What is Capital Gains Tax in India: Types, Rates, Calculation, Exemptions & Tax Saving

Most of the valuable assets you own are treated as capital assets, and their sale attracts a capital gains tax. These gains are categorized as either short-term or long-term depending on the holding period, with each type taxed at different rates. As per Budget 2024, the Long-Term Capital Gains (LTCG) tax rate is 12.5%, while the Short-Term Capital Gains (STCG) tax rate is 20% or according to applicable income tax slab rates.

What is Capital Gains Tax in India?

Capital gains tax in India refers to the tax imposed on the profits arising from the sale or transfer of capital assets such as real estate, shares, or mutual funds. These profits are treated as income and taxed in the year of transfer. Capital gains are divided into two categories based on how long the asset was held before sale:

• Short-Term Capital Gains (STCG): Applicable when assets are held for less than 12 months in the case of equity shares, equity-oriented mutual funds, or units of a business trust. For other types of assets, the short-term period is less than 24 months.
• Long-Term Capital Gains (LTCG): Applicable when assets are held for more than 12 months for equity shares, equity-oriented mutual funds, or business trust units. For other assets, the holding period exceeding 24 months is considered long-term.

Capital Gains Tax Rates in India
Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG)

---

Before 23rd July 2024

The following tax rates apply to capital gains arising from transfers made before 23/07/2024:

Tax Type	Condition	Applicable Tax Rate
Long-Term Capital Gains (LTCG)	Sale of:- Listed equity shares (if STT was paid on both purchase and sale)- Units of equity-oriented mutual funds (if STT was paid on sale)	10% on gains exceeding ₹1 lakh
Other Long-Term Assets	Assets other than those mentioned above	20%
Short-Term Capital Gains (STCG)	When STT is not applicable	Taxed as per normal income tax slab rates
	When STT is applicable	15%

---

 

From 23rd July 2024 onwards

For transfers made on or after 23/07/2024, the following revised tax rates are applicable:

Tax Type	Condition	Applicable Tax Rate
Long-Term Capital Gains (LTCG)	Sale of:- Listed equity shares (if STT was paid on both purchase and sale)- Units of equity-oriented mutual funds (if STT was paid on sale)	12.5% on gains exceeding ₹1.25 lakh
Land or Building or Both	For individuals and HUFs:– 12.5% without indexation- 20% with indexationFor others:– 12.5% without indexation	As per choice or taxpayer type
Other Long-Term Assets	All other categories of capital assets	12.5%
Short-Term Capital Gains (STCG)	When STT is not applicable	Taxed as per normal income tax slab rates
	When STT is applicable	20%

---

Meaning of Capital Assets

Capital assets include land, buildings, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery.
They also cover ownership or rights in an Indian company, including management rights, control rights, or any other legal entitlement.

Exceptions to Capital Assets

The following items are not treated as capital assets under the Income Tax Act:

a. Stock-in-trade, consumables, or raw materials held for business or professional purposes.
b. Personal belongings such as clothing and furniture used for personal purposes by the taxpayer or their family members.
c. Agricultural land located in rural areas of India.
d. 6½% Gold Bonds (1977), 7% Gold Bonds (1980), and National Defence Gold Bonds (1980) issued by the Central Government.
e. Special Bearer Bonds (1991).
f. Gold Deposit Bonds issued under the Gold Deposit Scheme (1999), or deposit certificates issued under the Gold Monetization Schemes of 2015 and 2019, as notified by the Central Government.

---

Classification of Capital Assets

Capital assets are categorized based on their holding period into Short-Term Capital Assets (STCA) and Long-Term Capital Assets (LTCA).

Short-Term Capital Asset (STCA)

An asset held for up to 24 months before being sold is considered a Short-Term Capital Asset. If you sell the asset within 24 months of purchase, any gain arising will be treated as short-term capital gain.

However, certain assets are treated as short-term if held for 12 months or less, such as:

• Equity or preference shares of a company listed on a recognized stock exchange in India.
• Listed securities, including debentures, bonds, and government securities.
• Units of the Unit Trust of India (UTI), whether quoted or unquoted.
• Units of equity-oriented mutual funds, whether quoted or unquoted.
• Zero-coupon bonds, whether quoted or unquoted.

Long-Term Capital Asset (LTCA)

An asset held for more than 24 months before being sold is classified as a Long-Term Capital Asset (LTCA). Therefore, if you sell the asset after 24 months from the date of purchase, the gain arising from such a sale will be considered a long-term capital gain.

Capital assets such as land, buildings, and house property are treated as long-term when held for 24 months or more (applicable from the Financial Year 2017–18 onwards).

However, certain assets qualify as Long-Term Capital Assets if they are held for more than 12 months, including:

• Equity shares in a company listed on a recognized stock exchange in India.
• Listed securities such as debentures, bonds, and government securities.
• Units of the Unit Trust of India (UTI).
• Units of equity-oriented mutual funds.

Note:

• As per Section 50AA, capital gains arising from the sale of units of specified mutual funds acquired on or after April 1, 2023, and market-linked debentures will always be treated as short-term capital gains, irrespective of the holding period.
• In cases where an asset is obtained by gift, inheritance, will, or succession, the holding period of the previous owner is also considered when determining whether it is a short-term or long-term capital asset.
• For bonus shares and rights shares, the holding period begins from the date of allotment of those shares.

Tax Rates on Equity and Debt Mutual Funds

The taxation of capital gains on mutual funds depends on the type of fund and the date of acquisition. Funds that invest more than 65% of their total portfolio in equities are classified as equity mutual funds, while others are considered debt mutual funds.

---

1. Mutual Funds Acquired on or Before 1 April 2023

Type of Fund	Short-Term Capital Asset	Long-Term Capital Asset
Debt Funds	Taxed as per the individual’s income tax slab rate	20% with indexation benefit
Equity Funds	15%	10% on gains exceeding ₹1.25 lakh, without indexation*

---

2. Mutual Funds Acquired After 1 April 2023

Type of Fund	Short-Term Capital Asset	Long-Term Capital Asset
Debt Funds	Taxed as per the individual’s income tax slab rate	Taxed as per the individual’s income tax slab rate
Equity Funds	15%	10% on gains exceeding ₹1.25 lakh, without indexation*

---

Note:

• A 10% tax without indexation, with an exemption limit of ₹1,25,000, applies to transfers made on or before 23/07/2024. For transfers made after 23/07/2024, the applicable tax rate is 12.5% without indexation.
  
• From 01/04/2023 onwards, capital gains from Debt Mutual Funds, Market Linked Debentures, and Unlisted Bonds or Debentures are always treated as short-term, irrespective of the holding period, and are taxed according to the individual’s applicable slab rates.

Comparison of Tax Rates After Budget 2024

The table below highlights the revised tax rates on different types of capital assets before and after the Union Budget 2024.

---

Key Notes

• Sovereign Gold Bonds (SGBs):
  Capital gains on SGBs are fully exempt if the bonds are held until maturity.
• Units of AIF (Alternative Investment Funds):
  This applies only to Category I and II AIFs.
  Income from securities transactions of such AIFs is taxable in the hands of the unit holders, as if they directly invested in the securities rather than through the fund.
  The Budget 2025 further clarified that income from securities transactions for these funds will always be treated as Capital Gains.

---

Would You Like a CA to Help You With Your IT Returns?

Managing capital gains taxes can be complex. Our expert Chartered Accountants can help you with tax filing and capital gains reporting, ensuring full compliance and maximum savings.
✔️ Tax filing within 48 hours
✔️ Plans start at ₹4,000 for taxpayers with capital gains or losses.

---

Exemption on Capital Gains

Capital gains can lead to significant tax outflows, but the Income Tax Act provides various exemptions under Sections 54 to 54F that help reduce or eliminate tax liability when certain conditions are fulfilled.

---

Section 54 – Exemption on Sale of House Property

Under Section 54, taxpayers can claim an exemption from long-term capital gains arising from the sale of a residential property by reinvesting the gains in up to two new residential properties.

Key points:

• The exemption applies if the capital gains (not the entire sale value) are reinvested in one or two residential houses.
• The two-house exemption is available once in a lifetime and only if the capital gain does not exceed ₹2 crores.
• If only one property is purchased, there is no limit on the sale value.
• The new property can be purchased or constructed, and the investment must be made within the prescribed time frame.
• If the cost of the new property is higher than the capital gain, the exemption will be limited to the amount of capital gain.

Conditions for Availing this Benefit

To claim exemption under Section 54, certain conditions must be met:

• The new residential property must be purchased within 1 year before or 2 years after the date of sale of the original property.
• Alternatively, the capital gains can be invested in constructing a new house, but the construction must be completed within 3 years from the date of sale.
• If the new property is sold within 3 years of its purchase or completion of construction, the exemption will be withdrawn, and the amount earlier claimed as exemption will become taxable.
• The maximum capital gains exemption limit under Sections 54 and 54F is now ₹10 crore. (Previously, there was no upper limit.)

---

Exemption on Capital Gain Exceeding ₹2 Crore

If the amount of capital gain exceeds ₹2 crore, the taxpayer can claim exemption only for one residential house property.
The property must be:

• Purchased within 1 year before or 2 years after the date of sale, or
  
• Constructed within 3 years after the date of sale.

---

Section 54F – Exemption on Capital Gains from Sale of Assets Other Than a House Property

Section 54F provides an exemption when long-term capital gains arise from the sale of any capital asset other than a residential house.

Key points:

• The entire sale consideration (not just the gain) must be invested in a new residential house property.
• The new property must be purchased within 1 year before or 2 years after the sale, or constructed within 3 years from the date of sale.
• Exemption is available only for one house property.
• If the new property is sold within 3 years, the exemption will be revoked and become taxable.
• If the entire sale consideration is reinvested, the whole capital gain will be exempt.
• If only a part of the sale proceeds is invested, the exemption will be proportionate, calculated as:

Exempt LTCG=Capital Gain×Net Sale ConsiderationCost of New House​

Section 54EC – Exemption on Sale of House Property by Reinvesting in Specified Bonds

Under Section 54EC, you can claim an exemption from capital gains tax if the profits from the sale of a house property are reinvested in certain specified bonds.

If you do not wish to reinvest the sale proceeds in another property, you can invest up to ₹50 lakh in bonds issued by the following government-backed institutions:

National Highway Authority of India (NHAI)

Rural Electrification Corporation (REC)

Power Finance Corporation (PFC)

Indian Railway Finance Corporation (IRFC)

Key conditions:

The investment must be made within 6 months from the date of sale of the property.

These bonds cannot be transferred or sold for a period of 5 years from the date of investment.

The capital gains exemption can be claimed only if the investment is made before the tax filing due date.

You can also combine this exemption with other exemptions available under Sections 54, 54B, and 54F.

Section 54B – Exemption on Capital Gains from Transfer of Agricultural Land

Section 54B provides tax exemption on capital gains arising from the sale of agricultural land used for agricultural purposes by an individual, their parents, or a Hindu Undivided Family (HUF) for at least 2 years prior to the sale.

Key points:

The exemption applies to both short-term and long-term capital gains.

The exempted amount will be the lower of the capital gain or the amount invested in the new agricultural land.

The investment must be made in new agricultural land (rural or urban) within 2 years from the date of transfer.

The new agricultural land purchased to claim exemption should not be sold within 3 years from its purchase date.

If the new land is not purchased before filing the return, the capital gains amount must be deposited under the Capital Gains Account Scheme, 1988 in any branch (except rural branches) of a public sector bank or IDBI Bank before the due date of filing the return.

The exemption can be claimed up to the amount deposited in this account.

If the deposited amount is not utilized for purchasing agricultural land within the specified period, it will be treated as taxable capital gain in the year when the 2-year period expires.

Section 54D – Capital Gains on Transfer of Land and Building Used for Industrial Undertaking

Conditions to be Fulfilled:

1. The exemption under Section 54D applies when there is a compulsory acquisition of land or building used for an industrial undertaking.
2. The land or building must have been used by the assessee for the business of the industrial undertaking for at least 2 years before the date of transfer.
3. The assessee must purchase or construct another land or building within 3 years from the date of transfer — either to shift, re-establish, or set up a new industrial undertaking.
4. If the investment is not made before filing the return of income, the capital gain amount must be deposited under the Capital Gains Account Scheme (CGAS).

---

Amount of Exemption:

• If the cost of the new asset is equal to or greater than the sale consideration, the entire capital gain is exempt from tax.
• If the cost of the new asset is less than the capital gain, exemption will be limited to the amount invested in the new asset.

---

Capital Gains Account Scheme (CGAS):

Finding a new property, arranging funds, and completing documentation can take time. To address this, the Income Tax Department allows taxpayers to temporarily deposit their capital gains under the Capital Gains Account Scheme, 1988.
If the capital gains are not reinvested before the due date of filing the return (15th September for FY 2024-25), the amount can be deposited in a PSU or other eligible bank under this scheme.

The amount deposited will be treated as an exemption from capital gains tax. However, if the money is not utilized for purchasing or constructing the new industrial property within the specified period, it will be treated as a short-term capital gain in the year the 3-year period expires.

Calculating Capital Gains

Capital gains are calculated based on how long the asset has been held — short-term or long-term. The computation method differs for both categories, depending on the period of holding, type of asset, and cost adjustments allowed.

---

Key Terms to Understand

1. Full Value of Consideration:
This refers to the total amount received or receivable by the seller in exchange for the transfer of a capital asset.
Capital gains are taxable in the year of transfer, even if the payment is not yet received.

2. Cost of Acquisition:
The original purchase price or value at which the seller acquired the asset. This forms the base cost used for calculating gains.

3. Cost of Improvement:
The capital expenditure incurred to make additions or alterations to the asset. These costs enhance the asset’s value and are added to the acquisition cost when computing total capital gains.

---

Important Notes:

• In cases where the capital asset is inherited, gifted, or received through other means, the cost of acquisition and cost of improvement of the previous owner are also considered.
• Any improvements made before April 1, 2001, are not included while calculating the cost of improvement.

This structured approach ensures accurate computation of capital gains liability under the Income Tax Act.

How to Calculate Short-Term Capital Gains (STCG)

Short-term capital gains arise when a capital asset is sold within the short-term holding period as defined under the Income Tax Act (e.g., less than 36 months for property, less than 12 months for listed shares).

Here’s a step-by-step process to calculate STCG:

---

Step 1: Determine the Full Value of Consideration

This is the total sale value received or receivable from the transfer of the asset.

Step 2: Deduct Allowable Expenses

Subtract all expenses directly related to the sale, such as:

• Brokerage or commission on sale
• Legal fees
• Advertising costs for sale

Step 3: Deduct Cost Components

Now deduct the following from the net sale consideration:

• Cost of acquisition (the amount paid to acquire the asset)
• Cost of improvement (capital expenses for any enhancement to the asset)

Step 4: Deduct Applicable Exemptions

If eligible, claim exemptions under Sections 54B or 54D for reinvestment in specific assets.

---

Formula for Short-Term Capital Gain:

Short-Term Capital Gain =
Full Value of Consideration
– Expenses Incurred Exclusively for Transfer
– Cost of Acquisition
– Cost of Improvement

The resulting figure is your taxable short-term capital gain, which is added to your total income and taxed at applicable rates.

These rates apply without the benefit of indexation.

Deductible Expenses and Indexed Cost of Acquisition / Improvement

When calculating capital gains, certain expenses and adjustments can be claimed as deductions to reduce your taxable gain. These deductions differ based on the type of asset sold and are meant to ensure that only the actual net profit from the sale is taxed.

---

A. Sale of House Property

You can deduct the following expenses from the total sale price:

• Brokerage or commission paid to secure a buyer.
• Cost of stamp papers or documentation charges.
• Travelling expenses related to the sale or transfer of the property (even if incurred after the sale).
• Legal and administrative costs related to inheritance—such as obtaining a will, succession certificate, or executor’s fee—if the property was inherited.

---

B. Sale of Shares

For the sale of shares or securities, the following deductions are permitted:

• Broker’s commission or service fees for executing the sale.
• Note: Securities Transaction Tax (STT) cannot be claimed as a deductible expense.

---

C. Sale of Jewellery

In case of selling jewellery:

• The broker’s commission or service fees paid for securing a buyer can be deducted.

---

Note:
Expenses claimed while calculating capital gains cannot be claimed again under any other head of income. Each expense can be claimed only once.

---

Indexed Cost of Acquisition / Improvement

Indexation is used to adjust the purchase and improvement costs of a capital asset to account for inflation over the period of holding. This helps reduce the taxable capital gain.

Formula:

Indexed Cost of Acquisition=(Cost of Acquisition × CII of Year of Transfer) ÷ CII of Year of Acquisition (or FY 2001-02, whichever is later)\text{Indexed Cost of Acquisition} = \text{(Cost of Acquisition × CII of Year of Transfer) ÷ CII of Year of Acquisition (or FY 2001-02, whichever is later)}Indexed Cost of Acquisition=(Cost of Acquisition × CII of Year of Transfer) ÷ CII of Year of Acquisition (or FY 2001-02, whichever is later)

• CII (Cost Inflation Index) is notified annually by the Income Tax Department.
• For assets acquired before 1 April 2001, the cost of acquisition is taken as the higher of actual cost or Fair Market Value (FMV) as on 1 April 2001, as per the taxpayer’s choice.

By applying indexation, your cost base increases, and consequently, the taxable capital gain is reduced—resulting in lower tax liability.

Indexed Cost of Improvement and Illustrations of Capital Gains Calculation

Indexed Cost of Improvement

The Indexed Cost of Improvement helps in adjusting the cost of improvements made to a capital asset for inflation, similar to how the indexed cost of acquisition is calculated.

Formula:

Indexed Cost of Improvement=Cost of Improvement×CII of Year of TransferCII of Year of Improvement\text{Indexed Cost of Improvement} = \text{Cost of Improvement} \times \frac{\text{CII of Year of Transfer}}{\text{CII of Year of Improvement}}Indexed Cost of Improvement=Cost of Improvement×CII of Year of ImprovementCII of Year of Transfer​

✅ Note 1: Any improvement made before 1st April 2001 should not be considered for indexation.
✅ Note 2: Earlier, indexation benefit was available on all long-term capital assets. However, as per Budget 2024, this benefit was initially withdrawn, which received significant public criticism.
✅ To address this, the Government reintroduced an option allowing individuals and HUFs to choose between:

• 12.5% tax without indexation, or
• 20% tax with indexation — applicable for real estate transactions.

---

Illustrations

Scenario 1: Long-Term Capital Gain on Sale of Property

Details:

• Sale Date: 24th August 2024
• Sale Price: ₹50,00,000
• Purchase Price: ₹25,00,000 (acquired on 19th Feb 2020)
• CII (FY 2019–20): 301
• CII (FY 2024–25): 363

Particulars	12.5% Without Indexation (1)	20% With Indexation (2)
Sale Consideration	₹50,00,000	₹50,00,000
Cost of Acquisition	₹25,00,000	₹25,00,000 × 363/301 = ₹30,14,950
Long-Term Capital Gain	₹25,00,000	₹19,85,050
Tax on LTCG	₹3,12,500 (12.5%)	₹3,97,010 (20%)

Conclusion:
In this case, opting for 12.5% without indexation is more beneficial.
However, for assets held much longer, 20% with indexation usually offers greater tax savings.

---

Scenario 2: Long-Term Capital Gains on Sale of Listed Equity Shares

Particulars	Sold on 20th March 2024 (Before 23 July 2024)	Sold on 24th August 2024 (After 23 July 2024)
Sale Consideration	₹50,00,000	₹50,00,000
Cost of Acquisition	₹25,00,000	₹25,00,000
Long-Term Capital Gain u/s 112A	₹25,00,000	₹25,00,000
Less: Exemption u/s 112A	₹1,25,000	₹1,25,000
Taxable LTCG	₹23,75,000	₹23,75,000
Tax Rate	10%	12.5%
Tax Payable	₹2,37,500	₹2,96,875

Conclusion:
The exemption of ₹1.25 lakh applies irrespective of the sale date, but tax rate differs based on whether the transfer occurred before or after 23 July 2024.

---

Scenario 3: Capital Gains on Sale of Debt Mutual Funds

Details:

• Investment: ₹10,00,000
• Sale Value: ₹18,00,000
• Holding Period: 4 years
• FY of Sale: 2024–25

Particulars	Acquired Before 1/4/2023	Acquired On or After 1/4/2023
Sale Price	₹18,00,000	₹18,00,000
Purchase Cost	₹10,00,000	₹10,00,000
Indexed Cost of Acquisition	₹10,00,000 × 363/280 = ₹12,96,428	Not Applicable
Capital Gain	₹5,03,572	₹8,00,000
Tax Rate	20% (after ₹3,00,000 exemption)	Normal slab rate
Tax Payable	₹40,714	₹36,400*

Saving Tax on Sale of Agricultural Land

In certain situations, the profit earned from selling agricultural land may be completely exempt from income tax or may not fall under the category of capital gains. The details are as follows:

a. Rural Agricultural Land:
Agricultural land situated in a rural area in India is not treated as a capital asset. Hence, any profit from its sale is not subject to tax. (Refer above for the definition of rural agricultural land.)

b. Land Held as Stock-in-Trade:
If you are engaged in the regular business of buying and selling land, the agricultural land will be considered stock-in-trade. In such cases, any profit from its sale will be taxable under the head Income from Business and Profession.

c. Compulsory Acquisition of Urban Agricultural Land:
Capital gains arising from compensation received due to compulsory acquisition of urban agricultural land are exempt from tax under Section 10(37) of the Income Tax Act.

If your transaction does not fall under any of the cases mentioned above, you can claim exemption under Section 54B of the Income Tax Act.

Disclaimer: The content on this website is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult qualified experts before acting on any information. K M GATECHA & CO LLP accepts no liability for errors, omissions, or outcomes from the use of this content. This site is not an advertisement or solicitation.