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

Capital gains tax is the tax payable on profits earned from the sale of a capital asset such as shares, mutual funds, property, gold, or bonds. The applicable capital gains tax rate depends on the asset type and holding period, resulting in either short-term capital gains (STCG) or long-term capital gains (LTCG). Understanding capital gains taxation helps investors calculate tax liability, claim exemptions, and plan investments efficiently.

Capital Gains Tax at a Glance

Particular	Details
Meaning	Profit arising from the transfer of a capital asset
Types	Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG)
STCG Tax Rate	20% (where applicable under Section 111A) or slab rates for other assets
LTCG Tax Rate	12.5% (where applicable) after the prescribed exemption limit
Capital Gains Exemptions	Available under Sections 54, 54B, 54D, 54EC, 54F, 54G and other eligible provisions
ITR Forms	Generally reported in ITR-2 or ITR-3

Capital Gains Tax - Latest Updates and Changes

The capital gains tax regime has undergone significant changes following Budget 2024, with revised tax rates, simplified holding periods, and changes to indexation benefits. These changes continue under the Income Tax Act, 2025, making it important for taxpayers to understand the latest rules before reporting capital gains.

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”.

Types of Capital Gains

Capital gains are classified into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the type of capital asset and its holding period before transfer. The applicable tax rate depends on this classification.

1. Short-Term Capital Gains (STCG)

A gain is treated as short-term when a capital asset is sold before completing the prescribed holding period. STCG is generally taxed at 20% under Section 111A for eligible equity assets, while gains from other assets are taxed at the applicable income tax slab rates.

2. Long-Term Capital Gains (LTCG)

A gain is treated as long-term when a capital asset is held for at leaist the prescribed holding period before transfer. In most cases, LTCG is taxed at 12.5% (without indexation), and eligible taxpayers can also claim exemptions under the Section 54 series by fulfilling the prescribed conditions.

However, LTCG under Section 112A are taxed at 12.5% with an exemption of up to Rs. 1.25 lakh. 

Capital Gains Tax Rates in India

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

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. 

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

The Income Tax Act provides several exemptions that can help reduce or eliminate your capital gains tax liability if the sale proceeds are reinvested in specified assets within the prescribed time limits. The most commonly claimed exemptions are under Sections 54, 54B, 54D, 54EC, 54F, and 54GB.

1. Section 54 – Sale of Residential House

Section 54 exemption is available to individuals and HUFs who sell a long-term residential house and reinvest the capital gains in another residential house within the prescribed time.

2. Section 54B – Sale of Agricultural Land

Section 54B exemption is available to individuals and HUFs on the sale of agricultural land, provided the capital gains are reinvested in another agricultural land.

3. Section 54D – Compulsory Acquisition of Land or Building

Section 54D exemption is available where land or building used for an industrial undertaking is compulsorily acquired, and the compensation is reinvested in another eligible industrial asset.

4. Section 54EC – Investment in Specified Bonds

Section 54EC exemption is available when long-term capital gains are invested in notified bonds issued by eligible institutions within the prescribed period.

5. Section 54F – Sale of Assets Other Than Residential House

Section 54F exemption is available when long-term capital gains arising from the sale of any capital asset (other than a residential house) are invested in a new residential house, subject to prescribed conditions.

6. Section 54GB – Investment in Eligible Start-ups

Section 54GB exemption is available when proceeds from the sale of a residential property are invested in eligible start-ups through subscription to equity shares, subject to specified conditions.

Capital Gains Account Scheme (CGAS)

The Capital Gains Account Scheme (CGAS) allows taxpayers to temporarily park their unutilised capital gains if they are unable to invest in the eligible asset before the ITR filing due date. Depositing the amount in a CGAS account helps preserve eligibility for claiming capital gains exemptions under the Income Tax Act.

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. 

How to Save Tax on Capital Gains?

You can legally reduce your capital gains tax liability by planning your investments and timing your transactions carefully. Here are some effective tax-saving strategies:

• Use tax-loss harvesting: Set off eligible capital losses against capital gains to reduce your taxable income.
• Claim exemptions under the Section 54 series: Reinvest capital gains in eligible assets to claim exemptions under Sections 54, 54B, 54D, 54EC, 54F, or 54GB.
• Invest in 54EC Bonds: Invest up to ₹50 lakh in specified bonds within 6 months of the transfer to claim exemption.
• Plan the timing of your sale: Selling an asset after completing the prescribed holding period may qualify it as a long-term capital asset and attract a lower tax rate.
• Track your holding period: Before selling an asset, check whether waiting a little longer can convert short-term gains into long-term gains and reduce your tax liability.

ITR Filing for Capital Gains Income

If you have earned capital gains during the financial year, you must report them while filing your Income Tax Return. Ensure that you choose the correct ITR form and disclose all gains accurately in Schedule CG to avoid notices or mismatches.

Common Mistakes While Calculating Capital Gains

• Using the wrong holding period to classify gains as short-term or long-term.
• Applying incorrect tax rates based on the type of asset.
• Claiming indexation where it is not permitted under the latest rules.
• Ignoring transfer-related expenses such as brokerage and stamp duty while calculating gains.
• Not claiming eligible exemptions under Sections 54, 54B, 54EC, 54F, or other applicable provisions.
• Failing to set off and carry forward capital losses as permitted under the Income Tax Act.
• Reporting incorrect figures in Schedule CG while filing the ITR.
• Not reconciling capital gains with AIS/Form 26AS, leading to mismatches and possible notices.