Capital Gains Tax in India: Types, Rates, Calculation and Exemptions (FY 2025-26)

When you sell a capital asset at a profit, that profit is subject to capital gains tax. The rate you pay and how you calculate it depends on what you sold, how long you held it, and whether the sale happened before or after July 23, 2024. The Finance (No. 2) Act, 2024 made the most significant changes to capital gains taxation in years, and those changes now form the baseline for FY 2025-26.

This guide covers the current framework in full: what counts as a capital asset, how to calculate gains, the updated holding periods and tax rates, how to reduce tax liability through exemptions, and what changed with the July 2024 reforms.

Applicable for FY 2025-26 (AY 2026-27). Last reviewed against the Finance (No. 2) Act, 2024 and CBDT Notification No. 70/2025 (CII for FY 2025-26). Tax outcomes depend on facts, dates, and asset type. Consult a qualified Chartered Accountant for transaction-specific decisions.

Capital Gains Tax at a Glance

• Two categories: Short-term capital gains (STCG) and long-term capital gains (LTCG), determined by holding period.
• July 23, 2024 is the pivot date: The Finance (No. 2) Act, 2024 changed holding periods, tax rates, and indexation rules from this date.
• Equity STCG (Section 111A): 20% for listed shares, equity mutual funds, and units of business trusts where STT is paid.
• Equity LTCG (Section 112A): 12.5% on gains above ₹1.25 lakh per financial year.
• Other LTCG (Section 112): 12.5% without indexation for transfers on or after July 23, 2024.
• Other STCG: Taxed at applicable slab rate for most non-equity assets.
• Indexation largely removed for transfers on or after July 23, 2024, with one exception for immovable property acquired before that date.
• Key exemptions: Sections 54, 54F, and 54EC allow reducing or deferring capital gains tax on reinvestment, subject to conditions and caps.
• Section 87A rebate does not apply to capital gains taxed at special rates, even if total income is below ₹12 lakh under the new regime (FY 2025-26).

What Is a Capital Asset?

Capital gains tax applies when a capital asset is sold at a profit. Capital assets include property, shares, mutual fund units, gold, bonds, and intangible assets such as trademarks and patents.

Certain personal-use items are excluded from the definition of capital assets under the Income Tax Act. One commonly misunderstood exception applies to jewellery.

Capital Gains vs Capital Losses

If a capital asset is sold below its purchase price, the result is a capital loss. These losses can reduce the overall capital gains liability, subject to specific set-off rules.

How to Calculate Capital Gains

The basic formula applies to all capital assets:

• Sale consideration: The amount received or receivable on transfer of the asset.
• Transfer expenses: Brokerage, legal fees, stamp duty paid by the seller, and similar costs directly related to the transfer.
• Cost of acquisition: The original purchase price of the asset.
• Cost of improvement: Eligible capital expenditure on improving the asset, most commonly applied for property.

Once the gain figure is established, classify it as STCG or LTCG based on the holding period, then apply the relevant tax rate.

STCG vs LTCG: Holding Periods After July 23, 2024

Before July 2024, three holding period buckets applied depending on asset type: 12 months, 24 months, and 36 months. The Finance (No. 2) Act, 2024 simplified this to two buckets for most assets.

Tax Rates After July 23, 2024

The following rates apply to transfers made on or after July 23, 2024 for resident individuals and HUFs unless otherwise noted. All rates are before surcharge and cess.

Indexation: What Changed and What Remains

Indexation adjusts the cost of acquisition for inflation using the Cost Inflation Index (CII) published by CBDT annually. By increasing the effective cost, it reduces the taxable gain. Before July 23, 2024, long-term capital gains on most assets were eligible for indexation at a 20% rate. The Finance (No. 2) Act, 2024 removed indexation for most transfers, paired with the reduced 12.5% rate.

The property indexation choice

For immovable property acquired before July 23, 2024 and sold by a resident individual or HUF on or after that date, a choice is available between two options:

• Option 1: Pay 12.5% LTCG tax without indexation on the actual gain.
• Option 2: Pay 20% LTCG tax with indexation benefit on the inflation-adjusted gain.

The taxpayer may choose whichever option results in a lower tax liability. The right option depends entirely on the specific numbers: the original purchase year, the current CII, the sale value, and the purchase price. The worked example in this article illustrates how to compare the two. The CII for FY 2025-26 is 376, as notified by CBDT via Notification No. 70/2025 dated July 1, 2025. CII values are available on the official Income Tax India portal (incometaxindia.gov.in).

Special Case: Section 50AA (Specified Mutual Funds and Market-Linked Debentures)

Certain instruments lose the benefit of long-term capital gains treatment entirely, regardless of holding period.

Under Section 50AA, gains from the following are treated as short-term capital gains irrespective of how long they are held:

• Specified mutual funds: broadly, debt-oriented funds with 35% or less equity exposure, acquired on or after April 1, 2023.
• Market-linked debentures.

Even if these instruments are held for five or more years, gains are taxed at the applicable slab rate, not at the 12.5% LTCG rate.

How to Save Tax Legally: Key Capital Gains Exemptions

The Income Tax Act provides reinvestment-based exemptions that allow reducing or deferring capital gains tax if specific conditions are met. The three most commonly used are Sections 54, 54F, and 54EC.

Section 54: Sell a residential house, buy another residential house

Section 54F: Sell any long-term asset (other than a house), buy a residential house

Section 54EC: Sell land or building, invest in specified bonds

Worked Examples

Example 1: Equity mutual fund LTCG (Section 112A)

Investment of ₹5,00,000 in an equity mutual fund, sold after 14 months for ₹7,50,000.

Example 2: Property LTCG with Section 54EC

Plot of land (held more than 24 months) sold in FY 2025-26 for ₹90,00,000. Transfer expenses ₹2,00,000. Original purchase price ₹58,00,000.

If only ₹20,00,000 were invested in bonds, the exemption would be limited to ₹20,00,000 and ₹10,00,000 would remain taxable at 12.5%.

Example 3: Capital loss set-off

In FY 2025-26:

The ₹70,000 STCL is first set off against the STCG of ₹1,00,000, leaving ₹30,000 net STCG. The LTCG of ₹2,00,000 is reduced by the ₹1,25,000 annual 112A exemption, leaving ₹75,000 taxable LTCG. Tax is then computed on ₹30,000 at 20% (Section 111A) and ₹75,000 at 12.5% (Section 112A).

Example 4: Property with the indexation choice

House purchased in FY 2015-16 for ₹40,00,000, sold in FY 2025-26 for ₹90,00,000. As a resident individual selling property acquired before July 23, 2024, two options are available.

CII values used: FY 2015-16 = 254, FY 2025-26 = 376 (CBDT Notification No. 70/2025 dated July 1, 2025).

With the correct CII of 376 for FY 2025-26, Option 2 (20% with indexation) produces marginally lower tax in this scenario. The difference narrows or reverses depending on purchase year and CII ratio. For properties purchased much earlier, the indexed cost may be substantially higher, making Option 2 more compelling. For recently purchased properties, Option 1 is typically better. The right choice is always specific to the transaction.

Transfer expenses not included for simplicity. Consult a qualified Chartered Accountant for your specific computation.

Share Buyback: New Treatment From October 2024

Before October 1, 2024, share buybacks were taxed at the company level under Section 115QA. Shareholders received buyback proceeds effectively free of further tax at their end.

From October 1, 2024, this changed. Buyback proceeds are now taxed as dividend income in the hands of the shareholder at their applicable slab rate. The cost of acquisition of shares bought back is treated as a capital loss, which can be set off or carried forward under normal capital loss rules.

Section 87A and Capital Gains: An Important Trap

Section 87A provides a tax rebate for resident individuals whose total income does not exceed specified thresholds. For FY 2025-26, the rebate is up to ₹12,500 under the old regime (income up to ₹5 lakh) or up to ₹60,000 under the new regime (income up to ₹12 lakh).

Capital gains taxed at special rates under Sections 111A, 112A, and 112 are specifically excluded from the Section 87A rebate. This means:

Documents to Keep Ready

Accurate documentation makes filing clean and protects against scrutiny. The following are relevant for common capital gains situations:

• Equity and mutual funds: Purchase and sale contract notes, capital gains statement from broker or fund house, demat account statements.
• Property: Purchase deed, sale deed, proof of transfer expenses (brokerage, legal fees, stamp duty), proof of improvement costs (invoices, bank trail).
• Section 54 or 54F claims: New property agreement, payment proofs, possession documents, and CGAS deposit proof if applicable.
• Section 54EC claims: Bond allotment letter, investment date, lock-in confirmation from the issuer.
• Gold and jewellery: Original purchase receipts or valuation certificate at time of purchase, sale receipts, assay or valuation certificate if available.

FAQs

1. Is capital gains tax always 12.5% now?

No. The 12.5% rate applies to LTCG under Sections 112A and 112. STCG on listed equity and equity mutual funds is 20% under Section 111A. STCG on property, gold, and other non-equity assets is taxed at the applicable slab rate. The correct rate depends on asset type and holding period.

2. Can indexation still be claimed on property sold in FY 2025-26?

Yes, but only for resident individuals and HUFs selling immovable property acquired before July 23, 2024. The choice is between 12.5% without indexation or 20% with indexation using the applicable CII values. The CII for FY 2025-26 is 376, notified by CBDT via Notification No. 70/2025. For property acquired on or after July 23, 2024 and for all other assets, indexation is not available.

3. Does the ₹1.25 lakh exemption apply to all capital gains?

No. The ₹1.25 lakh annual exemption applies only to LTCG under Section 112A, covering listed equity shares, equity-oriented mutual funds, and business trust units where STT is paid. It does not apply to property, gold, debt funds, or other asset classes.

4. Can capital losses be set off against salary income?

No. Capital losses can only be set off against capital gains. Short-term capital losses can be set off against both STCG and LTCG. Long-term capital losses can only be set off against LTCG. Neither type can be adjusted against salary, business income, or other income heads.

5. What is the maximum exemption under Section 54 or 54F?

From AY 2024-25 onwards, the maximum exemption under both Section 54 and Section 54F is capped at ₹10 crore. Capital gains reinvested beyond this amount do not qualify for exemption under these sections, regardless of the reinvestment amount.

6. Are debt mutual funds taxed like equity mutual funds?

No. Debt-oriented mutual funds with 35% or less equity exposure acquired on or after April 1, 2023 are covered by Section 50AA and taxed at slab rate irrespective of holding period. The 12.5% LTCG treatment does not apply regardless of how long the units are held.

7. How are buyback proceeds taxed from October 2024 onwards?

From October 1, 2024, buyback proceeds are taxed as dividend income in the hands of the shareholder at the applicable slab rate. The cost of shares bought back is treated as a capital loss. Buyback income is reported under Income from Other Sources, not under capital gains.

8. Does Section 87A rebate apply to capital gains?

No. Capital gains taxed at special rates under Sections 111A, 112A, and 112 are excluded from the Section 87A rebate for FY 2025-26. Even if total income falls below the rebate threshold, capital gains tax at the applicable special rate remains payable. Please consult a SEBI-registered investment adviser or qualified tax professional if you are unsure how this applies to your specific situation.

9. How long can a capital loss be carried forward?

Up to 8 assessment years, provided the income tax return for the year in which the loss was incurred was filed on time. A late-filed return forfeits the right to carry forward capital losses for that year.

10. What is the Capital Gains Account Scheme?

Where the reinvestment required for Sections 54 or 54F cannot be completed before the ITR filing due date, the unspent capital gains may be deposited in a CGAS account with a notified PSU bank. This preserves exemption eligibility while the purchase or construction is completed within the prescribed time limits. Unutilised CGAS deposits at the end of the time limit are treated as taxable LTCG in that year.

11. Do NRIs pay capital gains tax at the same rates?

Broadly similar rates apply to NRIs for Indian assets, but with important differences. TDS is deducted at source on capital gains arising to NRIs, with the buyer required to deduct before payment. NRIs cannot offset the basic exemption limit against special-rate capital gains under Sections 111A or 112A, unlike resident individuals who can use the unexhausted basic exemption against such gains in some cases. The applicable Double Taxation Avoidance Agreement (DTAA) between India and the NRI's country of residence may modify the effective rate. NRIs should assess their position under the relevant DTAA before any significant capital asset disposal.

Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or financial instruments. Capital gains tax rates, holding periods, CII values, and exemption conditions referenced here are based on the Finance (No. 2) Act, 2024, CBDT Notification No. 70/2025, and publicly available Income Tax Department guidance applicable for FY 2025-26 (AY 2026-27). Rules may change in subsequent budgets or notifications. Past market behaviour is not indicative of future outcomes. Please consult a SEBI-registered investment adviser or qualified Chartered Accountant before making any tax filing or investment decision.