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

Most valuable assets you own are considered capital assets, such as property, shares, or bonds. When these assets are sold for a profit, the earnings are subject to capital gains tax. The tax is categorized as short-term or long-term depending on how long the asset was held, and each is taxed at different rates. As per Budget 2024, Long-Term Capital Gains (LTCG) tax is 12.5%, while Short-Term Capital Gains (STCG) tax is 20% or taxed at slab rates. An exemption of ₹1.25 lakh applies on LTCG arising from the transfer of equity shares or equity-oriented mutual funds.

What is Capital Gains Tax in India?

Capital gains tax refers to the tax charged on the profit from selling a capital asset like real estate, stocks, or mutual funds. This gain is treated as income and taxed in the financial year in which the transfer of the asset occurs.

There are two types of capital gains, based on how long the asset is held:

Short-Term Capital Gains (STCG): Applies when equity shares, equity-oriented mutual fund units, or business trust units are held for less than 12 months. For other assets, the short-term period is less than 24 months.
Long-Term Capital Gains (LTCG): Applies when equity shares, equity-oriented mutual fund units, or business trust units are held for more than 12 months. For other assets, the holding period is over 24 months.

Meaning of Capital Assets

Capital assets refer to valuable properties such as land, buildings, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. They also include ownership rights in an Indian company, along with rights of management, control, or any other legal entitlement.

However, the following are not treated as capital assets:

a. Stocks, consumables, or raw materials held for business or professional use
b. Personal belongings like clothes and household furniture meant for personal use
c. Agricultural land located in rural areas of India
d. 6½% Gold Bonds (1977), 7% Gold Bonds (1980), or National Defence Gold Bonds (1980) issued by the Central Government
e. Special Bearer Bonds (1991)
f. Gold Deposit Bonds under the Gold Deposit Scheme (1999) or deposit certificates under the Gold Monetisation Schemes of 2015 and 2019 notified by the Central Government

Definition of Rural Area

For taxation under capital gains, it is important to check whether agricultural land qualifies as rural land. This classification depends on both the distance from the nearest municipality or cantonment board and the population of that area.

Land will be considered rural agricultural land if it falls under these conditions:

No.	Shortest Aerial Distance from Municipality / Cantonment Board	Population (as per latest census)
1	Within local limits	≤ 10,000
2	More than 2 kms	> 10,000
3	More than 6 kms	> 1,00,000
4	More than 8 kms	> 10,00,000

Types of Capital Assets

1. Short-Term Capital Asset (STCA)

An asset held for up to 24 months is treated as a Short-Term Capital Asset. If such an asset is sold within 24 months of acquisition, it falls under this category.

Certain assets are considered short-term if they are held for 12 months or less. These include:

Equity or preference shares of a company listed on a recognized stock exchange in India
Listed securities such as debentures, bonds, and government securities
Units of UTI, whether listed or not
Units of equity-oriented mutual funds, whether listed or not
Zero-coupon bonds, whether listed or not

2. Long-Term Capital Asset (LTCA)

Any asset held for more than 24 months qualifies as a Long-Term Capital Asset. Therefore, if sold after two years from the purchase date, it will be categorized as long-term.

For capital assets such as land, building, or house property, a holding period of 24 months or more (effective from FY 2017–18) is required to be treated as long-term.

However, the following assets are considered long-term if held for more than 12 months:

Equity shares of a company listed on a recognized stock exchange in India
Listed securities such as debentures, bonds, and government securities
Units of UTI
Units of equity-oriented mutual funds

Important Notes:

As per Section 50AA, capital gains from the sale of units of a specified mutual fund (purchased on or after April 1, 2023) and market-linked debentures are always treated as short-term capital gains, regardless of the holding period.
If an asset is acquired through gift, will, succession, or inheritance, the holding period of the previous owner is also counted when deciding whether it is short-term or long-term.
For bonus shares or rights shares, the holding period begins from the date of allotment of such shares.

Capital Gains Tax Rates

Capital gains are taxed differently depending on whether they are long-term or short-term, and the rules have changed with effect from 23 July 2024.

1. Before 23/07/2024

The tax rates applicable on transfers made before this date were:

Tax Type	Condition	Applicable Tax
Long-Term Capital Gains (LTCG)	Sale of listed equity shares (if STT paid on purchase and sale) and sale of units of equity-oriented mutual funds (if STT paid on sale)	10% on gains exceeding ₹1 lakh
	Other long-term assets	20%
Short-Term Capital Gains (STCG)	Where STT was not applicable	Taxed at normal slab rates
	Where STT was applicable	15%

2. From 23/07/2024 Onwards

For transfers made on or after 23 July 2024, the following tax rates apply:

Tax Type	Condition	Applicable Tax
Long-Term Capital Gains (LTCG)	Sale of listed equity shares (if STT paid on purchase and sale) and units of equity-oriented mutual funds (if STT paid on sale)	12.5% on gains exceeding ₹1.25 lakh
	Land or Building or Both (for Individuals/HUF)	12.5% without indexation OR 20% with indexation (choice available)
	Land or Building or Both (for Other Taxpayers)	12.5% without indexation
	Other long-term assets	12.5%
Short-Term Capital Gains (STCG)	Where STT is not applicable	Taxed at normal slab rates
	Where STT is applicable	20%

Tax Rates on Equity and Debt Mutual Funds

The taxation of capital gains depends on whether the fund is classified as an equity fund or a debt fund. Equity funds invest more than 65% of their portfolio in equities.

Fund Type	Acquired on or before 01/04/2023	Acquired after 01/04/2023
Debt Funds	STCG: Taxed as per individual’s slab ratesLTCG: 20% with indexation	STCG: Taxed as per slab ratesLTCG: Taxed as per slab rates (treated as short-term regardless of holding period)
Equity Funds	STCG: 15%LTCG: 10% on gains exceeding ₹1.25 lakh without indexation*	STCG: 15%LTCG: 10% on gains exceeding ₹1.25 lakh without indexation*

Note 1: For transfers up to 23/07/2024, LTCG on equity funds is taxed at 10% without indexation above ₹1.25 lakh. For transfers after this date, the tax rate is 12.5% without indexation.

Note 2: From 01/04/2023, gains from Debt Mutual Funds, Market-Linked Debentures, and Unlisted Bonds/Debentures are always treated as short-term, regardless of holding period, and taxed at normal slab rates.

Comparison of Tax Rates After Budget 2024

The table below highlights the applicable tax rates on different types of capital assets, comparing the rules before and after the 2024 Budget:

Note:

Sovereign Gold Bonds: Capital gains on Sovereign Gold Bonds are fully exempt if held until maturity.
Units of AIF: Applies only to Category I and II AIFs. Income from securities transactions of these funds is taxable in the hands of investors as if they had invested directly. As clarified in Budget 2025, such income will always be treated as Capital Gains.

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Exemptions on Capital Gains

Capital gains often result in substantial tax obligations. However, the Income Tax Act provides relief through exemptions under Sections 54 to 54F, which can lower or even eliminate this tax burden if specific conditions are satisfied.

Section 54: Exemption on Sale of Residential Property

Taxpayers can claim exemption on long-term capital gains from the sale of a house property by reinvesting in up to two residential houses.
This benefit for two properties is allowed only if the capital gain does not exceed ₹2 crore and can be availed once in a lifetime.
If gains are reinvested in a single house property, there is no ₹2 crore limit on the value of reinvestment.
The exemption applies only to the amount of capital gain and not the entire sale consideration. If the cost of the new property is higher than the capital gains, the exemption is limited to the actual capital gain.

Conditions:

The new house can be purchased within 1 year before or 2 years after the date of sale.
Alternatively, the capital gains can be used for construction, provided construction is completed within 3 years of the sale.
If the newly purchased or constructed property is sold within 3 years, the exemption will be withdrawn.
The exemption under Sections 54 and 54F is capped at ₹10 crore. Earlier, there was no such ceiling.

Exemption on Capital Gains Above ₹2 Crore

If the capital gain is more than ₹2 crore, the taxpayer can:

Purchase one residential house property within 1 year before or 2 years after the sale; OR
Construct a house property within 3 years of the sale.

Section 54F: Exemption on Sale of Assets Other Than House Property

Available when long-term capital gains arise from selling any asset other than a residential house.
To claim the exemption, the entire sale consideration (not just the capital gain) must be invested in purchasing or constructing one residential house property.
The new property must be purchased within 1 year before or 2 years after the sale, or construction must be completed within 3 years.
Only one house property can be purchased or constructed for this exemption.
If the new property is sold within 3 years, the exemption will be revoked.

Extent of Exemption:

If the entire sale consideration is reinvested, the full capital gain is exempt.
If only a portion is invested, the exemption is calculated proportionately:

ExemptLTCG=CapitalGain×CostofNewHouseNetConsiderationExempt LTCG = Capital Gain \times \frac{Cost of New House}{Net Consideration}ExemptLTCG=CapitalGain×NetConsiderationCostofNewHouse

Section 54EC: Exemption on Sale of House Property by Investing in Specified Bonds

Section 54EC allows an exemption when capital gains from the sale of a residential property are reinvested into certain bonds.

If you do not wish to reinvest the profit from selling your house into another property, you can instead invest up to ₹50 lakhs in bonds issued by:

National Highway Authority of India (NHAI)
Rural Electrification Corporation (REC)
Power Finance Corporation (PFC)
Indian Railway Finance Corporation (IRFC)

These bonds have a lock-in period of 5 years and cannot be sold before this period ends. The investment must be made within 6 months of the property sale, and before the income tax return filing deadline, to claim the exemption.

It is important to note that investments under this section can be made alongside exemptions claimed under other provisions of Section 54.

Section 54B: Exemption on Capital Gains from Transfer of Agricultural Land

Section 54B provides relief when capital gains (short-term or long-term) arise from the transfer of urban agricultural land that was used for farming purposes by the individual, their parents, or a Hindu Undivided Family (HUF) for at least 2 years prior to sale.

The exemption available is the lower of the actual capital gain or the amount reinvested in purchasing another agricultural land (urban or rural).
The new agricultural land must be purchased within 2 years from the date of transfer.
This newly purchased land must not be sold within 3 years from the date of acquisition.

If the new agricultural land is not purchased before filing the income tax return, the capital gains amount should be deposited under the Capital Gains Account Scheme, 1988 in a public sector bank (except rural branches) or IDBI Bank.

The exemption can be claimed for the amount deposited. However, if the deposited amount is not used to purchase agricultural land within 2 years of the sale, it will be treated as capital gains in the year the 2-year period expires.

Section 54D: Capital Gains Exemption on Transfer of Land or Building Used for an Industrial Undertaking

Section 54D of the Income Tax Act provides relief when land or building used for an industrial undertaking is compulsorily acquired and replaced with a new asset.

Conditions to Qualify

The land or building must be compulsorily acquired by the government.
The property should have been used by the assessee for the purpose of the industrial undertaking for at least 2 years before the transfer.
The assessee must invest the capital gains by purchasing new land/building or constructing a new building for:
- Shifting or re-establishing the existing undertaking, or
- Setting up a new industrial undertaking.
This investment must be made within 3 years from the date of transfer.
If the investment is not completed before filing the return of income, the unutilized capital gain must be deposited under the Capital Gains Account Scheme (CGAS).

Amount of Exemption

If the cost of the new asset is equal to or greater than the capital gain, the entire capital gain will be exempt.
If the cost of the new asset is less than the capital gain, the exemption will be allowed only up to the amount invested.

Role of the Capital Gains Account Scheme (CGAS)

Since buying or constructing a new property takes time, the Income Tax Department allows taxpayers to deposit unutilized gains in a Capital Gains Account with a public sector bank (or specified banks) under the Capital Gains Account Scheme, 1988.

This deposit qualifies for exemption while filing the return.
If the deposited amount is not utilized within the specified period (3 years), it will be treated as a short-term capital gain in the year the time limit expires.

Calculating Capital Gains

Capital gains are calculated differently depending on whether the asset is held for the short term or the long term.

Key Terms You Should Know

Full Value of Consideration: The total amount received (or receivable) by the seller when transferring a capital asset. Capital gains are taxable in the year of transfer, even if the payment has not yet been received.
Cost of Acquisition: The purchase price or the value at which the seller originally acquired the asset.
Cost of Improvement: Any capital expenses incurred by the seller to make additions or improvements to the asset.

📌 Note:

If the asset was acquired by gift, inheritance, or succession, the cost of acquisition and improvement made by the previous owner is also included.
Improvements made before April 1, 2001, are not considered.

How to Calculate Short-Term Capital Gains (STCG)

Steps:

Begin with the Full Value of Consideration.
Deduct the following:
- Expenses incurred exclusively for the transfer (e.g., brokerage, legal fees).
- Cost of acquisition.
- Cost of improvement.
Deduct any applicable exemptions under Sections 54B / 54D.

Formula:
👉 Short-Term Capital Gain (STCG) = Full Value of Consideration – Expenses on Transfer – Cost of Acquisition – Cost of Improvement – Exemptions (if any).

How to Calculate Long-Term Capital Gains (LTCG)

Steps:

Begin with the Full Value of Consideration.
Deduct the following:
- Expenses incurred exclusively for the transfer.
- Indexed cost of acquisition (purchase price adjusted for inflation).
- Indexed cost of improvement.
Deduct exemptions under Sections 54, 54D, 54EC, 54F, and 54B.

Formula:
👉 Long-Term Capital Gain (LTCG) = Full Value of Consideration – Expenses on Transfer – Indexed Cost of Acquisition – Indexed Cost of Improvement – Eligible Exemptions.

📌 Allowed deductions: Only expenses directly related to the sale/transfer are deductible (e.g., stamp duty, brokerage, registration charges).

Special Tax Rules on LTCG from Equity

Transfers up to 23rd July 2024:
- Tax at 10% on LTCG from listed shares/equity mutual funds exceeding ₹1.25 lakh per financial year (without indexation benefit).
Transfers after 23rd July 2024:
- Tax at 12.5% on LTCG from listed shares/equity mutual funds.
- Exemption of ₹1.25 lakh continues.

Deductible Expenses

When calculating capital gains, certain expenses can be deducted from the total sale price of the asset. These vary depending on the type of asset sold:

A. Sale of House Property
You can deduct:

Brokerage or commission paid to secure a buyer
Cost of stamp papers
Travelling expenses related to the transfer (even if incurred after the transfer)
Inherited property: costs like will-related procedures, succession certificate fees, or executor’s charges (in some cases)

B. Sale of Shares
You can deduct:

Broker’s commission related to the shares sold
❌ Securities Transaction Tax (STT) cannot be claimed as a deduction

C. Sale of Jewellery

Broker’s commission or service charges for finding a buyer can be deducted

👉 Note: These expenses can be claimed only once under capital gains and not under any other head of income.

Indexed Cost of Acquisition / Improvement

To adjust for inflation, the Cost Inflation Index (CII) is applied to the cost of acquisition and improvement. This helps reduce taxable capital gains.

Formula for Indexed Cost of Acquisition:

Indexed Cost of Acquisition=(Cost of Acquisition×CII of year of transferCII of year of acquisition or FY 2001-02 (whichever is later))\text{Indexed Cost of Acquisition} = \left( \text{Cost of Acquisition} \times \frac{\text{CII of year of transfer}}{\text{CII of year of acquisition or FY 2001-02 (whichever is later)}} \right)Indexed Cost of Acquisition=(Cost of Acquisition×CII of year of acquisition or FY 2001-02 (whichever is later)CII of year of transfer)

For assets acquired before 1 April 2001, taxpayers can choose actual cost or Fair Market Value (FMV) as on 1 April 2001.

Formula for Indexed Cost of Improvement:

Indexed Cost of Improvement=(Cost of Improvement×CII of year of transferCII of year of improvement)\text{Indexed Cost of Improvement} = \left( \text{Cost of Improvement} \times \frac{\text{CII of year of transfer}}{\text{CII of year of improvement}} \right)Indexed Cost of Improvement=(Cost of Improvement×CII of year of improvementCII of year of transfer)

Improvements made before 1 April 2001 should not be considered.

Important Update:

Earlier, indexation was allowed on all long-term assets.
Now, under the amended rule:
- Individuals and HUFs can choose between 12.5% without indexation OR 20% with indexation for real estate.

Illustrations

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

Mr. QAX sold his house on 24th August 2024 for ₹50 lakhs.
He bought it on 19th Feb 2020 for ₹25 lakhs.

Since the sale happened after 23rd July 2024, he can choose:

Particulars	12.5% Without Indexation	20% With Indexation
Sale Price	50,00,000	50,00,000
Cost of Acquisition	25,00,000	30,14,950 (indexed)
LTCG	25,00,000	19,85,050
Tax Payable	3,12,500	3,97,010

✅ Here, 12.5% without indexation is more beneficial. But if the property was held for a much longer time, indexation could give higher savings.

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

Mr. X sold listed equity shares for ₹50 lakhs. Purchase cost: ₹25 lakhs.

Sold before 23rd July 2024 → Tax @ 10% beyond exemption
Sold after 23rd July 2024 → Tax @ 12.5%

Particulars	20th Mar 2024	24th Aug 2024
Sale Price	50,00,000	50,00,000
Cost of Acquisition	25,00,000	25,00,000
LTCG	25,00,000	25,00,000
Less: Exemption (u/s 112A)	1,25,000	1,25,000
Taxable LTCG	23,75,000	23,75,000
Tax Payable	2,37,500	2,96,875

✅ Exemption of ₹1,25,000 applies in both cases.

Scenario 3: Capital Gains on Debt Mutual Funds

Mr. Vinay invested ₹10 lakhs in 2018-19 in a debt mutual fund and sold in 2024-25 for ₹18 lakhs.

Particulars	Purchased before 1/4/2023	Purchased after 1/4/2023
Sale Value	18,00,000	18,00,000
Cost	10,00,000	10,00,000
Indexed Cost	12,96,428	Not Applicable
LTCG	5,03,571	8,00,000
Tax Payable	40,714 (20% after exemption)	36,400 (slab rates)

👉 Clearly, the new rule benefits short-term holders but removes indexation benefits for long-term investors.

Saving Tax on Sale of Agricultural Land

In certain cases, capital gains from the sale of agricultural land may be fully exempt from income tax or may not even fall under the “capital gains” category. Here’s how:

a. Rural Agricultural Land

Agricultural land located in a rural area of India is not considered a capital asset.
Therefore, any gains from its sale are not taxable under capital gains.

b. Land Held as Stock-in-Trade

If you are engaged in the business of buying and selling land and hold agricultural land as stock-in-trade, the profits will be taxable as business income under the head Profits and Gains from Business or Profession.

c. Compensation for Compulsory Acquisition

If your urban agricultural land is compulsorily acquired, any capital gains from compensation received are exempt from tax under Section 10(37) of the Income Tax Act.

d. Exemption under Section 54B

If your agricultural land does not qualify for the above exemptions, you may still claim relief under Section 54B, which allows exemption when capital gains are reinvested in the purchase of new agricultural land within the prescribed time limit.

FAQs on Capital Gains Tax in India

1. Do NRIs have to pay tax on property sales in India?
Yes. Non-Resident Indians (NRIs) are liable to pay tax on the gains arising from the sale of immovable property in India.

2. What is the tax rate on Long-Term Capital Gains (LTCG) from selling house property?

For transfers made before 23rd July 2024, LTCG is taxed at 20% with indexation.
For transfers made on or after 23rd July 2024, taxpayers can choose either:
- 12.5% without indexation, or
- 20% with indexation on real estate transactions.

3. Can I set off a Short-Term Capital Loss against other income?
No. Capital losses can only be set off against capital gains. Specifically:

Short-Term Capital Loss (STCL) can be adjusted against both Short-Term and Long-Term Capital Gains.
Long-Term Capital Loss (LTCL) can be adjusted only against Long-Term Capital Gains.

4. Is indexation benefit available for short-term capital assets?
No. The benefit of indexation is available only for long-term capital assets to account for inflation. It is not applicable to short-term capital assets.

5. Is TDS applicable on payments to NRIs for property sales?
Yes. The buyer must deduct TDS (Tax Deducted at Source) on the capital gains:

For short-term property, TDS is deducted as per the NRI’s income tax slab rate.
For long-term property, TDS is deducted at 20% on LTCG.