Capital gains tax is one of the most important aspects of personal income tax in India. A “capital gain” arises when you sell a capital asset at a price higher than its purchase price. This gain is treated as income and taxed under the head “Capital Gains” in the Income Tax Act, 1961. Recent amendments introduced in the Finance Act, 2024, have changed how capital gains are taxed, with uniform rates and clearer rules for different types of assets. Understanding these changes is essential for anyone who invests or owns capital assets.
This blog aims to outline the meaning of capital gain and capital assets along with their importance, their types, classification into short-term and long-term, applicable tax rates, exemptions, and the need for capital gains in India.
What are Capital Assets?
Capital assets are moveable and immovable property owned and held by individuals for investment or for personal use. The property is not meant to be used for regular business trading
Capital assets include:
- Land and buildings
- Shares and mutual fund units
- Bonds and debentures
- Gold, silver, or jewellery
- Rights in intellectual property
- Other investment assets
It does not include:
- Stock-in-trade
- Personal movable property such as cars (for personal use), furniture, and clothes
- Agricultural land in rural areas
What are Capital Gains?
When a person sells a capital asset and earns a profit, the amount of profit is referred to as a capital gain. In simple terms, if you buy a property, share, gold, or any other capital asset and later sell it at a higher price, the difference between the sale price and purchase price is your capital gain.
Capital gains are classified as:
- Short-Term Capital Gain (STCG): When the asset is sold within a short period for less than 12, 24, or 36 months, depending on the kind of asset.
- Long-Term Capital Gain (LTCG): When the asset is held for a longer duration, for more than 12, 24, or 36 months, depending on the kind of asset
Holding period for classification
| Type of Asset | Short-Term Holding Period | Long-Term Holding Period |
| Listed Equity Shares / Equity MF | Up to 12 months | More than 12 months |
| Unlisted Shares / Immovable Property | Up to 24 months | More than 24 months |
| Debt Mutual Funds, Gold, Jewellery, Other Assets | Up to 36 months | More than 36 months |
When is Capital Gain taxed?
The capital gain is taxed in the year in which the capital asset is transferred. However, in some special cases, such as compulsory acquisition by the government, the gain may be taxed in the year the compensation is received.
How is capital gain calculated?
Capital Gain = Sale Price – (Purchase Price + Improvement Cost + Transfer Expenses)
Short-Term Capital Gains (STCG)
A Short-Term Capital Gain (STCG) arises when a person sells a capital asset after holding it for a shorter period than what is specified for long-term treatment. The formula to calculate Short-Term Capital Gain is:
STCG = Full Sale Value – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
Whereas the
- Full Sale Value is the price at which the asset is sold.
- Cost of Acquisition is the original purchase cost.
- Cost of Improvement is the expenses incurred to improve the asset.
- Transfer Expenses include brokerage, stamp duty, legal fees, etc.
Tax Rates Applicable to STCG (As Per FY 2025-26)
1. On Listed Equity Shares / Equity Mutual Funds
If the shares or mutual funds are listed on a recognised stock exchange, and
sold within 12 months on a recognised stock exchange and Securities Transaction Tax (STT) is paid:
- Tax Rate: 20% (flat), from FY 2024–25 onwards.
- No benefit of deduction or exemption under Chapter VI-A (such as Section 80C).
Previously, the rate was 15%, but the new flat 20% rate aims to simplify capital gain taxation.
2. On the other Capital Assets
This includes:
- Debt mutual funds
- Unlisted shares
- Gold, jewellery, artworks
- Real estate (sold before 24 months of holding)
- Any other capital asset
- Taxed at applicable individual slab rates.
- Can be adjusted against the basic exemption limit if applicable.
Exemptions or deductions on STCG
| Type of STCG | Tax Rate | Deductions (80C, 80D)? | Rebate (87A)? | Reinvestment Exemption? |
| On listed shares/equity MFs (Sec 111A) | 20% | Not allowed | Not allowed | Not available |
| On other assets (property, gold, etc.) | As per the slab | Allowed if eligible | Allowed | Not available |
Long-Term Capital Gains (LTCG)
A Long-Term Capital Gain (LTCG) is the profit you make when you sell a capital asset after holding it for a longer duration. The Long Term Capital Gain is calculated as:
TCG = Full Sale Value – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
1. Tax Rate on LTCG (Post 23 July 2024)
The Finance Act, 2024, introduced a uniform taxation rate on long-term capital gains:
- Flat 12.5% tax rate (plus cess and surcharge) on all LTCG arising after 23 July 2024, on gains exceeding ₹1.25 lakh in a financial year.
This applies to:
- Equity shares
- Equity-oriented mutual funds
- Debt mutual funds
- Real estate
- Gold and other capital assets
The previous differentiated rates and indexation benefits have been removed in most cases. The ₹1.25 lakh exemption applies specifically to LTCG on equity shares and equity-oriented mutual funds.
2. Transitional provision for real estate and certain assets
For real estate (land/building) or other eligible assets acquired before 23 July 2024, taxpayers have an option:
- Either pay tax at 20% with indexation on the long-term gains,
- Or opt for 12.5% without indexation under the new system,
Whichever results in lower tax liability.
This grandfathering provision avoids penalising long-term property holders who made decisions under the previous tax structure.
Exemptions from LTCG Tax
You can save tax on LTCG by investing in certain assets, as per these sections:
1. Section 54 – Residential House:
It is applicable when you sell a house and reinvest the gains in another residential house.
Conditions:
- Buy within 1 year before or 2 years after the sale.
- Or construct within 3 years.
2. Section 54F – Any asset other than House:
It is Applicable when you sell any long-term asset (like land, gold) and invest the entire sale amount in a residential house.
- Full exemption if the entire sale amount is invested.
3. Section 54EC – Capital Gain Bonds
- Invest the LTCG (not the wholesale value) in specified bonds (e.g., NHAI or REC).
- Maximum investment allowed: ₹50 lakh.
- Bonds are locked in for 5 years.
Capital Gains on Mutual Funds
1. Equity-Oriented mutual funds
- STCG (if held <12 months): 20%
- LTCG (if held >12 months): 12.5% after ₹1.25 lakh exemption
2. Debt mutual funds
- For units purchased on or after 1 April 2023:
- No indexation
- LTCG taxed at 12.5% flat rate if held >36 months
- For units purchased before 1 April 2023:
- Eligible for 20% rate with indexation (if sold before 23 July 2024)
- Post 23 July 2024, taxed under the new regime
3. Hybrid funds
Tax treatment depends on equity exposure:
- Equity exposure >65%: Treated like equity funds
- Equity exposure <65%: Treated like debt funds
Exemptions from long-term capital gains tax
Certain sections of the Income Tax Act allow exemption from LTCG if reinvestment is made in specified assets:
1. Section 54 – Residential house property
- Applies when LTCG arises from the sale of a residential property.
- Exemption if capital gain is reinvested in another residential property in India within 1 year before or 2 years after the sale, or within 3 years if constructing.
- If the reinvested amount is less than the capital gain, a proportionate exemption applies.
2. Section 54F – Other long-term capital assets
- Applies when LTCG arises from the sale of any asset other than a residential house.
- Exemption available if the net sale consideration is reinvested in a residential house.
- Assessee should not own more than one house (other than the new one) on the date of transfer.
3. Section 54EC – Capital gains bonds
- Exemption on LTCG from sale of land/building, if invested in notified bonds (e.g., NHAI, REC) within 6 months.
- Maximum investment limit: ₹50 lakh
- Lock-in period: 5 years
Why is Capital Gain Tax Needed in India?
- To tax the income: When you sell an asset for more than what you have paid for it, you have made a gain and taxing this gain ensures that you pay tax only on the increase in your wealth, not on the full sale value.
- Capital gains create equity between different types of income earners, as when salary
- Long-term investment: The Income Tax Act, 1961, rewards long-term investors through the lower tax rates on LTCG and Exemptions under Sections 54, 54F, and 54EC of the Income Tax Act, 1961.
- In the past, people used to convert regular income into capital gains to escape tax. By defining and taxing capital gains, the Income Tax Act, 1961, closes loopholes and prevents misuse.
Conclusion
While the new system provides flat tax rates and removes indexation for most assets, it also reduces the complexity for investors. However, it is essential to understand the specific rules that apply to your case, particularly if your asset was acquired or sold around the transition dates. Investors need to understand it in depth and make full use of the exemptions available under various sections by planning their reinvestments wisely.
Related Services
