Special Tax Rates on Capital Gains and Investment Income Arising from Specified Securities

Overview

The Income Tax Act, 1961 does not apply a uniform tax rate across all categories of income. Certain types of income — particularly those arising from specific securities and investments — are governed by dedicated provisions that prescribe their own tax rates, eligibility conditions, and deduction restrictions. Sections 111A, 112A, 115A, 115AB, 115AC, and 115AD of the Income Tax Act, 1961 collectively form the framework for such special taxation, each targeting a distinct class of assessee and a defined set of financial instruments.

This article presents a structured breakdown of these provisions as amended by the Finance Act, 2026, covering eligible assessees, applicable securities, prescribed tax rates, and the availability of deductions and basic exemption benefits.

Why Special Tax Rates Exist for Certain Securities

India's capital markets involve a wide range of participants — domestic residents, non-residents, foreign companies, overseas funds, and Foreign Portfolio Investors (FPIs). The nature of their investments and the instruments they hold vary significantly. To address this complexity, the legislature has created targeted provisions rather than a one-size-fits-all approach.

These special provisions serve multiple purposes:

  • Encouraging foreign investment by offering competitive and predictable tax rates
  • Distinguishing between different types of income such as dividends, interest, royalties, fees for technical services, and capital gains
  • Providing clarity to offshore financial institutions on their tax obligations in India
  • Ensuring that equity-linked savings are taxed differently from debt or hybrid instruments

Important Note: These provisions override the general rates applicable under the Act wherever they specifically apply. Assessees covered under these sections must compute their tax liability accordingly.

Eligible Assessee

Section 111A applies to any assessee — whether resident or non-resident, individual, Hindu Undivided Family (HUF), firm, or company.

Securities Covered

The provision applies to the following instruments:

  • Equity shares listed on a recognised stock exchange
  • Units of equity-oriented mutual funds
  • Units of business trusts

The transaction must be subject to Securities Transaction Tax (STT) at the time of sale.

Tax Rate

Nature of Gain Rate
Short-Term Capital Gains (STCG) 20%

Deductions and Basic Exemption

  • Chapter VI-A deductions: Not available against such gains
  • Basic exemption limit: Available only to resident individuals and resident HUFs

This means non-resident individuals and entities other than resident individuals and HUFs cannot adjust the basic exemption limit against short-term capital gains taxable under Section 111A.

Eligible Assessee

Section 112A also covers any assessee, making it broadly applicable across all categories.

Securities Covered

The provision applies to the same class of instruments as Section 111A: