Selling an asset, whether it be your family home, a portfolio of shares, or gold jewellery, can often result in a substantial gain. These gains can certainly be useful, but can also create a tax liability, known as Capital Gains Tax. Capital gains tax rules can be very complex in India. However, it is crucial for every taxpayer to get to grips with the basics.
This comprehensive guide will simplify capital gains tax, not only describing the types, methods of calculation, and various tax planning measures, but will also assist you in making good decisions and filing an accurate Income Tax Return.
While this guide will help you understand capital gains tax, a deeper dive into all tax complexities, including comprehensive principles, can be found in our specialized Accounting and Taxation course.
Types of Capital Gains: STCG vs. LTCG
The first step in calculating your capital gains tax liability is to ascertain whether your gain is considered to be "short-term" or "long-term". This important distinction will have an impact on the rates of tax you will pay and the advantages investors will receive. The difference is dependent on how long you held the asset, as follows:
Short-Term Capital Gain (STCG)
Results from selling a capital asset after holding it for a relatively short period.
Listed Equity Shares & Equity Mutual Funds: Held for 12 months or less.
Immovable Property (Land & Building): Held for 24 months or less.
Other Capital Assets: Held for 36 months or less. (You should note that for debt mutual funds acquired on or after April 1, 2023, the gain will always be considered a short-term gain irrespective of the holding period and will be taxed at slab rates.)
Long-Term Capital Gain (LTCG)
Occurs when a capital asset is sold after being owned longer than the unique asset class's short-term holding period.
Step-by-Step Guide to Calculate Capital Gains Tax in India
The basic premise for calculating capital gains is simple. Take your sale price and deduct your cost. The complication arises with how one thinks about their "cost" and the rates.
The Basic Formula:
Capital Gain = Full Value of Consideration (Sale Price) - Expenses on Transfer - Cost of Acquisition - Cost of Improvement
Let's get down to the specifics for STCG and LTCG:
Calculating Short-Term Capital Gains (STCG)
With STCG, you get to deduct the actual cost of acquisition and improvement from the net sale consideration. The actual cost is very specific.
Tax Rates for STCG:
Listed Equity Shares & Equity Mutual Funds (STT paid): 20% (effective July 23, 2024, although in previous Section 111A it was 15%) - Significant counters in the recent Budget.
Other Assets: You pay tax based on your applicable income tax slab rates, as STCG will get added to your total income. This would include STCG from debt mutual funds purchased or acquired on or after April 1, 2023.
Calculating Long-Term Capital Gains (LTCG)
LTCG is much simpler now with the Budget 2024 introduced and the changes facilitated in the discussions.
Long-term Capital Gain (LTCG) Tax Rates – (Effective July 23, 2024)
Listed Equity Shares & Equity Mutual Funds (STT paid): 12.5% on gains above Rs. 1.25 lakh (previously only above Rs. 1 lakh @ 10% Section 112A). The Rs. 1.25 lakh exemption limit is on a per financial year basis.
All Other Assets (e.g., Property, Debt Mutual Funds, Gold, Unlisted Shares): A flat 12.5% without indexation. This is an important change, as there will be little or no indexation for realizations on or after July 23, 2024.
Understanding Indexation (Crucial Update)
What is indexation? Historically, indexation allowed taxpayers to adjust the acquisition cost for inflation using the Cost Inflation Index (CII). This diminished the gain subject to tax, and ultimately the tax hit.
The Main Change: Indexation has been removed for the most part for the vast majority of assets realized on or after July 23, 2024. This means your LTCG will simply be Sale Proceeds less Actual Purchase Price (plus improvement expense or transfer expense (brokerage commission, legal fees, etc.)
What about Land and Building (Acquired BEFORE July 23, 2024): For real estate purchased before July 23, 2024, taxpayers will have the option of:
20% tax with indexation.
The option that provides the lower tax is available to taxpayers. This gives some options to property sellers
Capital Gains on Specific Assets: Practical Scenarios
Knowing how the various rules apply to your assets can assist:
Immovable Property (Land & Building)
Holding Period: STCG (24 months or less), LTCG (more than 24 months).
Calculating: Sale proceeds less expenses (brokerage commission, legal fees) less acquisition cost/improvement. For LTCG on properties obtained before July 23, 2024, the taxpayer must be able to compare the tax calculated with and without indexation. For properties obtained after this, only the 12.5% without indexation would be permitted.
Equity Shares & Equity Mutual Funds
Holding Period: STCG (< 12 months), LTCG (> 12 months)
STCG: 20% flat rate if STT paid
LTCG: 12.5% on gains over Rs. 1.25 lakh. There is a grandfathering clause whereby only gains on shares/MFs purchased prior to Feb 1, 2018, are taxed only on gains in excess of fair market value on Jan 31, 2018.
Debt Mutual Funds
Holding Period: If you acquired before April 1, 2023, STCG (< 36 months) is taxed at slab rate; LTCG (> 36 months) is taxed at 12.5% post-July 23, 2024 (without indexation) or 20% (if sold before July 23, 2024 with indexation).
For acquisitions on or after April 1, 2023, any gains would always be treated as STCG and taxed at your respective slab rates, regardless of the holding period, and there would be no indexation benefit. This is a very, very big categorical change for mutual fund investors. Similarly, it is important to be cognisant of the tax treatment of the specific Virtual Digital Assets (VDAs) you choose to invest in, including cryptocurrencies, when deciding on a platform. The best options can be found in our review of Top Crypto Exchanges and Trading Apps in India for 2025.
Gold, Jewellery, Other Movable Assets
Holding Period: STCG (< 36 months), LTCG (> 36 months)
Taxation: STCG as per slab rates; LTCG at a uniform 12.5% (for acquisitions post-July 23, 2024) without indexation.
Exemptions and Tax-Saving Strategies
Even though capital gains tax is not avoidable, the Income Tax Act has multiple provisions that allow you to avoid tax if you put your gains back into use. It is essential for tax planning:
Section 54 (Residential House to Residential House)
Exempts LTCG from the sale of a residential house, excluding the gain that has been reinvested into another residential house within one year prior to or two years after the sale or constructing one within three years. The maximum LTCG exemption can be up to Rs. 10 crore.
Section 54F (Other Long-Term Assets to Residential House)
Exemption from LTCG on the sale of a residential house if the gain is reinvested to purchase another residential house either within one year before or two years after the sale, or for constructing one within three years. The maximum exemption is Rs. 10 crore.
Section 54EC (Investment in Specified Bonds)
Exempts LTCG on any long-term asset if the gains (up to Rs. 50 lakh in any financial year) are invested in certain bonds (e.g., NHAI, REC) within six months from the date of transfer. These bonds are subject to a 5-year lock-in period.
Please keep the above deductions in mind to avoid some standard wrongs and exclusions while filing the Income Tax Return.
Conclusion
Knowing how capital gains tax operates in India is not only about following the rules but also about planning in the financial market. The alterations from Budget 2024 regarding indexation and an even level of LTCG rates mean you should reevaluate your investment and selling plans.
By knowing the difference between STCG and LTCG, what the new tax rates are, and what exemptions are available, you can make important decisions around tax liabilities and your financial health as a whole. Always remember to consult and seek advice from a qualified tax advisor for tailored tax advice, given that we are under a dynamic tax regime.
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