Last updated: December 17th, 2024 2:24 PM

Capital Gains Tax in India: Types, Tax Rates, Calculation, & Exemption

Capital Gains Tax in India applies to the profit earned from selling capital assets like property, stocks, bonds, and investments. These gains are categorised into Short-Term (STCG) or Long-Term Capital Gains (LTCG) based on how long the assets were held. The tax rates on these gains differ, and certain exemptions are available under the Income Tax Act. Understanding the intricacies of capital gains tax, including the types of assets involved, tax rates, and calculation methods, is crucial for effective tax planning and compliance in India. This guide covers the essential aspects of capital gains tax in India, including the types of capital assets, tax rates, calculation methods, inheritance, and tax-saving strategies.

What is a Capital Gains Tax in India?

Capital Gains Tax in India is a tax imposed by the government on the profit or gain that arises from the sale of a “capital asset”, such as stocks, bonds, real estate, or other investments. This tax applies in the year the 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), depending on the time the asset is held before being sold. The income generated from these capital gains is considered taxable, and understanding the specifics of Capital Gains Tax is essential for compliance and effective tax planning in India.

Types of Capital Gains Taxation in India

As mentioned, Capital Gains Tax in India is categorised into two types based on the duration for which the capital asset is held before it is sold: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). Let’s see each type in detail.

Short-Term Capital Gains (STCG)

Short-Term Capital Gains arise when a capital asset is sold within a short period of time, typically less than 36 months from the date of acquisition. For certain assets like equity shares and mutual funds, the holding period is reduced to 12 months. The gains from such short-term holdings are added to the taxpayer's income and taxed at applicable income tax rates unless the asset falls under specific provisions where a flat 15% tax rate applies.

Long-Term Capital Gains (LTCG)

Long-Term Capital Gains are generated when a capital asset is held for a longer duration, exceeding 36 months, before being sold. For assets like equity shares and mutual funds, the required holding period is 12 months. LTCG, on most assets, is taxed at a lower rate than STCG, often at 20%, with indexation benefits. However, LTCG from equity shares and equity-oriented mutual funds exceeding Rs. 1 lakh is taxed at 10% without indexation benefit.

What is a Capital Asset?

Capital asset, as defined by the Income Tax Act, is any property owned by an individual or entity, regardless of whether it's connected to a business or profession. This broad definition encompasses tangible assets like land, buildings, vehicles, and jewellery and intangible assets such as patents, trademarks, stocks, bonds, and mutual funds. Importantly, securities held by Foreign Institutional Investors (FIIs) as per SEBI regulations also fall under this category. The capital gains tax is directly related to capital assets as it is levied on the profit earned from their sale. When a capital asset is sold, the obtained profit or gain is subject to capital gains tax, which can be classified into short-term or long-term. Below, we have given the list which do not come under the capital assets category, 

• Stock-in-trade: Goods held for sale in the ordinary course of business.
• Consumable stores and raw materials: Items used in the production process.
• Personal effects: Everyday items like clothing, furniture, and personal use vehicles. However, this exclusion doesn't cover valuable items like jewellery, art, or antiques.
• Agricultural land: Land outside municipal or cantonment areas with a population below-specified limits.
• Certain government bonds: Gold bonds, National Defence Gold Bonds, and Special Bearer Bonds.

What are the Types of Capital Assets?

In Indian taxation, capital assets are classified into two primary categories based on their holding period: “short-term” and “long-term”. The tax treatment for these assets differs significantly.

1. Short-Term Capital Assets

A capital asset is considered short-term if it is held for a period of 36 months or less from the date of transfer to its owner. However, for immovable properties, this holding period was reduced to 24 months from the financial year 2017-18. There are certain assets that fall under the short-term category even if their holding period is less than 12 months. This applies only if the date of transfer is after 10 July 2014. These assets include:

• Equity or preference shares of any listed companies in India
• All other securities listed in India
• Zero coupon bonds
• All units of UTI
• Equity-oriented mutual fund units  

For unlisted shares and all immovable properties (including land, buildings, and machinery), the holding period for short-term classification is 24 months or less from the date of transfer.

2. Long-Term Capital Assets

A capital asset is considered long-term if it is held for a period exceeding 36 months from the date of transfer. Long-term capital gains from the sale of such assets are generally taxed at a lower rate compared to short-term capital gains. When a capital asset is acquired through gift, will, succession, or inheritance, the holding period of the asset includes the time it was held by the previous owner. This means that if the previous owner held the asset for a long period, the new owner may benefit from a longer holding period, potentially qualifying for lower tax rates on long-term capital gains. In the case of bonus shares or rights shares, the holding period starts from the date of their allotment, regardless of the original asset's holding period.

Tax Rates on Capital Gains in India

In the table below, we have given the tax rates on capital gains in India,

Type of Asset	Holding Period	Tax Rate
Equity Shares and Equity-Oriented Mutual Funds	Long-Term (More than 36 months)	12.5% (exceeding Rs. 1.25 lakh)
	Short-Term (Up to 36 months)	15%
Other Financial Assets (e.g., bonds, debentures)	Long-Term (More than 36 months)	12.50%
	Short-Term (Up to 36 months)	30%
Real Estate	Long-Term (More than 24 months)	20% with indexation benefit (for sales before 23rd July, 2024)
	Long-Term (More than 24 months)	12.5% without indexation benefit (for sales after 23rd July, 2024)
	Short-Term (Up to 24 months)	30%

 

Tax Rates on Equity and Debt Funds in India

We have provided the equity and debt funds in India, in the below-given table:

Fund Type	Before 1 April 2023	Effective 1 April 2023
(Debt Funds)
Short-Term Gains	At tax slab rates of the individual	At tax slab rates of the individual
Long-Term Gains	10% without indexation or 20% with indexation whichever is lower	At tax slab rates of the individual
(Equity Funds)
Short-Term Gains	15%	15%
Long-Term Gains	10% over and above Rs 1 lakh without indexation	10% over and above Rs 1 lakh without indexation

How to Calculate Capital Gains Tax in India?

A basic formula to calculate capital gains tax in India is, (Sale Price - Cost of Transfer - Indexed cost of acquisition - Indexed Cost of improvement) x Applicable Short Term/Long Term Capital Gains Tax rate. Here’s the calculation process of both long and short term capital gains tax in India,

How to Calculate Long term Capital Gains (LTCG)?

Here is the step by step process to calculate Long term capital gains (LTCG),

1. Determine the Full Value of Consideration:
   • This is the total amount received from the sale of the asset.
2. Deduct Relevant Expenses:
   • Expenditure incurred wholly and exclusively in connection with such transfer: These are expenses directly related to the sale, such as brokerage fees, stamp duty, and advertising costs.
   • Indexed cost of acquisition: This is the original cost of the asset adjusted for inflation.
   • Indexed cost of improvement: This is the cost of any improvements made to the asset adjusted for inflation.
3. Calculate Long-Term Capital Gain:
   • Subtract the expenses from the full value of consideration to determine the long-term capital gain.
   • Formula: Long-term capital gain = Full value of consideration - Expenses
4. Apply Exemptions (if applicable):
   • Section 54, 54D, 54EC, 54F, and 54B: These sections provide exemptions under certain conditions, such as reinvestment in specified assets.
   • Subtract any applicable exemptions from the long-term capital gain.

Note: As per Budget 2024, Long-term capital gains on the sale of equity shares/units of equity-oriented funds realized after March 31, 2018, are exempt up to Rs. 1 lakh per annum. Tax at 10% is levied only on long-term capital gains exceeding Rs. 1 lakh in a financial year without the benefit of indexation.

How to Calculate Short term Capital Gains (STCG)?

Follow the below steps to calculate short term capital gains (STCG),

1. Determine the Full Value of Consideration:
   • This is the total amount received from the sale of the asset.
2. Deduct Relevant Expenses:
   • Expenditure incurred wholly and exclusively in connection with such transfer: These are expenses directly related to the sale, such as brokerage fees, stamp duty, and advertising costs.
   • Cost of acquisition: This is the original cost of the asset.
   • Cost of improvement: This is the cost of any improvements made to the asset.
3. Calculate Short-Term Capital Gain:
   • Subtract the expenses from the full value of consideration to determine the short-term capital gain.
   • Formula: Short-term capital gain = Full value of consideration - Expenses
4. Apply Exemptions (if applicable):
   • Section 54B/54D: These sections provide exemptions under certain conditions, such as reinvestment in specified assets.
   • Subtract any applicable exemptions from the short-term capital gain.

Important Note: Short-term capital gains are generally taxed at the applicable income tax slab rates. This means the tax rate will depend on the individual's overall income.

Examples of Capital Gains Tax Calculation

Mrs. A is a resident individual and she purchases a house on 6th Jun 2011 for Rs. 7,00,000. She spends Rs. 1,50,000 on its improvement in Jun 2012. Case 1: Mrs. A sells the house for Rs. 20,00,000 on 19th May 2013. What would be the capital gain? Since the asset was held for less than 36 months, it is a short term capital asset and the Short-term capital gain shall be 20,00,000 – 7,00,000 – 1,50,000 = Rs. 11,50,000 Case 2:  Mrs. A sells the house for Rs. 20,00,000 on 9th Mar 2015 What would be the capital gain? Since the asset was held for more than 36 months, it is a long term capital asset. The indexed cost of acquisition will be 7,00,000 X 852/711 = Rs. 8,38,819 The indexed cost of improvement will be 1,50,000 X 852/785 = Rs. 1,62,803 The long-term capital gain = 20,00,000 – (8,38,819 + 1,62,803) = Rs. 9,98,378 Learn more about the concept of Capital Gains Accounts Scheme in Income Tax

Indexation Cost of Acquisition/Improvement on LTCG

Indexation is a method used to adjust the cost of acquisition or improvement of a long-term capital asset for inflation. This adjustment increases the cost base of the asset, thereby reducing the taxable capital gains.

Calculation of Indexed Cost of Acquisition

• Formula:
  • Indexed cost of acquisition = (Cost of acquisition * CII of the year in which the asset is transferred) / CII of the year in which the asset was first held by the seller or FY 2001-02, whichever is later
• Key Points:
  • CII: Cost Inflation Index is a value published by the government to adjust for inflation.
  • Cost of acquisition: The original cost of the asset.
  • Year of transfer: The year in which the asset is sold.
  • Year of first holding: The year in which the seller first acquired the asset.

Calculation of Indexed Cost of Improvement

• Formula:
  • Indexed cost of improvement = Cost of improvement * CII (year of asset transfer) / CII (year of asset improvement)
• Key Points:
  • CII: Cost Inflation Index as explained above.
  • Cost of improvement: The cost of any improvements made to the asset.
  • Year of asset transfer: The year in which the asset is sold.
  • Year of asset improvement: The year in which the improvement was made.

Give a note about revised indexation benefits on capital gains tax

Cost Inflation Index (CII) Number

The Cost Inflation Index (CII) is a numerical value used to adjust the cost of assets for inflation. It helps to reduce the taxable capital gains by accounting for the increased prices of goods and services over time. The CII is announced annually by the Indian government and is used to calculate the indexed cost of acquisition and improvement for long-term capital assets. The higher the CII, the lower the taxable capital gains, as it effectively increases the cost base of the asset. The Cost Inflation Index (CII) for the financial year 2024-25 has been announced as 363.

Capital Gains Tax Exemptions

Individuals can reduce their capital gains tax burden by availing of the tax benefits offered by the Income Tax Act of India. These benefits often involve reinvesting the proceeds from the sale of one asset into another.

Section 54

Section 54 offers an exemption on gains from selling a residential property when the proceeds are reinvested in another residential property within specified limits. The exemption can be availed only once, and additional tax may apply if the new property's cost is lower.

Section 54F

Section 54F offers an exemption on gains from the sale of any asset, except residential property, if the proceeds are reinvested in a new property within 12 months before or 24 months after the sale.

Section 54EC

Section 54EC provides an exemption on long-term capital gains from the sale of a residential property if the proceeds are reinvested in specific bonds within six months. These bonds cannot be redeemed for 60 months.

Section B

Section B offers an exemption on gains from the transfer of agricultural land if the proceeds are reinvested in another asset within 36 months of the sale, provided the land was transferred at least 24 months before the sale and the new asset is not sold within 36 months of acquisition. Learn more about Capital Gains tax exemptions

How to Report Capital Gains Tax to Income Tax Department?

Individuals who earn capital gains from the sale of assets like shares, mutual funds, or property must report these gains in their income tax return. Here's a step-by-step procedure on how to report capital gains while filing ITR-2:

1. Log in to the Income Tax e-filing Portal: Access the official Income Tax Department website and log in using your credentials.
2. Start a New Income Tax Return: Navigate to the 'e-File' section and select 'Income Tax Returns'. Choose the appropriate assessment year, your status (individual, HUF, etc.), and select ITR-2 as the income tax return form.
3. Provide Basic Information: Enter your personal details, income from other sources (salary, house property, etc.), and other relevant information.
4. Report Capital Gains:
   • Click on the 'Income Schedule' tab.
   • Select 'Schedule Capital Gains'.
   • Choose the type of capital asset you sold (equity shares, mutual funds, property, etc.).
   • Differentiate between short-term and long-term capital gains.
   • Provide detailed information about the sale transaction, including purchase price, sale price, expenses, and date of sale.
5. Calculate Tax Liability: The income tax software will automatically calculate your capital gains tax based on the applicable tax rates.
6. Review and Verify: Carefully review all the information entered in the return.
7. Generate ITR-V: Download the ITR-V form, sign it, and send it to the Income Tax Department's Bangalore office within 120 days of filing the return.

Capital Gains Tax Saving Strategies

Capital gains tax can significantly erode your capital earnings. That's why many tax-paying individuals seek strategies to reduce this burden. Here are some effective approaches:

• Holding Assets Longer: Holding assets for over 12 months before selling can significantly reduce your tax liability due to the lower tax rate applicable to long-term capital gains.
• Reinvesting Proceeds: Reinvesting capital gains within specific timelines can offer tax benefits. Consider investing in a new property, constructing a new property, or purchasing capital gain bonds.
• Investing in Capital Gain Account Scheme (CGAS): CGAS offers a temporary tax deferral by allowing you to deposit capital gains and reinvest them within a specified timeframe.

Budget 2024 Capital Assets Classification and Taxation Update

Budget 2024 introduces significant changes to the classification of capital assets and their corresponding tax implications: Asset Holding Periods Simplified:

• The classification for capital assets now includes only two holding periods: 12 months and 24 months, eliminating the previous 36-month category.
• All listed securities are deemed long-term if held for more than 12 months. For all other assets, the threshold for long-term classification is 24 months.

Changes in Capital Gains Taxation:

• Short-Term Capital Gains (STCG) tax on listed equity shares, units of equity-oriented funds, and units of business trusts has increased from 15% to 20%.
• STCG for other financial and non-financial assets remains taxed at applicable slab rates.

Adjustments to Long-Term Capital Gains (LTCG) Exemption and Tax Rates:

• The exemption limit for LTCG from the sale of equity shares, equity-oriented units, or business trust units has been raised from Rs. 1 lakh to Rs. 1.25 lakh annually.
• Concurrently, the LTCG tax rate on these assets has been increased from 10% to 12.5%, effective from July 23, 2024.

Long-Term Capital Gains on Other Assets:

• The tax rate for LTCG on other financial and non-financial assets has been reduced from 20% to 12.5%.
• The indexation benefit previously available for the sale of long-term assets has been removed. As of July 23, 2024, sales of long-term assets will be taxed at 12.5%, without the indexation benefit.

These updates aim to streamline asset classification and adjust taxation rates to reflect current economic conditions and investment patterns.

Conclusion

Capital Gains Tax in India is a significant aspect of tax planning for individuals and businesses. Understanding the different types of capital gains, the applicable tax rates, and the available exemptions is essential for effective tax compliance. By strategically planning investments and utilizing available tax-saving measures, individuals can minimize their capital gains tax burden and maximize their overall financial returns. It is advisable to consult with a IndiaFilings tax professional for personalized guidance and to ensure accurate reporting and compliance with the complex tax regulations surrounding capital gains in India.