Capital gains arise when a person sells a capital asset, like property, shares, or gold, for more than its purchase price. and are taxable under the Income Tax Act, 1961. A capital asset includes property of any kind, excluding personal items, rural agricultural land, and business stock. Gains are classified as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) based on how long the asset was held. STCG applies to assets sold within 12–36 months and is taxed at 15% or as per income slab, while LTCG applies to assets held longer and is taxed at 10% or 20% with indexation benefits. Indexation adjusts the purchase cost for inflation to reduce tax. Tax exemptions under Sections 54, 54F, and 54EC of the Income Tax Act, 1961, are available if gains are reinvested.
This blog provides a comprehensive and up-to-date explanation of the distinctions between STCG and LTCG, including exemptions under Indian tax laws.
What is a Capital Asset?
A capital asset is the property of any kind held by a person, whether connected with their business or not. It includes:
- Immovable properties such as land and buildings
- Shares and securities
- Mutual fund units
- Jewellery
- Bonds and debentures
- Patents and trademarks
However, certain items, such as stock-in-trade, personal goods (including clothes and furniture), and rural agricultural land, are not treated as capital assets for capital gains taxation.
What is Capital Gain?
Capital gain arises when a person transfers a capital asset and earns a profit from such a transfer. The gain is considered income and is therefore subject to taxation under the Income Tax Act, 1961
Depending on the duration for which the asset was held, capital gains are classified as:
- Short-Term Capital Gains (STCG)
- Long-Term Capital Gains (LTCG)
The classification affects both the method of calculation and the rate of taxation.
Classification of Capital Gains Based on Asset Holding Period
The holding period refers to the duration for which an asset was held before it was sold.
The classification is as follows:
| Type of Asset | Short-Term (STCG) | Long-Term (LTCG) |
| Listed equity shares & equity-oriented mutual funds | Up to 12 months | More than 12 months |
| Immovable property (land/building) | Up to 24 months | More than 24 months |
| Unlisted shares, gold, jewellery, and debt mutual funds | Up to 36 months | More than 36 months |
What is Short-Term Capital Gain (STCG)?
Short-Term Capital Gain (STCG) arises when a capital asset is sold within a specified short holding period and the sale value exceeds its purchase cost. The gain is the profit earned on such a transaction and is taxable under the Income Tax Act, 1961.
The definition of “short-term” varies depending on the type of asset involved:
- Equity Shares & Equity-Oriented Mutual Funds listed on a recognized stock exchange in India:
If held for less than 12 months, the gain on sale is considered STCG. - Immovable Property (Land or Building):
If held for less than 24 months, the gain is treated as short-term. - Other Capital Assets (e.g., debt, mutual funds, gold, jewellery, etc.):
If held for less than 36 months, gains from their sale fall under STCG.
STCG = Full Sale Value – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
What is Long-Term Capital Gain (LTCG)?
Long-Term Capital Gain (LTCG) refers to the profit earned from the sale of a capital asset that has been held for a longer duration, usually 12, 24, or 36 months, as specified under the Income Tax Act, 1961. The holding period that qualifies an asset for LTCG treatment depends on the type of asset:
Taxation of LTCG:
- Equity Shares and Equity Mutual Funds (with STT paid):
- LTCG up to ₹1 lakh in a financial year is exempt.
- Gains exceeding ₹1 lakh are taxed at 10% under Section 112A, without indexation.
- Other Capital Assets (like real estate, gold, debt funds, etc.):
- Taxed at 20% under Section 112 of the Income Tax Act, 1961, with the benefit of indexation.
Indexation: Meaning and Use
Indexation is a method used in income tax to adjust the purchase price of an asset based on inflation. Its primary purpose is to calculate Long-Term Capital Gains (LTCG), considering how the value of money changes over time.
When you buy an asset like land, property, or gold and sell it after holding it for a long period, the actual profit may seem high. But a part of this increase in value is often due to inflation, not a real gain. Indexation helps adjust for this by increasing the purchase price using a tool called the Cost Inflation Index (CII), which is published annually by the Income Tax Department.
Indexed Cost = Original Cost × (CII in Sale Year / CII in Purchase Year)
Example:
If you bought land in 2004-2005 for ₹10 lakhs and sold it in 2023-24:
- CII for 2004-05 = 113
- CII for 2023-24 = 348
- Indexed cost = 10,00,000 × (348 / 113) ≈ ₹30.79 lakhs
- If sold for ₹50 lakhs, the LTCG = ₹50L – ₹30.79L = ₹19.21 lakhs
Tax = 20% of ₹ 19.21 L = ₹3.84 lakhs (approx.)
Where is Indexation Allowed?
Indexation benefit is allowed only for long-term capital assets such as:
- Real estate
- Gold and jewellery
- Debt mutual funds (before April 2023)
- Unlisted shares
It is not allowed for listed equity shares or equity-oriented mutual funds taxed under Section 112A of the Income Tax Act, 1961.
Exemptions from Long-Term Capital Gains Tax
To promote reinvestment and housing, the Income Tax Act, 1961 offers exemptions from LTCG tax under various sections:
1. Section 54
If an individual or HUF sells a residential property and uses the gains to buy another residential property within a specified time frame, the LTCG tax can be exempted.
- The new house must be purchased within 1 year before or 2 years after the sale (or constructed within 3 years).
- The exemption is limited to the amount invested.
2. Section 54F
If any capital asset (not residential property) is sold and the full sale consideration (not just the gain) is invested in a residential property, then full exemption is allowed.
- Must not own more than one house (apart from the new one).
- If the full amount is not invested, the exemption is proportionate.
3. Section 54EC
If LTCG from the sale of land or building is invested in specified bonds (NHAI, REC) within 6 months, then the gain is exempt from tax.
- Maximum investment: ₹50 lakhs
- Lock-in period: 5 years
Differences Between STCG and LTCG
| Feature | Short-Term Capital Gain (STCG) | Long-Term Capital Gain (LTCG) |
| Holding Period | Up to 1–3 years (depending on asset) | More than 1–3 years |
| Tax Rate (Equity) | 15% (Section 111A) | 10% (above ₹1 lakh, Section 112A) |
| Tax Rate (Others) | As per the income tax slab | 20% with indexation (Section 112) |
| Indexation Benefit | Not allowed | Allowed (except on equity shares) |
| Exemptions Available | No major exemptions | Section 54, 54F, 54EC exemptions available |
| Applicable Sections | Section 111A | Sections 112, 112A, 54, 54F, 54EC |
Reporting Capital Gains in ITR
- ITR Forms and Capital Gains:
- ITR-1 (Sahaj): Now allows reporting of LTCG up to ₹1.25 lakh from equity shares and mutual funds where Securities Transaction Tax (STT) is paid.
- ITR-2 and ITR-3: Required for reporting higher capital gains, multiple asset classes, or if claiming capital losses.
- Schedule CG Bifurcation:
- Capital gains must be reported separately for transactions before and after July 23, 2024, due to changes in tax rates and indexation benefits.
- Additional Reporting Requirements:
- Disclosure of sale consideration, cost of acquisition, and capital gains for each asset.
- Reporting of TDS details under specific section codes.
- Declaration of high-value transactions, such as cash deposits over ₹1 crore, foreign travel expenses exceeding ₹2 lakh, and electricity bills over ₹1 lakh.
Conclusion
In conclusion, understanding capital gains is important for anyone involved in property, investments, or other valuable assets. Whether it is a short-term gain or a long-term one, knowing the tax implications helps you make informed financial decisions. With proper planning, like utilizing indexation benefits or reinvesting under Sections 54, 54F, or 54EC, you can significantly reduce your tax burden. As tax laws continue to evolve, staying updated with the latest provisions ensures compliance and savings.
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