Section 197 Tax on long-term capital gains.

Income-tax Act, 2025

At a Glance

Document examined is Clause 197 of the Income Tax Bill, 2025 (Old Version), which sets out methodology for taxing long-term capital gains (LTCG) in India. It matters to individual/HUF taxpayers, non-residents/foreign companies, and the revenue department as it prescribes computation and special reliefs (for certain land/building transfers). Effective/decision date: Not stated in the document beyond the reference date of acquisition (23rd July, 2024) used for transitional relief.

Background & Scope

Statutory hook: Clause 197 of the Income Tax Bill, 2025 (Old Version) - titled "Tax on long-term capital gains." Context: establishes the method of computing tax where total income includes income charged under the head "Capital gains" arising from transfer of long-term capital assets. Coverage: persons whose total income includes LTCG; special rules for resident individuals/HUFs and transitional relief for land/building acquired before 23 July 2024. Definitions provided for "securities," "listed securities," "unlisted securities," and "indexed cost of acquisition/improvement" by cross-reference to section 2(h) of the Securities Contracts (Regulation) Act, 1956 and section 72 respectively. The Bill provides no broader policy rationale beyond the operative computation provisions.

Statutory Provision Mode

Text & Scope

Clause 197 prescribes a two-part taxation method for assessee whose total income includes LTCG: (a) compute income-tax on total income excluding LTCG as if that reduced amount were the total income; (b) compute tax on LTCG at a flat 12.5% rate; tax payable is aggregate of (a) and (b). Sub-section (2) creates an exemption mechanism for resident individual/HUFs where reduced total income falls below the basic exemption limit: LTCG is reduced to the extent the reduced total income falls short of the basic exemption, with balance taxed at 12.5%. Sub-section (3) supplies a transitional relief for resident individual/HUF transfers of land or building acquired before 23 July 2024: excess income-tax computed under a specified formula E = A - B is to be ignored, where A is tax computed under clause (b) of sub-section (1) and B is tax computed under clause (b) of sub-section (1) taking rate as 20% and gains computed using indexed cost of acquisition/improvement. Sub-section (4) (in the Bill) provides a deduction rule for gross total income: where gross total income includes LTCG, gross total income shall be reduced by such income and the deduction under Chapter VIII shall be allowed as if the reduced gross total income were the gross total income. Sub-section (5) contains definitional cross-references.

Interpretation

The clause reflects an intent to segregate LTCG from other income for rate application while preserving progressive taxation principles for non-LTCG income (by taxing non-LTCG income at normal rates and LTCG at a concessional flat rate). The resident individual/HUF provision in sub-section (2) operates as a mechanism to preserve exemption threshold benefits for personal taxpayers by allowing an adjustment of LTCG to the extent necessary to retain the basic exemption. The transitional mechanism in sub-section (3) indicates a legislative intent to mitigate potential tax increases resulting from the change in rate/calculation methodology for land/building acquired before the specified date (23 July 2024), by effectively capping excess tax to the difference between tax computed under the new 12.5% regime and what would have been payable under a 20% rate with indexed costs.

Exceptions/Provisos

Sub-section (2) operates as a proviso-type relief for resident individuals/HUFs relating to the basic exemption limit. Sub-section (3) provides a special transitional carve-out applicable only to resident individual/HUF transfers of land or building acquired before the specified date; it effectively reduces the incremental tax burden to nil up to a calculated excess. No other explicit exceptions or provisos are contained. The Bill does not state any exception for equity shares or units within the operative text (although the explanatory line appended asserts such exclusions-see "Not stated in the document." on legislative exclusion beyond the explanatory note).

Illustrations

• Example 1 (Resident individual with basic exemption): Taxpayer's other income (excluding LTCG) = INR 2,00,000; basic exemption limit = Not stated in the document. Therefore precise computational illustration with amounts is Not stated in the document. The mechanism: LTCG is reduced by amount by which reduced total income falls short of the basic exemption; remaining LTCG taxed at 12.5%.
• Example 2 (Transitional relief for land): Resident individual sells land acquired before 23 July 2024. Compute A = tax on LTCG at 12.5%; compute B = tax on LTCG assuming 20% rate and gains computed with indexed cost. Excess E = A - B; E is ignored. Numerical details and rates for other slabs are Not stated in the document.

Interplay

Definitions rely on cross-references: "securities" per section 2(h) of the Securities Contracts (Regulation) Act, 1956; "indexed cost" meanings per section 72. The Bill refers to Chapter VIII deductions (for computation of gross total income) but does not cite specific sections; the interplay with section 72 is invoked in the transitional relief clause. The document does not set out interactions with other specific notifications, circulars or international tax treaty provisions. Not stated in the document: whether the section supersedes earlier provisions, or how it interacts with any existing capital gains exemptions/rollovers elsewhere in the Bill/Act.

Differences between Section 197 of the Income-tax Act, 2025 and Clause 197 of the Income Tax Bill, 2025 (Old Version) 

Summary of textual differences and their practical impact.

• Sub-section numbering and cross-references: The Act version (Document 1) contains sub-sections (1)-(6), while the Bill old version (Document 2) contains sub-sections (1)-(5).
  • Practical impact: The Act adds new sub-section (4) in Document 1 dealing specifically with computation of long-term capital gains for non-residents/foreign companies in respect of unlisted securities or shares of private companies (i.e. exclusion of section 72(6) effect). Document 1 also reindexes the definitions block into sub-section (6) whereas the Bill had definitions in sub-section (5). This indicates an expansion of scope and greater specificity in the enacted provision compared to the Bill.
• Non-resident / foreign company carve-out (new in Act): Document 1, sub-section (4), provides: "In the case of an assessee being a non-resident (not being a company) or a foreign company, the long term capital gains arising from the transfer of a capital asset, being unlisted securities or shares of a company not being a company in which the public are substantially interested, shall be computed without giving effect to the provisions u/s 72(6)." This paragraph is absent from Document 2.
  • Practical impact: The Act expressly exempts or adjusts the manner of computing LTCG for non-residents/foreign companies for certain unlisted securities by excluding set-off provisions u/s 72(6). This alters tax incidence and computation mechanics for such taxpayers, potentially increasing taxable gains where section 72(6) would otherwise allow set-off or carry-forward treatment; it introduces a distinct regime for cross-border disposals of private-company equity.
• Transitional date language: Both texts reference 23rd July, 2024 for acquisition date in the special formula addressing land/building acquired before that date. The Bill (Document 2) phrases it "which is acquired before the 23rd July, 2024," whereas the Act (Document 1) uses "which was acquired before the 23rd July, 2024."
  • Practical impact: Minor drafting edit with no substantive difference in effect.
• Formula variable references: In the Bill (Document 2) the formula explanation for A and B refers to "clause (b) of sub-section (1)" and "clause (b) of sub-section (1)" respectively, whereas the Act (Document 1) uses "sub-section (1)(b)" and in the description of B explicitly mentions taking rate as 20% and computing capital gains by taking cost of acquisition/improvement as "indexed cost..."
  • Practical impact: Substantive content is materially the same; the Act's wording is marginally clearer and consistent in cross-references.
• Indexed cost definitions placement: In the Bill (Document 2) definitions (securities/listed/unlisted/indexed cost meanings) are in sub-section (5) with slightly different punctuation and parentheses. The Act relocates and numbers these definitions as sub-section (6) and includes an explicit dash preceding them.
  • Practical impact: Organizational only; no substantive change to defined meanings.
• Explanatory sentence present in Bill but not in Act: Document 2 contains an explanatory sentence at the end: "Clause 197 of the Bill provides for taxation of long-term capital gains where the capital gains arise from the transfer of a long-term capital asset (other than an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust)." This explanatory note is absent in Document 1.
  • Practical impact: The Bill text includes a drafting note describing the intended coverage (excluding specified equity-oriented assets); the Act omits that explanatory sentence in the published section text. Practically, the exclusion relied on in that explanatory line is not explicit within the section's operative text in either document; reliance on such explanatory notes is limited.

Practical Implications

• Compliance and risk areas: Taxpayers must segregate LTCG from other income and compute tax in two limbs. Resident individuals/HUFs must monitor whether their non-LTCG income falls below the exemption threshold to avail the LTCG reduction under sub-section (2). For land/building transfers acquired before 23 July 2024, taxpayers must compute dual tax calculations (12.5% approach vs 20% with indexed cost) to quantify any excess for relief under sub-section (3).
• Record-keeping/evidence: To apply sub-section (3) relief and indexed cost computations u/s 72, taxpayers will need documentary evidence of acquisition dates, acquisition/improvement costs, and records sufficient to compute indexed cost of acquisition/improvement (Not stated in the document: specific documentary formats or retention periods).

Key Takeaways

• Clause 197 prescribes a bifurcated tax computation for LTCG: normal tax on other income and 12.5% on LTCG.
• Resident individuals/HUFs get relief preserving the basic exemption limit by reducing LTCG to the extent necessary.
• Transitional relief for resident individual/HUF transfers of land/building acquired before 23 July 2024 caps excess tax by comparing the 12.5% computation with a 20% indexed-cost computation.
• The Bill provides definitional cross-references to the Securities Contracts (Regulation) Act and section 72 for indexed cost meanings.
• Practical compliance will require separate LTCG computations and retention of acquisition/improvement records to substantiate indexed cost calculations.
• Notably, the Bill text itself does not contain the non-resident/foreign company carve-out that appears in the enacted Act; practitioners should note the enacted change in the final Act (Document 1).

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Full Text:

Section 197 Tax on long-term capital gains.

Long-term capital gains tax restructured: LTCG segregated and taxed separately while preserving basic exemption and transitional relief. Clause 197 prescribes segregation of long-term capital gains from other income, taxing non-LTCG income under the normal progressive regime while subjecting LTCG to a separate rate; resident individuals/HUFs may reduce LTCG to preserve the basic exemption to the extent reduced total income falls short of that threshold. A transitional relief for resident individual/HUF transfers of land or building acquired before a specified cutoff requires dual computation-new LTCG method versus an indexed-cost prior-rate computation-and ignores any excess new-regime tax up to the calculated difference. The enacted Act adds a carve-out for non-resident/foreign-company disposals of unlisted or private-company shares excluding section 72(6) set-off.