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 in India. 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 Union Budget 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 save tax legally through exemptions, and what changed with the July 2024 reforms.

Last reviewed for Finance (No. 2) Act, 2024 and FY 2025–26. Tax outcomes depend on facts, dates, and asset type. Verify with a qualified CA 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 key exception for property.
• Key exemptions: Section 54, Section 54F, and Section 54EC allow legally 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 your total income is below ₹12 lakh.

What Is a Capital Asset?

You pay capital gains tax when you sell a capital asset for a profit. Capital assets include property, shares, mutual fund units, gold, bonds, and even intangible assets like trademarks and patents.

Some items are excluded from the definition of capital assets under the Income Tax Act, typically personal-use items like furniture and household items. However, one important exception applies:

Capital Gains vs Capital Losses

If you sell a capital asset below your purchase price, you have a capital loss. These losses can be used to reduce your 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 used for property.

Once you have the gain figure, 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, there were three holding period buckets: 12 months, 24 months, and 36 months depending on the asset. 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 noted otherwise.

All rates above are before surcharge and cess, which apply depending on total income and residential status.

Indexation: What Changed and What Remains

Indexation adjusts the cost of acquisition for inflation using the Cost Inflation Index (CII) published by CBDT each year. By increasing the effective cost, it reduces the taxable gain. Before July 23, 2024, long-term capital gains on most assets were calculated with indexation at a rate of 20%.

The Finance (No. 2) Act, 2024 removed indexation for most transfers, paired with the reduced 12.5% rate. However, one important option remains for property.

The property indexation choice

For immovable property (land or building) acquired before July 23, 2024 and sold by a resident individual or HUF on or after that date, a choice is available:

• 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. For older properties where the indexed cost is significantly higher than the original purchase price, the 20% with indexation route may work out to lower total tax in some cases, depending on the indexed cost. For recently acquired property where inflation adjustment is modest, the 12.5% route may be better. The right choice depends entirely on the numbers in your specific transaction.

The Cost Inflation Index (CII) values needed for this calculation are published annually by CBDT on the official income tax India portal (incometaxindia.gov.in). Always use the notified CII for the year of purchase and the year of sale when computing the indexed cost.

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 how long you hold them.

Under Section 50AA, gains from the following are treated as short-term capital gains irrespective of holding period:

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

In plain terms, even if you hold these for five years, the gains are taxed at your applicable slab rate, not at the 12.5% LTCG rate. The "wait long enough and pay less" logic does not apply here.

How to Save Tax Legally: Key Capital Gains Exemptions

The Income Tax Act provides several reinvestment-based exemptions that allow you to reduce or defer capital gains tax if you meet specific conditions. 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)

You invested ₹5,00,000 in an equity mutual fund and sold it after 14 months for ₹7,50,000.

Example 2: Property LTCG with Section 54EC

You sell a plot of land (held for more than 24 months) in FY 2025–26 for ₹90,00,000. Transfer expenses were ₹2,00,000. Original purchase price was ₹58,00,000.

If only ₹20,00,000 were invested in bonds (not the full gain), 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, your capital gains and losses are as follows:

Set-off: The ₹70,000 STCL is first set off against the STCG of ₹1,00,000, leaving ₹30,000 net STCG. The remaining 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% and ₹75,000 at 12.5%.

Example 4: Property with the indexation choice

You purchased a house in FY 2015-16 for ₹40,00,000 and sell it in FY 2025-26 for ₹90,00,000. As a resident individual selling property acquired before July 23, 2024, you have two options.

In this case, the 12.5% without indexation option is more tax-efficient. For older properties with a lower original cost relative to current CII ratios, the indexed route may produce a significantly lower tax. The right choice depends on the numbers in your specific case.

* CII values used: FY 2015-16 = 254, FY 2025-26 = 363. Illustrative only. Transfer expenses not included for simplicity. Consult a CA for your specific computation.

Share Buyback: A New Treatment From October 2024

Before October 1, 2024, share buybacks were taxed as capital gains in the hands of the shareholder (at a special 20% rate at the company level under Section 115QA).

From October 1, 2024, the treatment changed. Proceeds from share buybacks are now taxed as dividend income in the hands of the shareholder, at their applicable slab rate. The cost of acquisition of the shares bought back is then treated as a capital loss in the shareholder's hands, 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 of up to ₹12,500 (old regime) or ₹60,000 (new regime) for resident individuals whose total income does not exceed specified thresholds. Many investors assume this rebate applies to all their tax liability, including capital gains.

It does not. 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

Having documentation in order makes filing accurate and protects against scrutiny. The following are relevant for common capital gains scenarios:

• Equity and mutual funds: Purchase and sale contract notes, capital gains statement from your 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: New property agreement, payment proofs, possession documents, and CGAS deposit proof if applicable.
• Section 54EC: Bond allotment letter, investment date, lock-in confirmation from the issuer.
• Gold and jewellery: Original purchase receipts, valuation certificates, sale receipts.

Final Takeaway

The July 2024 reforms simplified capital gains tax in India by reducing it to two holding period buckets and moving most LTCG to a uniform 12.5% rate. The broad strokes are cleaner than before. But the details still matter: the indexation choice for older property, the Section 50AA trap for debt funds, the ₹10 crore cap on exemptions, the Section 87A rebate exclusion, and the new buyback treatment are all points where the general understanding often falls short of the actual rule.

The practical sequence for any disposal: classify the asset correctly, compute the gain using the right cost basis, determine STCG or LTCG based on holding period, apply the correct rate from the post-July 2024 framework, and then check whether Section 54, 54F, or 54EC applies before finalising your liability.

If you are also receiving dividend income or IDCW from mutual fund holdings, those are taxed separately from capital gains and reported under a different schedule. Our dividend income tax guide covers that framework in detail. For mutual fund-specific taxation across equity, debt, and hybrid categories, the mutual fund taxation guide has the full picture.

FAQs

1. Is capital gains tax always 12.5% now?

No. Many LTCG cases are now at 12.5%, but 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 your applicable slab rate. The 12.5% rate applies specifically to long-term gains.

2. Can I still claim indexation on property sold in FY 2025-26?

Yes, but only if you are a resident individual or HUF selling immovable property acquired before July 23, 2024. In that case, you can choose between 12.5% without indexation or 20% with indexation, whichever results in lower tax. For all other assets and for property acquired on or after July 23, 2024, 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, which covers 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. Any capital gains reinvested beyond this amount do not qualify for exemption under these sections.

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. They do not get the 12.5% LTCG treatment regardless of how long you hold them.

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. Report buyback income 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. Even if your total income falls below the rebate threshold, you still owe capital gains tax at the applicable rate on these gains.

9. How long can I carry forward a capital loss?

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.

10. What is the Capital Gains Account Scheme?

If you cannot complete the reinvestment required for Sections 54 or 54F before the ITR filing due date, you can deposit the unspent capital gains in a CGAS account with a notified PSU bank. This preserves your exemption eligibility while you complete the purchase or construction within the prescribed time limits. Unutilised CGAS deposits at the end of the time limit become taxable as LTCG in that year.

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

Not in all cases. NRIs pay capital gains tax on Indian assets at broadly similar rates, but there are important differences. TDS is deducted at source on capital gains arising to NRIs, with the buyer required to deduct TDS before making payment, unlike resident investors where TDS on capital gains generally does not apply. NRIs also cannot claim the basic exemption benefit under Section 111A the way resident individuals can. However, the applicable Double Taxation Avoidance Agreement (DTAA) between India and the NRI's country of residence may reduce the effective rate. NRIs should assess their position under the relevant DTAA and ensure required documentation is in place before any significant capital asset disposal.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or investment advice. Tax rules change. Please consult a qualified Chartered Accountant for transaction-specific or return-filing decisions.