Long-Term Capital Gains Tax is undergoing a major shift under Clause 198 of the Income Tax Bill, 2025. This new clause aims to replace Section 112A of the Income-tax Act, 1961. Here’s a simplified breakdown of what changes, what remains, and how it impacts your equity investments.
What Was Section 112A All About?
Section 112A (introduced via Finance Act, 2018) laid out the tax regime for LTCG on:
- Equity shares listed on recognized stock exchanges
- Equity mutual funds
- Units of business trusts
Key Points under Section 112A:
| Particulars | Section 112A |
|---|---|
| Exemption limit | ₹1 lakh |
| Tax rate | 10% (without indexation) |
| Holding period | >12 months |
| Applicability | Listed shares, equity mutual funds |
| Surcharge & cess | Applicable |
| STT (Securities Transaction Tax) | Must be paid on acquisition and sale |
What’s New in Clause 198 of Income Tax Bill, 2025?
Clause 198 proposes a complete restructuring of LTCG provisions on market-linked instruments. It aims to:
- Consolidate LTCG rules under a unified structure
- Remove the ₹1 lakh exemption
- Impose a flat 12.5% tax on all such gains
- Eliminate the need for STT condition
- Simplify compliance for foreign investors and AIFs
Key Differences: Clause 198 vs. Section 112A
| Particulars | Clause 198 (2025 Bill) | Section 112A |
|---|---|---|
| Exemption | None | ₹1 lakh |
| Tax Rate | 12.5% flat | 10% |
| STT Condition | Not required | Mandatory |
| Simplicity for NRIs | Higher, due to STT removal | Moderate |
| Applicability | Listed shares, units of InvITs, REITs, AIFs | Limited to equity-based instruments |
Why Was This Change Introduced?
- To remove litigation around STT compliance
- To provide tax certainty to foreign portfolio investors
- To improve ease of compliance for pooled investment vehicles
- To widen the tax base by eliminating exemptions
Expert View: What Should Investors Watch Out For?
“The removal of the ₹1 lakh exemption will bite small retail investors. But for large FPIs and pooled funds, the simplification will bring relief. Investors need to rethink their long-term equity strategy.” — CA Ramesh Balakrishnan
Practical Impact on You
- Retail investors: May face slightly higher tax burden due to exemption loss
- NRIs/FPIs: Easier to comply without STT proofs
- Fund managers: Better clarity for long-term tax planning
- Compliance: Reduced documentation, fewer disputes
Legal Reference & Clarification
- Clause 198, Income Tax Bill, 2025
- Section 112A, Income-tax Act, 1961
- CBDT will likely issue clarifying FAQs before AY 2026-27 implementation
Summary Snippet (40–50 words)
Clause 198 of the 2025 Income Tax Bill replaces Section 112A, removing the ₹1 lakh LTCG exemption and introducing a flat 12.5% tax. It simplifies compliance for investors, especially NRIs and AIFs, but may increase tax outgo for small equity holders.
FAQs
Q1. Will the ₹1 lakh exemption still apply?
No. Clause 198 removes the LTCG exemption that Section 112A allowed.
Q2. Is indexation benefit allowed under Clause 198?
No. Flat 12.5% applies without indexation.
Q3. Will this impact SIP investors?
Yes. Gains above the exemption threshold on SIPs post April 2025 will be taxed fully.
Conclusion
Clause 198 marks a shift in India’s approach to taxing long-term equity gains. While it aims to simplify compliance and close loopholes, retail investors must revisit their tax strategy.
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