Tax on Short-Term Capital Gains 2026-27: 20% Rate under Income Tax Act 2025

Under the Income Tax Act 2025, a short-term capital gain on listed equity shares, equity-oriented fund units or business trust units is taxed at a flat 20%, provided securities transaction tax (STT) applies to the sale (section 196(1)). The rest of your income is taxed at its normal rates. A resident individual or HUF whose other income falls below the basic exemption limit can use that shortfall against the gain first (section 196(2)).

This guide explains when section 196 applies, how the tax is built up, and what a resident individual can set against the gain. Every figure comes from the Act as amended by the Finance Act, 2026, for tax year 2026-27. It is information, not tax advice.

When does section 196 apply to a short-term capital gain?

All three conditions in section 196(1) must hold:

1. the asset is a short-term capital asset;
2. it is an equity share in a company, a unit of an equity-oriented fund or a unit of a business trust; and
3. the sale is chargeable to STT under Chapter VII of the Finance (No. 2) Act, 2004.

If one of these fails, section 196 does not apply and the gain is simply part of your total income. That is the usual outcome for shares sold off-market without STT.

How long must I hold shares for the gain to be short-term?

Section 2(101) sets a default of 24 months or less. For a security listed on a recognised stock exchange in India, a unit of the Unit Trust of India, a unit of an equity-oriented fund or a zero-coupon bond, the period is 12 months or less. So a listed share sold after 11 months gives a short-term gain, and the same share sold after 13 months gives a long-term gain, taxed under section 198 instead. For the long-term side, read tax on long-term capital gains.

For the full short-term versus long-term picture across asset types, see short-term vs long-term capital gains under the 2025 Act.

What is an "equity-oriented fund"?

Section 196(5) points to the definition in section 198(8). In short, it is a fund under a specified mutual fund scheme (or a unit linked insurance policy scheme not exempt under Schedule II, Sl. No. 2) that invests:

• at least 65% of its proceeds in equity shares of domestic listed companies; or
• if it invests through another listed fund, at least 90% in that fund, which must itself hold at least 90% in domestic listed equity.

The percentage is measured on the annual average of the monthly averages of opening and closing figures. Check a fund's scheme documents before assuming it qualifies.

How is the tax on short-term capital gains calculated?

Section 196(1) splits your total income in two. The tax payable is the sum of:

1. income-tax at 20% on the short-term capital gains covered by section 196; and
2. income-tax on the balance of total income, worked out as if that balance were your entire income.

The gain itself is computed under section 72(1): full value of consideration, less expenditure wholly and exclusively on the transfer (such as brokerage), less cost of acquisition and any improvement cost. STT paid is not deductible (section 72(3)(b)).

Worked example 1: salaried individual with a short-term gain

Assumptions: tax year 2026-27, resident individual under the default slab table in section 202(1), other income (net taxable salary) of Rs 15,00,000, STT paid on the sale. Ravi bought 1,000 listed shares at Rs 250 and sold them after 8 months at Rs 340. Brokerage on the sale was Rs 1,500. Surcharge and cess are left out.

Step	Amount (Rs)
Sale value (1,000 x 340)	3,40,000
Less cost (1,000 x 250)	2,50,000
Less brokerage on sale	1,500
Short-term capital gain	88,500
Tax at 20% on 88,500	17,700
Tax on balance income of 15,00,000: 4,00,001 to 8,00,000 at 5% (4,00,000 x 5%)	20,000
8,00,001 to 12,00,000 at 10% (4,00,000 x 10%)	40,000
12,00,001 to 15,00,000 at 15% (3,00,000 x 15%)	45,000
Tax on balance income	1,05,000
Total tax under section 196(1)	1,22,700

Total income is Rs 15,88,500. The section 156(2)(b) rebate does not reduce this tax, because the tax is well below the amount by which total income exceeds Rs 12 lakh.

Worked example 2: gain partly absorbed by the basic exemption limit

Section 196(2) helps a resident individual or HUF whose total income, after taking out the section 196 gain, is below the maximum amount not chargeable to tax. The gain is reduced by the shortfall, and only the balance is taxed at 20%.

Assumptions: tax year 2026-27, resident individual, nil band of Rs 4,00,000 as in the section 202(1) table, other income of Rs 1,50,000 (a part-time job), short-term gain of Rs 3,00,000 on listed shares with STT paid.

Step	Amount (Rs)
Total income excluding the gain	1,50,000
Shortfall against 4,00,000 (4,00,000 - 1,50,000)	2,50,000
Gain reduced by the shortfall (3,00,000 - 2,50,000)	50,000
Tax at 20% on 50,000	10,000

The balance income of Rs 1,50,000 is in the nil band, so it carries no tax. Section 156(3) limits any rebate to tax computed under the section 202(1) rates, so do not assume the rebate also wipes out the 20% tax. Confirm the final figure in your return.

Worked example 3: a gain with no STT on the sale

Assumptions: tax year 2026-27, resident individual. Meena sells shares of a private company to a friend for Rs 5,00,000. She bought them for Rs 4,00,000 eight months ago. No STT arises because the sale is not on a recognised exchange.

Condition (b) of section 196(1) fails, so section 196 does not apply. The Rs 1,00,000 gain is added to her total income and taxed at her slab rates. Because the shares are unlisted, the holding period for a short-term gain is 24 months or less under section 2(101)(a), so she would still have a short-term gain at 8 months.

Real-life scenarios

Ravi books a quick profit. Ravi buys a listed company's shares in March 2026 and sells them in November 2026 through his broker, who collects STT. He held them for about 8 months, which is 12 months or less, so the profit is a short-term gain taxed at 20% under section 196. If he waits until after 12 months, it becomes long-term and section 198 applies.

Meena's student son sells mutual fund units. Meena's son earns Rs 90,000 from tutoring and sells equity-oriented fund units after 6 months for a gain of Rs 2,00,000. He is a resident individual, so the Rs 3,10,000 shortfall under section 196(2) is more than his gain. Because the gain is lower than the shortfall, no part of it is left to tax at 20%. The rebate point in section 156(3) should be checked separately.

Can I claim deductions against a short-term capital gain?

Section 196(4) says that where your gross total income includes such a gain, the Chapter VIII deduction is allowed from gross total income after removing the gain. In practice, Chapter VIII deductions cannot reduce the portion taxed at 20%. Remember that the default slab regime in section 202(2) itself disallows most Chapter VIII deductions, with the exceptions listed in section 202(2)(a)(xii).

Can I set off a short-term capital loss against a gain?

Yes. Under section 108(2)(a), a loss on a short-term capital asset is set off against income from any other capital asset for the same tax year, short-term or long-term. A long-term loss can be set off only against long-term gains (section 108(2)(b)). A loss that cannot be fully set off is carried forward under section 111(1) and set off only against capital gains of later years, for no more than eight tax years after the year the loss arose (section 111(2)).

Example (tax year 2026-27): Ravi has a short-term gain of Rs 88,500 on one share and a short-term loss of Rs 30,000 on another. The net short-term gain is Rs 58,500, so the 20% tax under section 196 applies to Rs 58,500, not Rs 88,500.

What if the asset is not covered by section 196?

A short-term gain on an asset outside section 196(1), such as a house held for 24 months or less or unlisted shares, is part of total income and taxed at slab rates, as the Meena example above shows.

Does section 196 apply to trades on an IFSC exchange?

Section 196(3) switches off the STT condition for a transaction on a recognised stock exchange located in an International Financial Services Centre, where the consideration is paid or payable in foreign currency. Rule 143 deals with the income of a specified fund that is the investment division of an offshore banking unit, and it refers to section 196 securities. That rule asks for Form No. 70 by the due date under section 263(1)(c).

Common mistakes

• Deducting STT from the gain. Section 72(3)(b) bars it. Only transfer expenses, cost and improvement cost reduce the gain.
• Using 12 months for every asset. The 12-month period is for listed securities, UTI units, equity-oriented fund units and zero-coupon bonds. Other assets use 24 months.
• Assuming 20% applies without STT. If the sale is not chargeable to STT, section 196 does not apply.
• Claiming the exemption shortfall as a non-resident. Section 196(2) is limited to a resident individual or HUF.
• Setting Chapter VIII deductions against the gain. Section 196(4) takes the gain out before those deductions are allowed.

Quick reference

Point	Rule	Where
Rate on eligible short-term gain	20%	196(1)(i)
Balance of total income	Taxed as if it were the whole income	196(1)(ii)
Holding period, listed securities and equity-oriented fund units	12 months or less is short-term	2(101)(b)
Holding period, other assets	24 months or less is short-term	2(101)(a)
Exemption shortfall adjustment	Resident individual or HUF only	196(2)
Chapter VIII deduction	From gross total income less the gain	196(4)
STT deductible from gain	No	72(3)(b)

Where this is in the Act

• Section 196: tax on short-term capital gains in certain cases.
• Section 198(8): meaning of equity-oriented fund.
• Section 2(101): short-term capital asset and holding periods.
• Sections 108(2) and 111: set off and carry forward of capital losses.
• Section 72: computation of capital gains, including STT disallowance in 72(3)(b).
• Section 202(1): slab rates and the nil band.
• Section 156: rebate for resident individuals.
• Rule 143: specified fund of an offshore banking unit, with Form No. 70.

How can CA firms keep track of capital gains work?

For a CA firm, the hard part is usually collecting purchase dates, contract notes and holding-period proof from each client before the return is prepared. Finexo's practice management software lets you track those document requests and filing deadlines across your client list. It does not compute capital gains for you.