Capital gains tax in India is a tax levied on the profit or gain derived from the sale of a capital asset and other valuable assets. These gains are considered income and must be declared in the income tax return for the year in which the asset is sold. The concept of capital gains is fundamental to India’s taxation system and affects individuals, companies, and investors alike.
Understanding Capital Assets
A capital asset is any property that is held by a person, movable or immovable, whether connected to their business or not. Common examples of capital assets include:
- Land
- Buildings
- Stocks and mutual funds
- Bonds and debentures
- Jewellery
- Vehicles
- Leasehold rights
However, certain items are not considered capital assets, such as:
- Stock-in-trade (i.e., goods used in business)
- Personal movable property, like furniture and clothes
- Agricultural land in rural India
- Gold bonds issued by the government
What is Capital Gain?
When a person sells a capital asset at a price which is higher than a purchase price, the profit earned is called a capital gain. This gain is taxable under the head “Capital Gains” in the Income Tax Act, 1961.
Types of Capital Gains
1. Short-Term Capital Gain (STCG)
If the asset is held for a shorter duration before being sold, the gain is classified as short-term. The holding period may vary depending on the asset type:
- For listed equity shares and the equity-oriented mutual funds: held for less than 12 months
- For immovable property (land/building): held for less than 24 months
- For other assets: held for less than 36 months
2. Long-Term Capital Gain (LTCG)
- For listed equity shares and equity of mutual funds: held for 12 months or more
- For immovable property: held for 24 months or more
- For other capital assets: held for 36 months or more
Capital Gains Tax Rates in India
1. Short-Term Capital Gains (STCG) Tax Rate
- For equity shares and equity-oriented mutual funds (STT paid): Taxed at 15%
- For other assets: Taxed as per the income tax slab rate of the taxpayer
2. Long-Term Capital Gains (LTCG) Tax Rate
- For equity shares and equity-oriented mutual funds (STT paid): Taxed at 10% (if the gain exceeds ₹1 lakh in a financial year, which is without indexation benefit)
- For other assets: Taxed at 20% (with indexation benefit)
Indexation Benefit
Indexation is a method of a managing the purchase price of an valuable asset for inflation using the Cost Inflation Index (CII). This reduces the taxable gain, which is especially beneficial in the case of long-term assets (except for equity shares and mutual funds).
Example:
If you purchased a property in 2010 for ₹20 lakh and sold it in 2025 for ₹60 lakh, the indexed cost of acquisition would be higher than ₹20 lakh, reducing the capital gain and tax liability accordingly…!
Exemptions under Capital Gains
- Section 54 – Sale of residential property
If you sell a residential property or assests and reinvest in another residential property within the time period of 1 year before or 2 years after the sale, or construct a house within 3 years, the capital gain is exempt.
- Section 54F – Sale of any asset other than a residential house
If the entire sale proceeds as are invested in a residential house property, the exemption applies (subject to certain conditions).
- Section 54EC – Investment in bonds
If long-term capital gains from the sale of land or building are invested in notified bonds (like NHAI, REC) within 6 months, up to ₹50 lakh, the gain is exempt.
- Section 10(38) – (Now withdrawn from FY 2018-19)
Earlier, long-term capital gains from equity shares and mutual funds were fully exempt, but this was withdrawn in Budget 2018.
Set-Off and Carry Forward of Capital Losses
- Short-term capital losses could be set off as against both the gains whether it is short-term or long-term capital gains.
- Long-term capital losses can only be set off against long-term capital gains.
- Unused capital losses can be carried forward for up to 8 assessment years.
Filing Capital Gains in ITR
Capital gains must be reported while filing the Income Tax Return (ITR):
- ITR-2: For individuals/HUFs with capital gains
- ITR-3: If income from business/profession also exists
You need to furnish:
- Full details of the asset sold
- Date of purchase and sale
- Sale consideration
- Indexed cost (for LTCG)
- Exemption claimed under relevant sections
Recent Updates on Capital Gains Tax
Budget 2023-24 Highlights:
- No indexation for debt mutual funds (from April 1, 2023): All capital gains from non-equity mutual funds will be taxed as short-term, regardless of holding period.
- REITs/InVITs: Distribution in the form of ‘repayment of capital’ to be taxed as capital gains.
Conclusion
Capital gains tax in India plays a significant and important role in determining post-sale returns on investments and assets, other valuable assets. Understanding its implications and significance about it helps in better tax planning, optimizing and other essential financial outcomes. By knowing the types of capital gains, applicable tax rates, exemptions available, and recent updates, taxpayers can navigate the system more efficiently and legally minimize their tax burden.
As with all tax matters, it is advisable to consult a tax professional or financial advisor for a proper understanding and accurate filing and to take full advantage of exemptions under the law.
