What is Capital Gains Tax In India: Types, Tax Rates, Calculation and Exemptions

Any profit or gains arising as a result of transfer of capital assets such as shares, land, house property, gold etc., are know as capital gains. Under the Income Tax Act, such capital gains are taxable in the hands of the taxpayer as long-term or short-term capital gains depending on the holding period of the capital assets.

Long-term capital gains are taxed at 12.5% with an exemption of up to Rs. 1.25 lakh (in case of equity shares, equity oriented mutual funds or units of business trusts) as per Section 112A. Short-term capital gains tax rate is 20% under Section 111A, however STCG on other other asset such as land, property or gold are taxed at applicable income tax slab rates. 

Capital Gains Tax Rates for FY 2025-26

Asset Type	STCG Tax Rate	LTCG Tax Rate
Listed Equity Shares	20%	12.5% above Rs. 1.25 lakh
Equity Mutual Funds	20%	12.5% above Rs. 1.25 lakh
Property	Slab Rate	12.5%
Gold	Slab Rate	12.5%
Debt Mutual Funds (acquired on or after 1 Apr 2023)	Slab Rate	Slab Rate

What is Capital Gains Tax?

Capital gains tax is the tax imposed on profits earned from the sale or transfer of capital assets. Capital assets include property, stocks, mutual funds, gold, and other investments. Under the Income Tax Act, the gains from such transfers are taxed in the financial year in which the asset is sold and must be reported while filing ITR under the head “Capital Gains Income”.

What are Capital Assets?

Capital assets are property or investments owned by a taxpayer, and profits from their transfer are taxed as capital gains under the Income Tax Act, 1961. 

Examples of capital assets include land, buildings, house property, vehicles, machinery, jewellery, patents, trademarks, and leasehold rights. Capital assets also include shares or rights in an Indian company, including rights of management, control, or any other legal rights associated with such ownership.

What are not Capital Assets?

a. Any stock, consumables or raw material, held for the purpose of business or profession

b. Personal goods such as clothes and furniture held for personal use

c. Agricultural land in rural India

d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the Central Government

e. Special bearer bonds (1991)

f. Gold Deposit Bond issued under the Gold Deposit Scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2019 notified by the Central Government.

Classification of Capital Assets

Capital assets are classified as long-term or short-term capital assets based on their holding period. Listed equity share, units of equity oriented mutual funds, and units of business trusts held for up to 12 months are classified as short-term capital assets. If held for more than 12 months, they are classified as long-term capital assets. 

Other assets such as property, gold, and unlisted shares are short-term capital assets if held up to 24 months, and long-term capital assets if held for more than 24 months. 

Holding Period of Different Capital Assets

The capital gains tax rate is determined based on the golding period of the asset. The Income Tax Act prescribes a holding period of 12 or 24 month to classify capital assets long-term or short-term. 

Long-Term and Short-Term Capital Gains

As previously discussed, capital gains are classified into two, based on the classification of assets. 

• If the capital assets are classified as long term, the gain arising from such assets are classified as long-term capital gains.
• If the capital assets are classified as short term capital assets, based on period of holding, gains from sale of them are treated as short-term capital gains.

However, there are some situations wherein despite a long holding period, the captial gains are treated as short-term. Examples include depreciable capital assets like machinery and commercial buildings, and market linked debentures.

Capital Gains Tax Rates in India

Capital gains tax is levied based on the holding period of the assets as follows:

Tax Rates on Equity and Debt Mutual Funds

Gains made on the sale of debt funds and equity funds are treated differently. Any fund that invests heavily in equities (more than 65% of their total portfolio) is called an equity fund.

Note*: Irrespective of the holding period, debt funds acquired after 01/04/2023, the capital gains on sale of such Debt Mutual Funds, market linked debentures and Unlisted Bonds or Debentures are always considered short-term and are taxed at normal slab rates.

Are Capital Gains Taxed Differently Under the New Tax Regime

Capital gains are taxed at a fixed tax rate or applicable slab rates under both the tax regime. Under Section 112A, long-term capital gains are taxed at 12.5% with an exemption of up to Rs. 1.25 lakh, and short-term capital gains under Section 111A are taxed at 20% flat irrespective of the tax regime. 

Taxpayers can also avail exemption on long-term capital gains by eligible reinvestment, which is allowed under both tax regimes. Therefore, capital gains taxation and rates are generally unaffected by regime selection.

Capital Gains Exemptions

Capital Gains in general can lead to significant tax liabilities. But there are various provisions in the Income Tax Act offering various exemptions that can help reduce or eliminate this burden if specific conditions are met under sections 54 to 54F.

1. Section 54: Exemption on Sale of House Property on Purchase of Another House Property

• Taxpayers can get an exemption from long-term capital gain from the sale of house property up to Rs 10 crore, under section 54.
• If they invest in two house properties, the capital gain on the sale of house property must not exceed Rs 2 crores.
• The Long Term Capital Gain can be reinvested into buying or constructing two other house properties.

2. Section 54F: Exemption on Capital Gains on Sale of any Asset other than a House Property

• Capital gains exemption on any property except a house, can be claimed under section 54F. (Up to Rs. 10 crore)
• Purchase the new property either 1 year before the sale or 2 years after the sale of the property. 
• You can also construct a property within 3 years from the date of sale.
• LTCG exemption = Capital gains x Cost of new house / Net consideration.

3. Section 54EC: Exemption on Sale of House Property on Reinvesting in Specific Bonds

Exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds.

• Exemption under section 54EC can be claimed when the capital gains are re-invested in specified bonds.
  1. National Highway Authority of India (NHAI), 
  2. Rural Electrification Corporation (REC), 
  3. Power Finance Corporation (PFC) or 
  4. Indian Railway Finance Corporation (IRFC)
• The money invested can be redeemed after 5 years, but they cannot be sold before the lapse of 5 years from the date of sale.

4. Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural Purpose

• Section 54B allows you to claim exemption on capital gains from urban agricultural land. 
• Both short term and long term capital gains are eligible for this exemption.
• The exempted amount is the investment in a new asset or capital gain, whichever is lower. 
• You must reinvest into a new agricultural land (in urban or rural area) within 2 years from the date of transfer. 
• The new agricultural land should not be sold within a period of 3 years from the date of its purchase.

5. Capital Gains Account Scheme

• If capital gains have not been invested until the due date of filing of return (31st July for FY 2025-26) of the financial year in which the property is sold, the gains can be deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988.
• This deposit can then be claimed as an exemption from capital gains, and no tax has to be paid on it. 
• However, if the money is not invested, the deposit shall be treated as a Short-Term Capital Gain in the year in which the specified period lapses.

Capital Gains Exemptions Summary

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.

Terms You Need to Know

1. Full value consideration: The consideration received or to be received by the seller for transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received yet.
2. Cost of acquisition: The value for which the capital asset was acquired by the seller.
3. Cost of improvement: Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller.

Note:

• In certain cases where the capital asset becomes the property of the taxpayer otherwise than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement incurred by the previous owner would also be included.
• Improvements made before April 1, 2001, is never taken into consideration.

1. How to Calculate Short-Term Capital Gains?

• Start with the full value of consideration
• Deduct the following:
  1. Expenditure incurred wholly and exclusively for such transfer
  2. Cost of acquisition
  3. Cost of improvement
• From this resulting number, deduct exemptions provided under sections 54B/54D
• This amount is a short-term capital gain to be taxed

2. How to Calculate Long-Term Capital Gains?

• Start with the full value of consideration
• Deduct the following:
  1. Expenditure incurred wholly and exclusively in connection with such transfer
  2. Indexed cost of acquisition
  3. Indexed cost of improvement
• From this resulting number, deduct exemptions provided under sections 54, 54D, 54EC, 54F, and 54B 

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)

Deductible Expenses

A. Sale of house property: These expenses are deductible from the total sale price in case of sale of property:

• Brokerage or commission paid for securing a purchaser
• Cost of stamp papers
• Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected
• Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases

B. Sale of shares: You may be allowed to deduct these expenses:

• Broker’s commission related to the shares sold
• STT or securities transaction tax is not allowed as a deductible expense

C. Where jewellery is sold: 

• In case of sale of broker’s jewellery and where a broker’s services were involved in securing a buyer, the cost of these services can be deducted.

Note: The expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of income, and you can claim them only once.

Indexed Cost of Acquisition / Improvement

The cost of acquisition and improvement is indexed by applying CII (Cost Inflation Index). It is done to adjust for inflation over the years of holding the asset. This increases one’s cost base and lowers the capital gains.          

The indexed cost of acquisition is calculated as:

The cost of acquisition of the assets acquired before 1st April 2001 should be actual cost or FMV as on 1st April 2001, as per taxpayer’s option.

The Indexed Cost of Improvement is calculated as:

Note: 

1. Improvements made before 1st April 2001, should not be considered.
2. Individual and HUF taxpayers can compute taxes either at 12.5 per cent without indexation or at 20 per cent with indexation on real estate transactions. 

Illustrations

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

Mr. X has sold a his house on 24th August, 2025 for Rs.50 Lakhs. He acquired the property on 19th February, 2020 for Rs.25 lakhs. Since he is an individual selling a building after 23rd July, 2024, he has a choice to exercise 12.5% without indexation or 20% with indexation. His capital gains under both the options are calculated as follows.

In this situation, the option of 12.5% without indexation is beneficial for the assessee. If the assessee has purchased the property far earlier, he would be able to claim huge indexation benefits, so that 20% option would be more beneficial for him.

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

Mr. X has sold a his listed equity shares on 24th August, 2025 for Rs.50 Lakhs. He acquired those on 19th February, 2020 for Rs.25 lakhs for both the situations.

Scenario-3: Capital Gains on Sale of Debt Mutual Funds

Here is calculation of the tax on debt funds before and after the investments as per the new regime:

Suppose Mr. Vinay invested Rs. 10,00,000 in FY 2018-19 in a debt mutual fund. He sold the investment after four years in FY 2025-26 for Rs. 18,00,000, resulting in a capital gain of Rs.8,00,000. 

*Basic exemption limit of Rs.4,00,000 (new regime) is exhausted against the capital gains income and the remaining amount is taxed. This is assuming that the tax payer has no other income. 

From the above example, it is clear that the changes in income tax rules will have a positive impact on the people if it is held for shorter period but if it is held for a longer period the indexation benefit will be foregone and it will lead to negative impact for the taxpayer. 

Which ITR Form to File for Capital Gains Income

Taxpayers having capital gains income are required to report it and pay applicable taxes on such capital gains while filing ITR. Capital gains income are to be reported in forms ITR-2 or ITR-3 (in case of business income). However, taxpayers can also report long-term capital gains under Section 112A up to Rs. 1.25 lakh only in form ITR-1 and ITR-4. 

Which ITR form is applicable for a taxpayer depends on the various source of income of that taxpayer. 

Saving Tax on Sale of Agricultural Land

In some cases, capital gains made from the sale of agricultural land may be entirely exempt from income tax or it may not be taxed under the head capital gains. See below:

1. Agricultural land in a rural area in India is not considered a capital asset and therefore any gains from its sale are not chargeable to tax. For details on what defines an agricultural land in a rural area, see above.
2. Do you hold agricultural land as stock-in-trade? If you are into buying and selling land regularly or in the course of your business, in such a case, any gains from its sale are taxable under the head Business and Profession.
3. Capital gains on compensation received for compulsory acquisition of urban agricultural land are tax exempt under Section 10(37) of the Income Tax Act..

Set-off and Carry Forward of Capital Loss 

Taxpayers incurring losses on transfer of capital assets are allowed to set-off and carry-forward these losses. Capital losses can be carried-forward up to 8 assessment years, provided that the ITR is filed with the applicable due date. Long-term capital losses can only be set-off aginst long-term capital gains. However, short-term capital losses can be set-off against both long-term and short-term capital gains income.