A resident with Rs 8,00,000 of income other than the gain and Rs 2,00,000 of short-term equity gains pays nil on the Rs 8,00,000, after the rebate, and Rs 40,000 plus cess on the gain.
• Old regime. Section 156(1) gives a resident individual with total income up to Rs 5,00,000 a rebate of the lower of the tax and Rs 12,500. Section 196 has no clause excluding its tax from that rebate. Section 198(7) does exclude long-term gains tax from the rebate, and section 196 carries no counterpart.

For new regime taxpayers the rebate gives nothing against section 196 tax; their relief is the Rs 4,00,000 exemption limit through the shortfall. Old regime taxpayers with total income at or below Rs 5,00,000 can use both the shortfall and the rebate. Example 3 below works through one case.

Computing tax on short-term equity gains

Short-term capital gain under section 196 is the full value of consideration minus the cost of acquisition and the expenditure incurred wholly and exclusively for the transfer. Brokerage, exchange charges and stamp duty on the sale are transfer expenses. STT is not deductible: section 72(3)(b) of the Income-tax Act 2025 bars it. No indexation applies to any short-term asset.

The order of computation for a resident individual is:

1. Compute short-term gains on each qualifying sale and net them against short-term capital losses of the year (section 108(2)(a)).
2. Deduct the gains from gross total income and allow Chapter VIII deductions on the balance (in the new regime, only those preserved by section 202(2)(a)(xii)).
3. Compute tax on the balance at slab rates.
4. If the balance is below the exemption limit, reduce the gains by the shortfall (section 196(2)).
5. Tax the remaining gains at 20 per cent.
6. Apply the section 156 rebate as the regime allows, then surcharge (capped at 15 per cent on the gains portion) and 4 per cent cess.

Example 1: salaried resident, new regime

A resident employee has income other than the gain of Rs 15,00,000 after the standard deduction, and sells shares held for eight months at a gain of Rs 2,00,000 in tax year 2026-27.

The salary is taxed separately at the section 202(1) slabs, and the gain does not move it into a higher slab. The rebate is not available because total income exceeds Rs 12,00,000.

Example 2: low-income resident, comparing regimes

A resident individual aged 45 has Rs 1,50,000 of interest income and Rs 5,00,000 of short-term gains from equity fund redemptions. Total income is Rs 6,50,000.

The new regime is cheaper by Rs 31,200, entirely because of its higher exemption limit.

Example 3: old-regime rebate on a short-term gain

A resident aged 50, in the old regime, has Rs 1,00,000 of other income and Rs 3,00,000 of short-term gains on listed shares. Total income is Rs 4,00,000. The shortfall is Rs 1,50,000 (Rs 2,50,000 minus Rs 1,00,000), so Rs 1,50,000 of the gain is taxed at 20 per cent, giving Rs 30,000. Total income is below Rs 5,00,000, so section 156(1) allows a rebate of Rs 12,500. Tax after rebate is Rs 17,500, and with cess Rs 18,200.

In the new regime the same person’s shortfall is Rs 3,00,000 (Rs 4,00,000 minus Rs 1,00,000), which absorbs the whole gain, and the tax is nil.

Example 4: surcharge cap above Rs 2 crore

A resident in the new regime has Rs 3 crore of business income and Rs 50 lakh of short-term equity gains. Income excluding the gain exceeds Rs 2 crore, so the slab tax attracts 25 per cent surcharge. The gains portion is capped:

The effective rate on the gain is 23.92 per cent. Without the cap, a 25 per cent surcharge would have taken the figure to Rs 13,00,000.

Example 5: non-resident redeeming an equity fund

A non-resident Indian redeems equity oriented fund units held for 10 months at a gain of Rs 3,00,000. The shortfall adjustment is not available, so the full Rs 3,00,000 is taxed at 20 per cent: Rs 60,000, plus cess of Rs 2,400. The mutual fund deducts tax at source under section 393(2) at the same rate before paying the redemption proceeds, and the investor claims credit for it in the return (TDS on NRI redemptions ).

Losses, set-off and carry-forward

A short-term capital loss can be set off against any capital gain, short-term or long-term, in the same tax year. Section 108(2)(a) of the Income-tax Act 2025 sets it against “the income, computed in respect of any other capital asset for that year”. A long-term loss, by contrast, can be set off only against long-term gains under section 108(2)(b). Section 109(2) bars setting either kind of capital loss against salary, business or any other head.

An unabsorbed short-term loss carries forward for eight tax years after the year in which it was first computed (section 111(2)) and can be set against any capital gain in those years (section 111(1)(a)). Section 121 makes carry-forward conditional on filing the return for the loss year by the due date under section 263(1). Losses computed under the 1961 Act carry into the new Act through section 536(2)(n), “upto eight financial years immediately succeeding the financial year in which such loss was first computed”.

The asymmetry gives short-term losses more use than long-term ones. A short-term loss of Rs 1,00,000 on a small-cap share can offset a long-term gain taxed at 12.5 per cent or a short-term gain taxed at 20 per cent; a long-term loss can never offset a short-term gain. This is the mechanism behind year-end tax-loss harvesting , and the procedure is in setting off mutual fund capital losses and carrying forward mutual fund capital losses .

Non-residents and foreign portfolio investors

Non-resident individuals pay the same 20 per cent on section 196 gains but without the section 196(2) shortfall adjustment, which is limited to residents. Tax is deducted at source under section 393(2) at the rate in force, with surcharge and cess. Treaty relief is covered in DTAA and NRI mutual fund investments .

Foreign portfolio investors are taxed under section 210 of the Income-tax Act 2025, the successor to Section 115AD. Its rate table charges 20 per cent on short-term gains “referred to in section 196” and 30 per cent on other short-term gains. The FPI rate therefore depends on the same STT test as a resident’s.

Reporting in the income tax return

For AY 2026-27 (financial year 2025-26), Section 111A gains are reported in Schedule CG of ITR-2 or ITR-3 and carried to Schedule SI, which taxes special-rate income. Rule 581 of the CBDT ITR-2 validation rules for AY 2026-27 checks that “income u/s 111A … chargeable @ 20%” in Schedule SI matches the figure in Schedule BFLA, the loss set-off schedule. Rule 991 refers to “income chargeable to tax at special rate under section 111A” in Part B-TI.

There is no Schedule 111A. Schedule 112A exists because long-term gains on STT-paid equity are reported scrip-wise to apply the 31 January 2018 grandfathered cost; short-term gains have no grandfathering and no scrip-wise schedule. Sale data reaches the Annual Information Statement from brokers, depositories and registrars, and the CAMS and KFintech capital gains statements give the per-scheme split of short-term and long-term gains for mutual fund units. The schedule-by-schedule procedure is in filling Schedule CG for mutual funds .

Comparison with section 198 (formerly Section 112A)

Section 196 and section 198 tax the same three asset classes and differ in holding period, rate, exemption, STT test and rebate treatment.

Source: Income-tax Act 2025, sections 196 and 198, gazette copy pp. 220 to 223.

The 7.5 percentage-point gap between the rates is the price of selling on or before the first anniversary of purchase rather than a day later. On a Rs 5,00,000 gain, a resident with total income up to Rs 50 lakh and other income of at least Rs 4,00,000 (so that neither surcharge nor the shortfall applies) pays Rs 1,04,000 including cess at 20 per cent, against Rs 48,750 at 12.5 per cent after the Rs 1,25,000 exclusion. The detail of the long-term regime is in Section 112A and LTCG on equity mutual funds .

Comparison with slab-rate short-term gains

Short-term gains outside section 196 are taxed at slab rates, which in the new regime run from nil to 30 per cent under section 202(1). For a taxpayer whose total income sits in the 5 or 10 per cent slab, slab taxation can be cheaper than 20 per cent; for one in the 30 per cent slab it costs 10 percentage points more.

Source: Income-tax Act 2025, sections 2(101), 76, 196 and 202(1).

Section 196 is a compulsory charge. A resident whose slab rate is lower cannot elect to have equity gains taxed at slab rates instead; the only relief for a low-income resident is the shortfall adjustment in section 196(2).

Trading income, buybacks, switches and stripping

Trading versus investment. Section 196 applies only to income chargeable under the head “Capital gains”. Profits assessed as business income, as intraday and futures and options profits are, fall outside it, and a high-frequency delivery trader can be assessed on business income on the facts of the case (intraday trading ).

Buybacks. From 1 April 2026 the Finance Act 2026 moved buyback proceeds back into capital gains, with an additional tax on promoters, after the 1 October 2024 to 31 March 2026 period in which they were taxed as dividends (capital gains tax in India , share buyback ). A short-term gain on shares tendered in a buyback is a section 196 gain only where the transfer is chargeable to STT.

Switches between schemes. A switch from one mutual fund scheme to another is a redemption followed by a purchase, so a switch out of an equity oriented fund within 12 months produces a section 196 gain (mutual fund switches ).

Bonus and dividend stripping. Losses created by buying units or shares just before a record date and selling soon after can be disallowed under the stripping rules described in bonus stripping and dividend stripping .

See also

• Capital gains tax in India
• Capital gains tax on equity in India
• Section 112A
• STCG on equity mutual funds under Section 111A
• LTCG on equity mutual funds under Section 112A
• Equity mutual fund taxation in India
• Hybrid mutual fund taxation
• Arbitrage fund taxation
• Securities Transaction Tax
• STT on equity mutual funds
• Income-tax Act 2025
• Income Tax Act 1961
• Finance Act 2026
• Finance (No. 2) Act 2024
• Section 87A rebate
• Section 123 of the Income-tax Act 2025
• Section 80C
• New tax regime in India
• Old tax regime in India
• Grandfathering rule for LTCG
• SIP taxation and FIFO
• Debt mutual fund indexation removal, 2023
• Fund of funds in India
• Exchange-traded funds in India
• Index funds in India
• ELSS mutual funds
• Real estate investment trust
• Infrastructure investment trust
• GIFT City
• Foreign portfolio investor
• NRI mutual fund TDS
• DTAA and NRI mutual fund investments
• ITR-2
• ITR-3
• Annual Information Statement
• CAMS and KFintech capital gains statements
• Mutual fund capital gains statement for ITR
• How to fill Schedule CG for mutual funds
• How to set off mutual fund capital losses
• How to carry forward mutual fund capital losses
• Tax-loss harvesting on Zerodha
• Bonus stripping
• Dividend stripping
• Share buyback
• Intraday trading
• Central Board of Direct Taxes

External references

• Income-tax Act 2025 (Act 30 of 2025), Gazette of India
• Finance Act 2026 (No. 4 of 2026), Gazette of India
• Memorandum explaining the provisions in the Finance (No. 2) Bill 2024
• Income Tax Department e-filing portal
• Securities and Exchange Board of India, regulator of REITs and InvITs

References

1. Income-tax Act 2025 (Act 30 of 2025), section 196, “Tax on short-term capital gains in certain cases”, Gazette of India, gazette copy pp. 220 to 221.
2. Income-tax Act 2025, sections 2(21), 2(101), 72(3)(b), 108, 109, 111, 121, 156, 198, 202, 210, 393 and 536.
3. Finance Act 2026 (No. 4 of 2026), section 3(4)(a) and (b), section 3(15), the table of maximum amounts not chargeable to income-tax in section 3, and First Schedule Part I-B Paragraph F.
4. Ministry of Finance, Memorandum explaining the provisions in the Finance (No. 2) Bill 2024, “Rationalisation and Simplification of taxation of Capital Gains”, p. 34, effective 23 July 2024.
5. Income Tax Department, Directorate of Income Tax (Systems), “ITR 2: Validation Rules for AY 2026-27”, version 1.0, 26 May 2026, rules 581 and 991.
6. Income Tax Act 1961, Section 111A (repealed with effect from 1 April 2026 by section 536 of the Income-tax Act 2025, subject to its savings clauses).