Capital Gains Tax

What is Capital Gains Tax in India?

Capital gains tax is the tax you pay on the profit you earn from selling something valuable, like property, stocks, mutual funds, or bonds. The Income Tax Act 1961 categorizes these gains into short term and long term, depending on how long you hold the asset before selling it. In simple terms, when you sell something valuable for a profit, you need to share a portion of those earnings with the government as capital gains tax.

As per the Union Budget 2025, short term capital gain tax continues to be taxed at higher rates starting from 15%. However, long term gains have been revised at 12.5% for certain assets, effective from April 2026. For instance, Unit Linked Insurance Plans (ULIPs) with annual premiums exceeding ₹2.5 lakh will now be subject to a 12.5% LTCG tax. Also, the tax on long term capital gains for Foreign Institutional Investors (FIIIs) has been increased to 12.5%.

Types of Capital Gains

We briefly discussed that there are two types of capital gains based on the timing of how long you hold an asset before selling it. Understanding these classifications helps you plan better and optimize your tax liabilities when selling capital assets. Let us understand these two types in detail:

Long Term Capital Gains (LTCG)

LTCG arises when you sell an asset after holding it for a longer period (more than 36 months). Assets like debt-oriented mutual funds, jewelry, or other non-equity investment plans fall into this category. However, for certain assets, like real estate, the holding period is reduced to 24 months to qualify as long term.

Certain assets are considered long term if held for more than 12 months, including:

• Equity shares or preference shares listed on a recognized Indian stock exchange
• Units of equity-oriented mutual funds, whether listed or not
• Zero-coupon bonds, regardless of listing
• Units of the Unit Trust of India (UTI)

Until now, long term capital gain taxes were lower, usually starting from 10%. However, following the Union Budget 2025, certain assets are now subject to a 12.5% LTCG tax rate.

Short Term Capital Gains (STCG)

STCG occurs when you sell an asset that you have held for 36 months or less. For immovable assets like land, buildings, or house property, the holding period to qualify as short term is reduced to 24 months.

If you inherit or receive a property as a gift, the holding period of the previous owner is also considered when deciding whether it is short term or long term. Similarly, for bonus shares or rights shares, the holding period starts from the date they were allotted.

Short term capital gains tax continues to be taxed at higher rates, starting from 15% for equity-related investments. The Union Budget 2025 has not introduced changes to the STCG tax rates.

Key Changes in the Union Budget 2025

The Union Budget 2025 introduced some significant updates to capital gains tax rules, impacting taxpayers in various ways. Here is a quick summary of some of these key changes:

• Higher Long Term Capital Gains Tax Rates

Effective from April 1, 2025, the LTCG tax rate on certain securities has been raised from 10% to 12.5%. This change applies to specific asset classes, and taxpayers should review the detailed provisions to understand their applicability.

• Exemption for Sovereign Wealth Funds (SWFs) and Pension Funds (PFs)

SWFs and PFs will continue to enjoy tax exemptions on gains from unlisted debt securities, encouraging long term investments.

• No Tax Rebate for Capital Gains

Although the new tax regime offers a rebate for incomes up to ₹12 lakh, this benefit does not apply to capital gains. Taxpayers with capital gains income will not be eligible for this rebate, so they should plan their finances accordingly.

How to Calculate Capital Gains?

The calculation of capital gains depends on how long you have held the asset (short term or long term). By considering these points, you can calculate the difference between the selling price and the combined costs (acquisition and improvement) to determine your capital gains.

• Cost of Improvement: Any expenses incurred for modifications or additions to the property can be added. However, improvements made before April 1, 2001, are not considered.
• Cost of Acquisition: This is the original amount you paid to purchase the asset.
• Full Value of Consideration: This refers to the total money or value you receive from transferring the asset. Even if the money is received later, the gains are calculated for the year the transaction is made.
• Inherited or Gifted Property: If the asset was inherited or gifted, the original purchase cost and any improvement costs by the previous owner are also included in the calculation.

Tax Rates on Long Term Capital and Short Term Capital Gains

This simple format helps differentiate the tax rates for long term and short term gains, ensuring clarity for all types of investors.

Long Term Capital Gains Tax Rates

Short Term Capital Gains Tax Rates

Capital Gains Exemption

Capital gain exemptions offer valuable opportunities to reduce tax liability and boost financial freedom. Some of the sections under which capital gains are exempted are:

Section 54

This exemption applies when you sell a residential property and reinvest the capital gains in another house. You can utilize this exemption once in your lifetime, provided the capital gain is under ₹2 crores. However, you do not have to invest the entire sale proceeds, just the capital gain. For your flexibility here, the new house can be purchased one year before or two years after the old one is sold. You can also use the gains to build a new home, but it needs to be completed within three years. And remember, you should hold onto that new house for at least three years, or the exemption gets revoked.

Section 54F

This exemption applies to capital gains from the sale of any long term capital asset other than a residential house, provided the entire net sale consideration is invested in purchasing or constructing a new residential property. The timelines are similar to Section 54: the new property can be purchased within one year before or two years after the sale or constructed within three years. But, selling the new house within three years also means losing the exemption.

Section 54EC

For exemption under this section, you can invest your gains (up to ₹50 lakhs) in specific bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). These bonds are locked in for five years, but the good news is you can redeem them after three years. Make sure you invest before the tax filing deadline to claim this exemption.

Section 54B

This exemption applies to capital gains from selling agricultural land. You can claim this exemption if you reinvest the profits into new agricultural land within two years. But remember, the new land needs to be held onto for at least three years after purchase.

Final Thoughts

Capital gains tax is not just a liability but a strategic financial tool. You can leverage this tool to your advantage through strategic planning, careful timing, and informed investment choices. Also, keeping your capital gains statement up to date will help you streamline the process of claiming exemptions and avoid errors when filing taxes.

By mastering these concepts and utilizing the various tax exemptions available, you can transform capital gains tax from a hurdle to a stepping stone on your path to financial freedom.

FAQs on Capital Gains Tax