Section 196 deals with the special tax treatment of short-term capital gains arising from the sale of specified equity shares, units of equity-oriented funds and units of business trusts, subject to prescribed conditions.

This section corresponds broadly to Section 111A of the Income-tax Act, 1961

Section 196(1)

Type of STCA

Where the total income of an assessee includes any income chargeable under the head “Capital gains”, arising from the transfer of a short-term capital asset–

(a) being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust; and

(b) the transaction of sale of such equity shares or unit is chargeable to STT (securities transaction tax) under Chapter VII of the Finance (No. 2) Act, 2004,

Calculation of tax payable on total Income

then, subject to the provisions of sub-section (2),

tax payable by the assessee on the total income, 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.

Section 196 applies only to following short term capital assets

(a) An equity share in a company.

(b) A unit of an equity-oriented fund.

(c) A unit of a business trust.

Ex

Suppose Ms. B has the following income:

Assuming the capital gain qualifies u/s 196(1), the tax computation has two components:

Tax on qualifying short-term capital gain: ₹2,00,000 × 20% = ₹40,000.

Tax on the remaining ₹8,00,000: calculated separately under the applicable tax regime and slab rates

Section 196(5)

For the purposes of this section, the expression “equity-oriented fund” shall have the meaning assigned to it in section 198.

Section 196(2)

In the case of an individual or a HUF, being a resident, where

total income as reduced by STCG computed u/ss (1) is below the maximum amount which is not chargeable to income-tax,

then, —

(a) such STCG shall be reduced by the amount which falls short of the maximum amount which is not chargeable to income-tax; and

(b) the tax on the balance of such STCG shall be computed at the rate as applicable in sub-section (1)(i).

Ex-1

Suppose Mr. C is a resident individual and his income for the tax year is as follows.

For illustration, assume his applicable basic exemption limit is ₹4,00,000.

Step 1: Calculate the unused exemption limit

₹4,00,000 − ₹2,00,000 = ₹2,00,000.

Step 2: Adjust the short-term capital gain

Since the unused exemption of ₹2,00,000 is sufficient to cover the entire capital gain of ₹1,50,000, no amount of that gain remains taxable at the special rate.

Ex-2

Suppose Mr. D has the following income:

Step 1: Calculate the unused exemption limit

₹4,00,000 − ₹3,50,000 = ₹50,000.

Step 2: Reduce the qualifying capital gain

₹1,50,000 − ₹50,000 = ₹1,00,000.

Step 3: Calculate tax on the remaining gain

₹1,00,000 × 20% = ₹20,000.

Therefore, the basic tax on the remaining qualifying capital gain is ₹20,000, before applicable surcharge and cess.

Section 196(3)

The provisions of sub-section (1)(b) shall not apply

to a transaction undertaken on a recognized stock exchange located in any IFSC and

where the consideration for such transaction is paid or payable in foreign currency.

IFSC = International Financial Services Centre

Section 196(4)

Where the gross total income of an assessee includes any STCG referred to in sub-section (1),

the deduction under Chapter VIII shall be allowed from the GTI as reduced by such STCG.

Ex

Suppose Ms. E has the following income and deduction claim:

For illustration, assume the ₹1,00,000 deduction is otherwise allowable.

The deduction is applied to the eligible income base of ₹8,00,000, rather than being used to reduce the ₹2,00,000 qualifying capital gain.