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

Imagine an investor redeems equity mutual fund units after several years of steady compounding. The sale generates a meaningful profit, but a portion of that return is reduced by tax. Similarly, a homeowner sells a residential property, only to discover that the final proceeds depend as much on tax treatment as on the sale price itself. In both cases, the difference between the gross gain and the amount ultimately retained is determined by capital gains tax. This article outlines the meaning and types of capital gains, applicable tax rates, calculation methods, and key exemptions under current Indian tax law, providing a practical framework for informed decision-making.

What is Capital Gains Tax?

When an asset is sold at a price higher than its purchase cost, the resulting profit is classified as a capital gain. In India, such gains arising from the sale of assets are subject to capital gains tax under the Income Tax Act. Capital assets include commonly recognised investments such as property, land, shares, and mutual funds, but they also include less obvious transactions, including:

• Sale of inherited land or property after legal transfer
• Sale of ESOP shares received from an employer
• Transfer of rights in an under-construction property before possession
• Sale of unlisted shares
• Exchange or settlement (without direct cash sale) involving immovable property, etc.

The tax outcome depends on factors including the holding period, the nature of the asset, and the availability of exemptions. Understanding these rules is essential for accurately assessing post-tax returns and for planning asset sales efficiently. For complex situations, consulting a tax advisor helps ensure you’re optimizing your tax liability.

Types of Capital Gain

Under Indian tax law, capital gains are classified based solely on the period for which an asset is held. The nature of the asset determines the minimum holding period required for a gain to be treated as short term or long term.

Short-Term Capital Gains (STCG)

Gains arising from the sale of a capital asset before the specified holding period is completed.

Long-Term Capital Gains (LTCG)

Gains arising from the sale of a capital asset after the specified holding period is completed.

LTCG Holding Periods for Different Asset Types

• Listed equity shares: More than 12 months
• Equity-oriented mutual funds and ETFs: More than 12 months
• Unlisted shares (directly or via CAT II funds): More than 24 months
• Debt mutual funds: 
  • Invested before 31st March 2023: More than 24 months
  • Invested after 31st March 2023: – 
• Listed bonds and debentures: 12 months
• Gold and silver (physical, ETFs, funds): More than 36 months
• Sovereign Gold Bonds: 7 years
• Real estate (land or building): More than 24 months
• REITs and InvITs: 12 months
• Hybrid funds:
  • Equity > 65% : 12 months
  • Equity 35% – 65% : 24 months
  • Equity < 35% : –
• Other capital assets: More than 36 months

Capital Gains Tax Rates

These are the current rates for Financial Year 2024-25 (Assessment Year 2025-26):

Important Points to Note:

• Plus applicable cess on all rates.
• A surcharge is applicable on capital gains in India if the taxpayer’s total income exceeds a specified threshold (for individuals and other non-corporate entities, on net taxable income more than 50 lakh). It is levied on the calculated tax amount, rate varies by income slab, and applies uniformly to both short-term and long-term capital gains.
• LTCG on listed equity shares, equity-oriented mutual funds, and units of business trusts where Securities Transaction Tax (STT) has been paid enjoys an annual exemption of ₹1.25 lakh.
• Indexation benefit has been removed for debt mutual funds from FY 2024-25 onwards, but remains applicable in limited cases for real estate.

*Tax Rates by Income Slab

India operates two income tax systems, with the new tax regime being the default one:

How to Calculate Capital Gains Tax

Calculating capital gains tax involves a systematic process. Follow these simple steps to determine your tax liability:

Step 1: Find the Sale Value

This is the total amount you received from selling your asset. Include all receipts. For property, include the full sale consideration. For shares, include the total sale proceeds.

Step 2: Calculate the Cost of Acquisition

This is what you originally paid for the asset. Include the purchase price. Add any improvement costs you incurred. For property, you can add any renovation or construction costs.

Step 3: Deduct Transfer Expenses

Subtract expenses incurred during the sale:

• Brokerage fees paid to agents
• Legal charges for documentation
• Registration charges
• Transfer fees
• Advertisement costs for property sales

Step 4: Calculate Capital Gain

Use this simple formula:

Capital Gain = Sale Value – (Cost of Acquisition + Improvement Costs + Transfer Expenses)

Step 5: Apply the Tax Rate

Based on the asset type and holding period, apply the appropriate tax rate. Refer to the rates mentioned in the previous section.

Example 1: Equity Shares

Purchase details:

• Bought 100 shares in January 2022
• Purchase price: ₹1,00,000
• Brokerage paid: ₹500

Sale details:

• Sold 100 shares in March 2024
• Sale price: ₹1,80,000
• Brokerage paid: ₹900

Calculation:

• Holding period: More than 12 months (Long-term)
• Sale value: ₹1,80,000
• Less: Cost (₹1,00,000 + ₹500): ₹1,00,500
• Less: Sale expenses: ₹900
• Capital Gain: ₹78,600
• Less: Exemption limit: ₹1.25 lakh (no tax as below exemption)
• Taxable gain: Nil
• Tax payable: Nil

Example 2: Property Sale

Purchase details:

• Bought property in April 2020
• Purchase price: ₹50,00,000
• Registration and stamp duty: ₹2,00,000

Sale details:

• Sold property in June 2024
• Sale price: ₹80,00,000
• Brokerage and legal fees: ₹2,00,000

Calculation:

• Holding period: More than 24 months (Long-term)
• Sale value: ₹80,00,000
• Less: Cost (₹50,00,000 + ₹2,00,000): ₹52,00,000
• Less: Sale expenses: ₹2,00,000
• Capital Gain: ₹26,00,000
• Tax rate: 12.5%
• Tax payable: ₹3,25,000 (plus cess)

These examples show how straightforward capital gains tax calculations can be. Always keep proper documentation. Maintain purchase bills, sale receipts, and expense proofs.

Special Provisions and Benefits for Capital Gains Tax

The Income Tax Act offers certain benefits and provisions that can substantially help plan investments strategically and save tax.

Indexation Benefit

Indexation benefit was a tax provision that adjusted your asset’s purchase price for inflation. It recognized that money loses value over time. ₹10 lakh in 2010 could buy much more than ₹10 lakh today, as inflation reduces money’s purchasing power every year. Indexation adjusted the original purchase price upward to its present value, reflecting this reality. Higher purchase cost means lower profit, and lower profit means less tax.

Under current rules, indexation has been largely withdrawn. Indexation benefit now applies only to real estate or land acquired before 23 July 2024. In such cases, taxpayers may choose between:

• the older 20% tax rate with indexation or,
• the newer 12.5% flat rate without indexation,

depending on which results in lower tax.

The 12.5% flat rate often works well for most investors, but for complex calculations involving old properties or large amounts, consult a tax consultant for accurate guidance.

Capital Gains for Senior Citizens

Senior citizens (60 years and above) enjoy certain benefits. They get higher basic exemption limits on total income.

However, capital gains tax rates remain the same. Senior citizens don’t get special rates on capital gains. But they can use various exemptions available under the law.

Senior citizens should plan asset sales carefully. Spreading gains across financial years helps utilize annual exemptions better. Consulting a tax advisor ensures they maximize available benefits.

How to Save Tax on Capital Gains: Available Exemptions

The Income Tax Act provides several exemptions that can significantly reduce or completely eliminate capital gains tax liability when reinvesting proceeds in specified assets or instruments.

Annual Exemption on Equity Investments

Long-term capital gains from equity shares and equity mutual funds enjoy an annual exemption of ₹1.25 lakh. This means that the first ₹1.25 lakh of your gains is completely tax-free every financial year. Only gains exceeding this limit face 12.5% tax.

Eligibility Conditions:

• Listed equity shares on recognized stock exchanges
• Equity-oriented mutual funds with 65%+ equity exposure
• Holding period must exceed 12 months
• Securities Transaction Tax (STT) must be paid

STCG Exemption Limit

There is no separate exemption limit for short-term capital gains. Equity-related short-term gains are taxed at a flat rate, and other short-term gains are added to total income and taxed as per slab. Basic exemption limits may absorb some gains if total income remains below thresholds

For such scenarios, a tax advisor can help determine actual tax liability.

Section 54: Exemption on Sale of Residential Property

Section 54 of the Income Tax Act provides tax exemption when selling a residential house and buying another one. Only individuals and HUF can claim this. The new house must be purchased within 1 year before the sale or 2 years after. For construction, the timeline is 3 years. The exemption equals capital gain or investment amount, whichever is lower. From FY 2023-24, two houses can be purchased if the gain is below ₹2 crore (one-time benefit). Selling the new property within 3 years reverses the exemption.

Section 54F: Exemption on Sale of Land and Other Assets

Section 54F of the Income Tax Act applies when selling land, gold, or any asset except residential houses. Only individuals and HUF qualify. The seller must not own more than one house on the sale date. The key difference is that the entire sale amount (not just profit) must be invested in a new residential house. Purchase within 2 years or construction within 3 years is required. Only one house can be purchased. Partial investment gives proportionate exemption using this formula: Capital Gain × (Investment ÷ Sale Amount). Selling the new house within 3 years is not allowed.

Section 54B: Exemption on Agricultural Land

Section 54B of the Income Tax Act applies when selling agricultural land and buying other agricultural land. Only individuals and HUF qualify. New agricultural land must be purchased within 2 years. The exemption equals capital gain or new land cost, whichever is lower. Selling the new land within 3 years is not allowed. This works only for agricultural land, not other property types.

Section 54EC: Exemption Through Bond Investment

Section 54EC of the Income Tax Act offers the simplest way to save capital gains tax. Instead of buying property, the capital gains can be invested in special government bonds issued by:

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

Any individuals, HUF, company or firm can claim this exemption. The maximum investment allowed is ₹50 lakh per financial year. The investment must be made within 6 months from the date of selling the asset. These bonds have a mandatory 5-year lock-in period and cannot be withdrawn before that.

The tax benefit works simply. If ₹50 lakh is invested in these bonds, ₹50 lakh of capital gain becomes tax-free immediately. The bonds pay around 5-5.5% interest annually, which is taxable as per the income tax slab rate. After 5 years, the principal amount returns completely tax-free, no capital gains tax applies on maturity. Only the annual interest earned during these 5 years remains taxable.

Smart Strategies to Reduce Your Capital Gains Tax

Beyond exemptions, several strategies can help minimize capital gains tax liability through strategic planning and timing.

1. Hold Assets for Longer Periods

• Short-term gains on equity are taxed at 20%, while long-term at only 12.5%
• For property and gold, short-term rates can go up to 30%, while long-term is 12.5%
• Long-term holdings also qualify for ₹1.25 lakh annual exemption on equity
• Strategic timing based on holding periods saves significant tax

2. Offset Capital Gains with Capital Losses

• Short-term losses can offset both short-term and long-term gains
• Long-term losses can only offset long-term gains
• Unused losses can be carried forward for 8 years
• For example, ₹5 lakh gain minus ₹2 lakh loss = only ₹3 lakh taxable
• Booking losses on underperforming assets before year-end reduces tax

3. Spread Asset Sales Across Financial Years

• Use the ₹1.25 lakh equity exemption multiple times across years
• Planning sales in lower-income years reduces slab-based taxation

4. Consider Gifting to Family Members

• Gifts to spouse, children, and parents are tax-free
• Recipient in lower tax bracket pays less tax on sale
• However, this requires proper documentation and genuine transfer

5. Use Joint Ownership Strategically

• Joint ownership splits gains between multiple people
• Each co-owner gets taxed separately on their share
• Multiple exemption limits can be utilized as each owner can use different exemptions (54, 54F, 54EC)
• Ownership must be genuine with proper investment proof and documentation should show each person’s contribution
• This strategy is best planned at purchase time, not through later transfer

6. Combine Multiple Exemptions and Strategies

• Large gains can be managed by splitting across different exemptions
• For example, ₹1.5 crore in property (Section 54F) + ₹50 lakh in bonds (Section 54EC)
• This type of tax planning must happen before asset sale, as time limits start immediately after sale and missing specific deadlines means losing exemptions completely

Tax planning for capital gains involves multiple interconnected rules and strict timelines. Small mistakes in timing, documentation, or calculations can result in losing benefits or facing penalties. For situations involving capital gains exceeding ₹50 lakh, multiple exemptions, inherited assets, joint ownership arrangements, or carried forward losses, consulting a tax advisor is highly recommended. Professional guidance ensures maximum savings while maintaining full legal compliance. Tax laws change with each budget, making expert advice valuable for staying updated and planning effectively.

Frequently Asked Questions on Capital Gains Tax in India

Is capital gains tax payable every year?
No. Capital gains tax applies only in the year an asset is sold or transferred.

Do I pay capital gains tax if I do not withdraw money?
No. Tax arises only on sale, redemption, or transfer of the asset.

Is capital gains tax different from income tax?
Yes. Capital gains are taxed under a separate framework with different rates and exemptions.

Can capital losses reduce capital gains tax?
Yes. Eligible capital losses can be set off against gains as per tax rules.

Does capital gains tax apply if I reinvest the entire amount?
Yes. Tax liability arises first. Exemptions apply only if reinvestment meets specific legal conditions.

Is the ₹1.25 lakh LTCG exemption available per asset or per investor?
It is available per investor, per financial year, across all eligible equity assets combined.

Are capital gains taxed differently for listed and unlisted shares?
Yes. Holding periods and tax treatment differ between listed and unlisted shares.

Is capital gains tax applicable on inherited property?
Tax applies only when the inherited asset is sold. The holding period includes the previous owner’s holding.

Disclaimer: This article is for informational and educational purposes only. Tax laws change regularly and the information provided is current as of December 2025. This content should not be considered as professional tax, legal, or financial advice. Always consult a qualified tax advisor or chartered accountant for guidance specific to your situation. The author is not responsible for any decisions made based on this information.