Income Tax Law | Carbon Credits

Section 115BBG: Tax on Income from Transfer of Carbon Credits

Section 115BBG of the Income-tax Act, 1961 provided a special tax rate of 10% on income from the transfer of qualifying carbon credits, without deduction for expenditure or allowances. This guide explains the provision, its statutory definition, calculations and its relevance after the Income-tax Act, 2025 came into effect.

Legal position as at 26 October 2026: Section 115BBG remains relevant to tax years governed by the Income-tax Act, 1961. The Income-tax Act, 2025 applies to tax years beginning on or after 1 April 2026. For such years, consult the corresponding provisions and applicable rules under the new Act rather than assuming the old section number continues.

What is Section 115BBG?

Introduced by Section 45 of the Finance Act, 2017 with effect from 1 April 2018 (assessment year 2018-19), Section 115BBG established a special method for taxing income earned from the transfer of carbon credits. It was intended to clarify the treatment of these receipts after disputes about whether carbon-credit receipts were capital or revenue in nature.

The section covers an assessee, meaning a person chargeable to income tax under the Act, whose total income includes income from transferring qualifying carbon credits. It does not restrict eligibility to companies or to a particular industry.

Section 115BBG: Key statutory provisions

Sub-section (1): Special 10% tax

Where total income includes income from the transfer of carbon credits, income tax is the aggregate of (a) tax at 10% on that carbon-credit income and (b) tax on the balance of total income computed as if the carbon-credit income were excluded. Applicable surcharge and health and education cess are additional to the basic tax, where relevant.

Sub-section (2): No expenditure or allowance deduction

Notwithstanding other provisions of the 1961 Act, no deduction for expenditure or allowance is permitted in computing the carbon-credit income taxed under sub-section (1)(a). Thus the concessional rate is applied without reducing the relevant income by related expenses or allowances.

Explanation: Meaning of carbon credit

The statutory explanation defines one unit of a carbon credit as a reduction of one tonne of carbon dioxide emissions, or equivalent greenhouse-gas emissions, validated under the United Nations Framework Convention on Climate Change framework and capable of being traded at the prevailing market price.

The statutory definition matters: not every environmental certificate, voluntary offset or emission-trading instrument necessarily meets the specific conditions of Section 115BBG. The instrument and verification framework should be checked before applying the special rate.

Important legal terms explained

Term	Meaning for this provision
Carbon credit	One unit representing one tonne of qualifying CO2 or equivalent emissions reduction, with the prescribed validation and tradability.
Transfer	A transaction by which qualifying credits are transferred for consideration, giving rise to income.
Assessee	A person whose income is assessable under the Income-tax Act, including eligible individuals, firms or companies.
Special rate	10% basic income tax on qualifying carbon-credit income, separately from tax on other income.

Example: How carbon-credit income is taxed

Assume a taxpayer has Rs. 12,00,000 of qualifying income from the transfer of carbon credits in a year governed by the 1961 Act. The basic tax under Section 115BBG is Rs. 1,20,000 (10% of Rs. 12,00,000). If no surcharge applies, health and education cess at 4% is Rs. 4,800, producing Rs. 1,24,800 on this component. Tax on any other income is calculated separately.

Illustration only. Actual liability depends on the relevant tax year, status, other income, surcharge, credits and applicable law.

Reporting, records and practical considerations

Retain the carbon-credit issuance, validation, registry and transfer records.
Keep sale agreements, invoices, bank receipts and the computation of gross qualifying income.
Check whether the transferred unit satisfies the precise statutory definition, especially for voluntary-market credits.
Report the income in the appropriate income-tax return and special-rate schedule for the relevant year.
Review any applicable international transaction, withholding, GST or other regulatory issues separately; Section 115BBG does not resolve them.

Income-tax Act, 2025: Effect from 1 April 2026

The Income-tax Act, 2025 took effect on 1 April 2026. The Income Tax Department explains that the 1961 Act continues to govern tax years beginning before that date, including related returns, assessments and appeals. Consequently, references to Section 115BBG remain important for earlier years, while income arising in tax years beginning on or after 1 April 2026 must be examined under the new Act and its applicable special-rate provisions.

Do not rely on the former section number alone for a 2026-27 tax-year return. Verify the relevant new-Act provision, eligibility, classification and return instructions in force for that year.

Official legislation and guidance

This article provides general legal information, not advice for any specific transaction. Check amendments, notifications and the applicable tax year before filing.