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

Investment in a immovable property, predominantly house is one of the most sought-after investments primarily because you get to own a house. While others may invest with the intention of earning a profit upon selling the property in the future. It is important to note that a house property is regarded as a capital asset for income tax purposes. Consequently, any gain or loss incurred from the sale of an immovable property may be subject to tax under the 'Capital Gains' head. Similarly, capital gains or losses may arise from sale of different types of capital assets such as stocks, mutual funds, bonds and other investments. We will delve into the chapter on ‘Capital gains’ in detail here.

Budget 2025 Update

• It is proposed to include ULIPs with premiums exceeding 10% of the policy’s sum assured, alongside those with annual premiums above Rs. 2.5 lakh.
• It is proposed to amend Section 2(14) to clarify that securities held by investment funds under Section 115UB, will be treated as capital assets

What is Capital Gains Tax in India?

• Any profit or gain that arises from the sale of a ‘capital asset’ is known as ‘income from capital gains’. 
• Such capital gains are taxable in the year of transfer of the capital asset takes place. 
• There are two types of Capital Gains: Short-Term Capital Gains(STCG) and Long-Term Capital Gains(LTCG).

Meaning of Capital Assets

• Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. 
• This includes having rights in an Indian company. It also includes the rights of management or control or any other legal right.

 The following do not come under the category of capital asset:

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.

*Definition of rural area: 

• To determine whether a land is a rural agricultural land or not, we should first determine if it is a rural land.
• For capital gains purposes, rural land is determined based on its distance from its nearest municipality or cantonment board and its population.
  • If the population of a municipality is less than 10,000, land situated outside the municipality is considered rural.
  • If the population is greater than 10,000 but within 1,00,000 - land situated farther than 2 km 
  • If the population is greater than 1,00,000 but within 10,00,000 - land situated farther than 6 km
  • If the population is greater than 10,00,000 - land situated farther than 8 km.

A tabular explanation of the above information is given below for a better understanding.

Types of Capital Assets?

1. STCA ( Short-Term Capital Asset ) An asset held for a period up to 24 months is a Short-Term Capital Asset. So, if you sell the asset within a period of 24 months of purchasing, then it would be called as a Short-Term Capital Asset. 

Some assets are considered Short-Term Capital Assets when these are held for 12 months or less. These assets are:

• Equity or preference shares in a company listed on a recognized stock exchange in India
• Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
• Units of UTI, whether quoted or not
• Units of equity oriented mutual fund, whether quoted or not
• Zero coupon bonds, whether quoted or not

2. LTCA ( Long-Term Capital Asset ): An asset held for more than 24 months is a long-term capital asset. So, if you sell the asset after a period of 24 months of purchasing, then it would be called as a Long-Term Capital Asset. 

Capital assets such as land, building and house property shall be considered as Long-Term Capital Asset if the owner holds it for a period of 24 months or more (from FY 2017-18).

However, in some of the assets, the applicable holding period is 12 months. 

Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as Long-Term Capital Asset.

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

Note: Capital gains from the sale of units of a specified mutual fund acquired on or after April 1, 2023, and market-linked debentures will always be treated as short-term capital gainsunder section 50AA, regardless of how long they have been held.

Comparison of Tax Rates After Budget 2024

The table below outlines the tax rates on various capital assets, both before and after the 2024 budget:

Note: 

• Sovereign Gold Bonds*: Capital gains on Sovereign Gold Bonds is exempt if held until maturity.
• Units of AIF**:
  • The line item pertains only to Category I and II AIF.
  • Income arising from securities transactions of AIF is taxable in the hands of unit holders as if they directly invested in the securities , not through funds.
  • It has been clarified in Budget 2025 that the income pertaining to securities transactions for these funds are always taxable as Capital Gains.

Classification of Inherited Capital Asset

• In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included in determining whether it’s a short term or a long-term capital asset. 
• In the case of bonus shares or rights shares, the period of holding starts from the date of allotment of bonus shares or rights shares respectively.

Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains

Following are the tax rates for capital gains arising in case the transfers happened before 23/07/2024.

For the transfers happened on or after, July 2024 tax on Capital Gains are to be taxed as follows 

Tax 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*: 10% tax without indexation with an exemption limit of Rs.1,25,000 - is applicable when transfer happens on or before 23/07/2024. The Tax of Rs. 12.5% without indexation is applicable for transfers happened after 23/07/2024.

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

How Will Change in Income Tax Rules Affect Taxation on 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 2024-25 for Rs. 18,00,000, resulting in a capital gain of Rs.8,00,000. 

Basic exemption limit of Rs.3,00,000 is exhausted against the capital gains income and the remaining amount is taxed. This is assuming that the tax payer has no other income. 

Tax Liability after the changes in Income Tax Rules (Under the new regime).

Suppose Mr. Vinay invested Rs. 10,00,000 in April 2023 in a debt mutual fund. He sold the investment after sometime in FY 2024-25 for Rs. 18,00,000, resulting in a capital gain of Rs.8,00,000.

LTCG taxation before and after the amendment.

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. 

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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:

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.

Cost of acquisition: The value for which the capital asset was acquired by the seller.         
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.

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively for such transfer
• Cost of acquisition
• Cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54B/54D

Step 4: This amount is a short-term capital gain to be taxed

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Indexed cost of acquisition
• Indexed cost of improvement

Step 3: 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.)

Exception: 

• If the transfer happened on or before 23/07/2024, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1.25 lakh in one financial year without the benefit of indexation.
• If the transfer happened after 23/07/2024, tax rate is 12.5%. Exemption of Rs. 1.25 Lakh available.

Deductible Expenses

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

• 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.         
Refer to this page for the complete list of CII.  

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: Improvements made before 1st April 2001, should not be considered.

Note: The indexation benefit that previously was available on sale of long-term assets, has now been done away with. However, this faced a backlash from the public. So, the Government has passed an amendment that allows individual and HUF taxpayers to compute taxes either at 12.5 per cent without indexation or at 20 per cent with indexation on real estate transactions. 

Guide to Obtain Capital Gains Statement from CAMS and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across CAMS serviced funds.

Guide to Obtain Capital Gains Statement from KARVY and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across KARVY serviced funds.

Guide to Obtain Capital Gains Statement from ZERODHA and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across ZERODHA serviced funds

Guide to Obtain Capital Gains Statement from Groww and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across Groww serviced funds.

Guide to Obtain Capital Gains Statement from Upstox and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across Upstox serviced funds.

Guide to Obtain Capital Gains Statement from ICICI and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across ICICI serviced funds

Guide to Obtain Capital Gains Statement from Paytm Money and Import the Data on ClearTax

Instead of manually entering the details you can simply upload a Realised Gain statement that is a consolidation of your investment performance, capital gains and income for the current and last financial years across Paytm Money serviced funds

ClearTax has now directly integrated with various platforms like 5Paisa, ICICI Direct, Paytm Money, Zerodha, etc. It will help you to import 1000s of capital gains transactions via a single click login.  

Exemption on Capital Gains

Example: Manya bought a house in July 2004 for Rs.50 lakh, and the full value of consideration received in FY 2024-25 is Rs.1.8 crore.         
Capital asset type: Since this property has been held for over 2 years, this would be a Long-Term Capital Asset.

Cost of acquisition: The cost price is adjusted for inflation and indexed cost of acquisition is taken. Using the indexed cost of acquisition formula, the adjusted cost of the house is Rs 1.61 crore. (Refer CII here for the calculations)

Capital gain: Hence, the net capital gain is Rs 19,00,000. (approx)

Tax: Long-term capital gains on sale of house property are taxed at 20%. For a net capital gain of Rs 19,00,000, the total tax outgo will be Rs.3,80,000 (approx)

This is a significant amount of money to be paid out in taxes. This can be lowered by taking benefit of exemptions provided by the Income Tax Act on capital gains when profit from the sale is reinvested into buying another asset.

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

Capital Gains Exemption under Section 54: 

• Taxpayers can get an exemption from long-term capital gain from the sale of house property by investing in up to two house properties.
• If they invest in two house properties, the capital gain on the sale of house property must not exceed Rs 2 crores.
• Unlike the previous point, the sale value is not limited to Rs. 2 crores if the capital gains are invested in only one house property. 
• The Long Term Capital Gain can be reinvested into buying or constructing two other house properties.
• The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 crores. 
• The taxpayer has to invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.

Conditions for availing this benefit:

1. The new property can be purchased either 1 year before the sale or 2 years after the sale of the property.
2. The gains can also be invested in the construction of a property, but construction must be completed within 3 years from the date of sale.
3. Please note that this exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.
4. The capital gains tax exemption limit under Section 54 and 54F is restricted to Rs.10 crore. Earlier, there was no threshold.

If the amount of capital gain exceeds Rs. 2 Crore  

If the amount of capital gain exceeds Rs. 2 Crore  then One residential house property should be purchased within 1 year before the date of sale of house property or 2 years after the date of sale of house property; (OR) Construct a house property within 3 years after the date of sale of house property.

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

• Exemption under Section 54F is available when there are capital gains from the sale of a Long-Term Capital Asset other than a house property. 
• You must invest the entire sale consideration and not only capital gain to buy a new residential house property to claim this exemption. 
• Purchase the new property either 1 year before the sale or 2 years after the sale of the property. 
• You can also use the sale consideration to invest in the construction of a property. However, the construction must be completed within 3 years from the date of sale.
• Only 1 house property can be purchased or constructed from the sale consideration to claim this exemption. 
• This exemption can be taken back, if this new property is sold within 3 years of its purchase. If the entire sale proceeds are invested towards the new house, the entire capital gain will be exempt from taxes if you meet the above-said conditions.

However, if you invest a portion of the sale proceeds, the capital gains exemption will be in the proportion of the invested amount to the sale price LTCG exemption = Capital gains x Cost of new house / Net consideration.

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.

• If you are not keen to reinvest your profit from the sale of your first property into another one, then you can invest them in bonds for up to Rs. 50 lakhs issued by National Highway Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC) or 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.
• The homeowner has six month’s time to invest the profit in these bonds. But to be able to claim this exemption, you will have to invest before the tax filing deadline.
• It is to be noted that investments under this section can also be made in addition to investments in other sections of 54 series. 

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

• When you make short-term or long-term capital gains from transfer of land situated in Urban area used for agricultural purposes – by an individual or the individual’s parents or Hindu Undivided Family (HUF) – for 2 years before the sale, exemption is available under Section 54B. 
• 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, which is purchased to claim capital gains exemption, should not be sold within a period of 3 years from the date of its purchase. 
• In case you are not able to purchase agricultural land before the date of furnishing of your income tax return, the amount of capital gains must be deposited before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.
• Exemption can be claimed for the amount which is deposited. If the amount which was deposited as per Capital Gains Account Scheme was not used for the purchase of agricultural land, it shall be treated as capital gains of the year in which the period of 2 years from the date of sale of land expires.
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Section 54D: Capital Gains on Transfer of  Land and Building which is used for Industrial Undertaking 

Conditions to be fulfilled :

• There must be compulsory purchase of land and building which is used for an industrial undertaking.
• The land and building should have been used by the assessee for purposes of the business of the industrial undertaking in the 2 years before the date of transfer.
• The assessee must purchase any other land or building or construct any building (for shifting or re-establishing the existing undertaking or setting up a new industrial undertaking) within 3 years from the date of transfer.
• If such investment is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS.

Amount of exemption :

• If the cost of a new asset is more than or equal to the sale consideration, then the entire capital gain will be exempted.
• If the cost of a new asset is lesser than Capital gains, capital gains to the extent of the cost of a new asset is exempt. i.e. the cost of a new asset will be exempted.

When can you invest in Capital Gains Account Scheme?

Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is one time-consuming process. Fortunately, the Income Tax Department agrees with these limitations. If capital gains have not been invested until the due date of filing of return (usually 31 July) 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.

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:

a. 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.

b. 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.

c. Capital gains on compensation received for compulsory acquisition of urban agricultural land are tax exempt under Section 10(37) of the Income Tax Act.

If your agricultural land wasn’t sold in any of the above cases, you can seek exemption under Section 54B.

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