You've just made a savvy investment in the stock market, watched your portfolio grow, and decided to cash in on your success by selling some of your stocks. But before you celebrate your financial triumph, there's one thing you can't overlook: capital gains tax.
Capital Gain Tax in India is the tax imposed by the government on the profit earned from the sale of certain assets, such as stocks, bonds, real estate, or other investments. This tax applies to both individuals and businesses.
In this guide, we have covered important aspects related to capital gains tax, capital gains tax in India, capital assets, their calculation, the Cost Inflation Index (CII), and much more in a very lucid and comprehensive manner.
Latest Update: As per a new update on 5 July 2024, short-term capital gains on equity shares and equity-oriented mutual funds will not be eligible for the section 87A rebate under the new tax regime.
Capital gains tax is a tax imposed on the profits realized from the sale of assets such as stocks, bonds, real estate, and other investments. It is the tax applied to the difference between an asset's purchase price (or "cost basis") and its selling price.
When you sell an asset for more than you paid for it, you have a capital gain. Conversely, if you sell an asset for less than you paid for it, you have a capital loss. Capital gains tax is typically only applied to capital gains, not to the total amount received from the sale.
It is mandatory for taxpayers to file their income tax returns for capital gains by submitting right ITR form to the Income Tax Department. Get Help on Capital Gain Tax Filing
To understand capital gains, you need to understand the concept of capital assets.
Now that you have understood what capital assets are and their types, it’s time to understand the types of capital gains. Capital gains are divided into short-term capital gains and long-term capital gains –
Short-term capital gains (STCG) are the profits you earn when you sell off your capital assets within one year of holding them. Note that the holding period varies as per the capital asset.
Long-term capital gain tax (LTCG) are the profits you earn when you sell off your capital assets after one year. Note that the period of holding for different assets to be claimed as long-term assets varies according to the asset.
Capital assets are the property you own and can be transferred, like land, buildings, shares, patents, trademarks, jewelry, leasehold rights, machinery, vehicles, etc.
Here is a list of assets that do not fall under the category of capital assets:–
Capital assets are divided into two types based on the period after which they are sold. The types of capital assets are as follows –
Short-term capital assets are those held for less than or equal to 36 months. This means that if you sell off the asset within 36 months of buying it, it would be called a short-term capital asset. However, in some cases, the holding period is reduced to 24 months and 12 months. These cases include the following –
| Capital Asset | Holding Period |
|---|---|
| Immovable property like houses, land, and buildings. | 24 months |
| Equity Shares of a company listed on the stock exchange, units of UTI, zero-coupon bonds, and equity-oriented mutual funds. | 12 months |
Long-term capital assets are those held for more than 36 months and then sold off. Immovable property sold after 24 months would be categorized as a long-term capital asset. In the case of equity shares, securities, mutual fund units, etc., however, the holding period of 12 months is applicable. If sold off after 12 months, they would be called long-term capital assets.
Generally, the holding period of capital assets to be considered as long-term is 36 months. However, there are certain exceptions to this rule. Here’s a summary of different types of capital assets and the period of holding, after which they are considered long-term capital assets -
| Capital Assets | Holding Period |
|---|---|
| Equity Shares or Preference Shares in a company (listed) | 12 months |
| Equity Shares or Preference Shares in a company (unlisted) | 24 months |
| Immovable Property (land or building or both) | 24 months |
| Securities like bonds, debentures, derivatives, and government securities (listed) | 12 months |
| Units of UTI (Unit Trust of India) (listed or unlisted) | 12 months |
| Units of equity-oriented mutual funds (listed or unlisted) | 12 months |
| Units of debt-oriented mutual funds (listed or unlisted) | 36 months |
| Zero coupon bonds (listed or unlisted) | 12 months |
When acquiring an asset through gift, will, succession, or inheritance, the duration for which the previous owner held the asset is considered.
| Full value of consideration | xxxxx |
| (-) Expenses incurred on transferring the asset | (xxxx) |
| (-) Cost of acquisition | (xxxx) |
| (-) Cost of the improvement | (xxxx) |
| Short-term capital gains | xxxxx |
Let’s understand it with an example. A house property was bought on 1st January 2021 for INR 50 lakhs. On 1st January 2022, INR 5 lakhs were spent on improving the house. On 1st November 2022, the house was sold for INR 65 lakhs.
Since the house was sold after 22 months of buying it, it would be categorized as a short-term capital asset. The gain from selling the house would be called a short-term capital gain, and it would be calculated as follows –
| The full value of consideration | INR 65 lakhs |
| (-) Cost of acquisition | INR 50 lakhs |
| (-) Cost of improvement | INR 5 lakhs |
| Short-term capital gains | INR 10 lakhs |
| Full value of consideration | xxxxx |
| (-) Expenses incurred in transferring the asset | (xxxx) |
| (-) Indexed cost of acquisition | (xxxx) |
| (-) Indexed cost of the improvement | (xxxx) |
| (-) expenses allowed to be deducted from the full value of the consideration | (xxxx) |
| (-) exemptions available under Sections 54, 54EC, 54B and 54F, etc. | (xxxx) |
| Long-term capital gains | xxxxx |
Let’s understand this with the help of an example -
A house property was purchased on 1st January 2000 for INR 20 lakhs. On 1st January 2005, repairs were done on the house, which amounted to INR 5 lakhs. On 1st January 2023, the house was sold for INR 75 lakhs. A brokerage was paid to the broker, which was INR 1 lakh. What would be the capital gain amount?
Since the asset has been held for more than 36 months, it is a long-term capital asset, and the gain is a long-term capital gain. The gain would be calculated as follows –
| Particulars | Calculation | Amount |
|---|---|---|
| Full value of consideration | - | INR 75,00,000 |
| Less: Indexed cost of acquisition | Cost of acquisition * CII of the year in which the asset is sold / CII of the year in which the asset was acquired = 20 lakhs * (CII of 2022-23 / CII of 2001-02 since it is the base year)= 20 lakhs * (331/100) | INR 66,20,000 |
| Less: indexed cost of improvement | Cost of improvement * CII of the year in which the asset is sold / CII of the year in which the asset was improved = 5 lakhs * (CII of 2022-23 / CII of 2004-05)= 5 lakhs * (272/113) | INR 14,64,602 |
| Less: brokerage paid | - | INR 1,00,000 |
| LTCG/LTCL | - | INR -6,84,602 |
Rebate on LTCG from Unlisted Equity Shares and Mutual Funds
If an individual's total income has any long-term capital gain under section 112A from the sale of equity shares or equity-based mutual funds. Such an individual will not be eligible for a section 87A rebate on such income in both the old and the new regimes.
As per section 112A of the Income Tax Act, the gains from the sale of listed equity shares or equity mutual funds are taxed at 10% if the amount exceeds Rs. 1 lakh in a financial year.
For example, if a person's net taxable salary is Rs 3.3 lakh per year and they have LTCG from the sale of equity shares worth Rs 1.10 lakh, they must pay 10% tax on the LTCG, which is Rs 10,000, plus 4% cess, totaling Rs 1,040. Since the tax payable on the net taxable salary is Rs 4,000, which is below the Section 87A threshold, they can claim a rebate u/s 87A. Therefore, they only need to pay the Rs 1,040 as tax on the LTCG.
Rebate Under Other Capital Gains
In the case of long-term capital gains from other assets such as real estate, unlisted shares, or short-term capital gains from equity mutual funds or equity shares. Rebate u/s 87A can be claimed on other capital gains.
Rebate Under STCG from Equity Shares and Mutual Funds
There is no restriction on claiming rebate u/s 87A on STCG arising from the sale of equity shares and mutual funds. Therefore, you can claim a section 87A rebate on your short-term capital gains on equity shares and mutual funds.
These are the expenses that were necessary to be incurred when selling the asset. Without these expenses, the asset would not have been purchased. These expenses, since mandatory, are allowed to be deducted from the full value of the consideration, which lowers the selling price / increases the cost of acquisition, and also decreases the capital gain. The expenses allowed to be deducted include the following –
Expenses Allowed for Property, Shares and Jewelry
Given below is the summary of the holding period and the capital gains tax rates for different capital assets -
| Capital Asset | Holding Period for Long Term Capital Asset | Long Term Capital Gain Tax (LTCG) | Short Term Capital Gain Tax (STCG) | Remarks |
|---|---|---|---|---|
| Stocks | > 12 months | 10% of gain | 15% of gain | LTCG applicable if total exceeds Rs. 1 Lakh in a financial year. |
| Unit Linked Insurance Plan (ULIPs) | > 12 months | 10% of gain | 15% of gain | LTCG applicable if total exceeds Rs. 1 Lakh in a financial year. |
| Equity Oriented Mutual Funds | > 12 months | 10% of gain | 15% of gain | LTCG applicable if total exceeds Rs. 1 Lakh in a financial year. |
| Other Mutual Funds | > 36 months | 20% with inflation indexation | Taxed based on income tax slab | |
| Government and Corporate Bonds | > 36 months | 20% with inflation indexation | Taxed based on income tax slab | |
| Gold | > 36 months | 20% with inflation indexation | Taxed based on income tax slab | |
| Gold ETF | > 12 months | 10% of gain | Taxed based on income tax slab | LTCG applicable if total exceeds Rs. 1 Lakh in a financial year. |
| Immovable Property | > 24 months | 20% with inflation indexation | Taxed based on income tax slab | |
| Movable Property | > 36 months | 20% with inflation indexation | Taxed based on income tax slab | No tax for LTCG reinvested in approved assets. |
| Privately held Stocks | > 24 months | 20% with inflation indexation | Taxed based on income tax slab |
Note: Taxes mentioned do not include any surcharge levied on income tax.
Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.
Taxation for mutual funds
| Product | Before | After | ||||
|---|---|---|---|---|---|---|
| Period of holding | Short Term | Long Term | Period of holding | Short Term | Long Term | |
| Equity oriented MF units | > 12 months | 15.00% | 10.00% | > 12 months | 20.00% | 12.50% |
| Specified Mutual funds which has more than 65% in debt | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | Slab rate |
| Equity FoFs | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Overseas FoF | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Gold Mutual Funds | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
Because capital gains tax tends to erode a significant portion of earnings, it becomes critical for individuals to utilize tax-saving strategies to help them reduce their tax liability. To assist individuals in minimizing their capital gains tax liability, the government provides a list of exemptions under capital gains. These tax exemptions are known as capital gains exemptions.
The exemption on two house properties shall be available once in a lifetime to a taxpayer, provided the capital gains do not exceed Rs. 2 crores.
The taxpayer is only required to invest the number of capital gains, not the complete sale proceeds.
The exemption under Section 54 will be limited to the total capital gain on sale if the purchase price of the new property is higher than the number of capital gains.
The following conditions must be met to enjoy the benefit:
An exemption is available under Section 54B when you make short-term or long-term capital gains from the transfer of land used for agricultural purposes – by an individual, the individual's parents, or a Hindu Undivided Family (HUF) – for two years before the sale.
The lesser of the capital gain on the sale of agricultural land or the investment in new assets is exempt from tax. You must reinvest in new agricultural land within two years of the transfer date.
This capital gains exemption applies to capital gains derived from the transfer of long-term capital assets. Individuals can take advantage of such long-term capital gain exemptions if they reinvest in securities such as targeted debentures, UTI units, government securities, government bonds, etc.
The following conditions must be met–
It is important to note that any loan availed against these securities before 3 years would be treated as a capital gain.
Long-term capital gains on the sale of long-term assets would be qualified for long-term capital gain exemption. Individuals will be eligible for such exemptions if they reinvest their proceeds in assets of either the Rural Electrification Corporation or the NHAI.
Such capital exemptions are available if and only if the following conditions are met:
Capital gains derived from the transfer of long-term capital assets would be eligible for a capital gain exemption if –
Exemption under Section 54F is available when capital gains are realized from the sale of a long-term asset other than a home. To qualify for this exemption, you must invest the entire sale consideration, not just the capital gain, in purchasing a new residential house property. Purchase the new property either one year before or two years after the previous one. You can also use the profits to fund the construction of a home. The construction, however, must be completed within three years of the date of sale.
In Budget 2014-15, it was stated that only one house property could be purchased or built from the sale consideration to claim this exemption. This exemption can be revoked if the new property is sold within three years of purchase. If you meet the conditions mentioned and invest the sale proceeds in the new house, the entire capital gain will be tax-free.
However, if you invest a portion of the sale proceeds, the capital gains exemption will be calculated as follows:
Capital gains x Cost of new house /net consideration = capital gains x cost of new house /net consideration.
Revised Section 54
For individuals or Hindu Undivided Families (HUFs) selling a residential house property (Long Term Capital Asset), the exemption on capital gains will be limited to Rs. 10 crore.
Even if the new house purchased exceeds this limit, the maximum exemption allowed will be capped at Rs. 10 crore. For instance, if the capital gain is Rs. 18 crore and the individual buys a new house worth Rs. 18 crore, the exemption will be restricted to Rs. 10 crore.
Revised Section 54F
Similarly, for individuals or HUFs selling a capital asset other than residential property (Long Term Capital Asset), the maximum exemption on capital gains will also be limited to Rs. 10 crore. Any investment exceeding this limit will not be considered for exemption. A provision is added to exclude the portion of net consideration exceeding Rs. 10 crore from the calculation of exemption under this section.
For example, if the consideration from selling a plot is Rs. 15 crore, with a capital gain of Rs. 8 crore, and the individual invests Rs. 12 crore in a new residential house, the exempted gain will be calculated as Rs. 8 * 10/15 = Rs. 5.33 crore, and the taxable amount will be Rs. 8 - 5.33 crore = Rs. 2.67 crore.
These amendments also apply to the provisions related to Capital Gains Accounts Scheme (CGAS), ensuring that the maximum exemption allowed is restricted to Rs. 10 crore. These changes aim to streamline and regulate the exemption provisions under the capital gains head.
If you have any capital gains in the previous year, you must mandatorily file ITR. Capital gains/losses during the year have to be reported in ITR-2 and ITR-3. You can also claim the available exemptions while filing your ITR.
However, filing ITR for capital gains can be complicated. Don’t worry! Our tax experts can help you file your ITR while ensuring that you don’t miss out on any potential deductions. If you are looking to save income tax on capital gains, get in touch with our tax experts.
If the total income of the assessee including capital gains, is below the basic exemption limit, then no tax is levied.
There are various ways to avoid capital gains tax by investing the amount of gain in the investment schemes of the government and other methods specified by CBDT.
Advance tax should be paid on capital gain income and casual income. The amount is calculated by adding the capital gain with the total income, and tax is calculated.
If the capital gains are short-term, then the rate for both listed and unlisted bonds and debentures are as per slab rates, and if gains are long-term, then the rate for listed bonds is 10% and for unlisted 20%
Capital assets on which depreciation is charged are sold to attract short-term capital gain. The cost of acquisition is taken in this case as the WDV of the assets.
Short-term capital gains are taxed at the slab rates of the assessee. So assessees must pay the tax on short-term capital gain at its tax brackets.
It depends on the nature of the assessee's business. If the trading of shares is the assessee's business, then it will be taxed under business income and otherwise under capital gain.
No, it cannot be avoided. The tax on capital gain must be paid irrespective of the person's residential status.
Yes, cryptocurrency gains are considered income under Business Income in India. You'll pay a flat 30% tax on any net cryptocurrency gains (total sales proceeds minus cost basis and expenses.
Yes, you must report all cryptocurrency transactions, including gains, losses, and exchange activity, on your tax return.
In India, you don't pay capital gains tax on inherited assets if you sell them immediately. Your cost basis for the asset becomes the fair market value at the time of inheritance, eliminating any initial capital gain (or loss).
If you hold onto the asset beyond a year, the cost basis becomes the fair market value at the time of inheritance plus any indexation benefits to account for inflation. You'll pay capital gains tax on any increase in value after adjusting for indexation.
The tax treatment of ESOPs in India depends on how they are exercised and sold. You may pay ordinary income tax at the applicable slab rate on the difference between the exercise price and the fair market value at the time of exercise. Any further appreciation when you sell the shares is taxed as long-term capital gains at 10% (exceeding Rs. 1 lakh) or 20%.
The Budget 2024 has proposed removing indexation benefits on capital gains from the sale of long-term capital assets. Previously, property owners adjusted their purchase prices for inflation, reducing taxable profits. The tax rate on long-term capital gains for both financial and non-financial assets has been reduced from 20% to 12.5%. However, the indexation benefit for the sale of long-term assets has been removed. As a result, any sale of long-term assets after July 23, 2024, will be taxed at 12.5% without the indexation benefit.
Individuals can still use the fair market value (FMV) as the cost of acquisition for assets purchased on or before April 1, 2001, when selling these assets.
The amendment to Finance Bill 2024 announced the restoration of indexation benefits on immovable property purchased before 23rd July 2024 for individuals and HUFs only for the purpose of computing tax. In other words, individuals can now choose between a 12.5% tax rate without an indexation benefit and a 20% tax rate with an indexation benefit
If you reinvest your capital gains in another property within a specified time period, you can claim an exemption under the following sections -
However, there are other ways to save tax on LTCG from sale of property too. Given below are the alternative methods -
