Capital Gains Tax in India: Types, Rates, Exemptions, and Calculations

In India, capital gains tax is charged on the profits made by selling a capital asset. A capital asset includes property, shares and gold. In order to better prepare for the capital gains tax, it is useful as a taxpayer to know capital gain tax’s concepts and types, rates, exempted assets, exemptions, and methods of calculating capital gains tax so you can better plan financially. This article aims to provide potential investors and taxpayers a guide regarding capital gains tax in India, including information on short-term and long-term capital gains, tax rates, indexed benefit, exempted capital gains and ways to avoid excessive capital gains tax.

What is Capital Gains Tax?

Capital gains tax refers to the taxes imposed on the profit or gain from the transfer of capital assets such as real estate, shares, mutual funds, or jewelry. The taxable gain is realized in the financial year during which the asset transfer takes place. Capital gains tax comes in two flavors: short-term capital gains tax and long-term capital gains tax; the applicable rates and exemptions depend on the asset type and ownership period.  

 Examples of capital assets include land, buildings, stocks, bonds, or virtual digital assets, such as cryptocurrencies. The capital gains tax is assessed on the difference between the sale price of the asset and the purchase price of the asset, adjusted to account for selling costs and inflation (if applicable). Knowing this allows one to comply with applicable tax regulations and lower potential tax obligations.

Types of Capital Gains Tax

Short-Term Capital Gains Tax

Short-term capital gains tax is levied on gains from assets that have been held for a brief period. The duration of an asset’s holding period can be asset dependent: 

• For listed equity shares, equity-oriented mutual funds, and business trust units: The period of holding is less than 12 months; 
• For other assets (project  assets, unlisted shares, debt mutual funds): The period of holding is less than 24 months (subject to Budget 2024 current holding period from July 23, 2024).

Short-term capital gains are taxed at an individual’s income tax slab rate except for listed equity shares and equity-oriented mutual funds and are taxed at a flat rate of 20% (after July 23, 2024). For example, if your income fell within the 30% tax bracket you would pay ₹1.5 lakh as capital gains tax if you sold a property held for 18 months for ₹5 lakh.

Long-Term Capital Gains Tax

A long-term capital gains tax applies to any asset owned for the greater of the following periods:

• Listed equity shares and equity-oriented mutual funds—more than 12 months;
• Other assets (for example, property, gold, debt mutual funds)—more than 24 months.

In general, the long-term capital gains tax percent is 12.5% without indexation for all types of assets, as defined in Budget 2024. However, if the property was acquired before July 23, 2024, taxpayers can choose between 12.5% without indexation, or pay 20% with indexation for a lower tax liability. For listed equity shares with gains of less than ₹1.25 lakh per year, taxpayers can take tax-free treatment under Section 112A.

Capital Gains Tax Rates

Short-Term Capital Gains Tax Rates

• Listed equity shares and equity-oriented mutual funds: 20% (was 15% before July 23, 2024).
• Other assets (e.g., property, unlisted shares): Taxed at the individual‘s income tax slab rate.
• Cryptocurrencies: 30% regardless of holding period and no deductions for expenses or losses.

Long-Term Capital Gains Tax Rates

• For listed equity shares and equity-oriented mutual funds, the rate is 12.5% on gains in excess of ₹1.25 lakh (no indexation).
• For property and other non-equity assets, the rates are 12.5% without indexation or 20% with indexation (for properties purchased prior to July 23, 2024).
• For debt mutual funds, the rate is 12.5% without indexation (in the case of debt mutual funds, following Budget 2024).

The long-term capital gains tax rate for real estate provides flexibility for purchases made before July 2024, as the tax will be minimized if taxpayers elect to take the indexation option if it is available.

Indexation in Capital Gains Tax

Indexation capital gains tax allows for the adjustment of the purchase price of a long-term capital asset for inflation to reduce taxable gains on the sale of the asset. The government uses an annual Cost Inflation Index (CII) (for example, CII equals 363 for FY 2024-25) to compute the indexed cost of acquisition and improvement of an asset. The indexed cost of acquisition can be calculated using the following formula:

Indexed Cost of Acquisition = (Cost of Acquisition × CII of Sale Year) ÷ CII of Purchase Year

For instance, if a property was purchased in 2001 for ₹10 lakh and then sold in 2024 for ₹50 lakh, the taxpayer could take the CII into account and would likely only be taxed on a much lower, adjusted gain in the event of a sale of the property. Nevertheless, post July 23, 2024, indexation benefits will be removed for the majority of assets and eliminated for everyone, even for property owners purchasing before that date, except where the property was acquired by an individual or HUF taxpayer who chooses to pay tax at 20% under the old regime for ‘tax bracket’ type gains with indexation.

For more insights on tax planning, check out Growthinfy’s guide on financial planning.

Capital Gains Tax Calculation

Short-Term Capital Gains Calculation

The formula for capital gains tax calculation for short-term gains is:

STCG = Sale Price – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)

For example, if you sell a property bought for ₹20 lakh after 18 months for ₹25 lakh, incurring ₹50,000 in transfer expenses, the STCG is:

₹25 lakh – (₹20 lakh + ₹50,000) = ₹4.5 lakh, taxed at your slab rate.

Long-Term Capital Gains Calculation

For long-term gains, the formula is:

LTCG = Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses + Exemptions)

For a property bought in 2010 for ₹30 lakh, sold in 2024 for ₹80 lakh, with ₹2 lakh in improvements and ₹1 lakh in transfer expenses, the calculation (assuming CII of 167 for 2010-11 and 363 for 2024-25) is:

• Indexed Cost of Acquisition: (₹30 lakh × 363) / 167 = ₹65.21 lakh
• Indexed Cost of Improvement: (₹2 lakh × 363) / 167 = ₹4.34 lakh
• LTCG = ₹80 lakh – (₹65.21 lakh + ₹4.34 lakh + ₹1 lakh) = ₹9.45 lakh
• Tax (at 20% with indexation): ₹9.45 lakh × 20% = ₹1.89 lakh

Alternatively, without indexation, LTCG = ₹80 lakh – (₹30 lakh + ₹2 lakh + ₹1 lakh) = ₹47 lakh, taxed at 12.5% = ₹5.88 lakh. Choose the lower tax liability option if applicable.

Exemptions on Capital Gains Tax

Several exemptions under the Income Tax Act help reduce capital gains tax property liability:

Short-term capital gains have limited exemptions, such as reinvestment in agricultural land under Section 54B for specific cases.

• Section 54: Provides exemption for LTCG from the sale of a residential property if it is reinvested in another residential property within the one year preceding the sale or the two years after the sale, or if the property is constructed within three years. The entire gain must be reinvested for the exemption to be available.
• Section 54F: Provides exemption for LTCG from the sale of non-residential assets if the gain is reinvested in a residential property. However, it includes various conditions, including that there has to be only one residential property held at the time of sale.
• Section 54EC: Provides exemption for up to ₹50 lakh of LTCG if it is invested in specified bonds (e.g. NHAI, REC) within 6 months of the sale.

Capital Gains Account Scheme (CGAS):

If the timelines cannot be met and the gain cannot be reinvested, the tax liability will still be deferred if it is simply parked in a CGAS account.

Short-term capital gains have only a few exemptions from taxes including under Section 54B which allows one to reinvest the sale of agricultural land for it to be exempt from tax but only for the limited circumstances.

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Key Changes in Budget 2024

The Union Budget 2024 introduced significant changes to simplify capital gains tax:

• Holding Periods: Standardized to 12 months for listed securities and 24 months for other assets.
• Tax Rates: Increased STCG rate for listed equity shares to 20% and LTCG to 12.5%. Removed indexation for most assets, except for pre-July 2024 property sales.
• Exemption Limit: Raised to ₹1.25 lakh for LTCG on equity shares and mutual funds.
• TDS for NRIs: Buyers must deduct TDS on property sales to NRIs at 20% for LTCG or slab rates for STCG.

These changes aim to streamline tax calculations but may increase tax liability for some due to the removal of indexation benefits.

Strategies to Save on Capital Gains Tax

• Reinvest Gains: You may benefit from Sections 54, 54F, or 54EC to reinvest your gains in either residential properties or specified bonds.
• Tax Loss Harvesting: If you incur capital losses, you can offset those against your gains in the same financial year and reduce your taxable income.
• CGAS: If you are not going to immediately reinvest your gain, deposit the gain in a CGAS account, as long as you comply with the exemption conditions.
• Records: Record of all items relating to the purchase, improvement, and sale are important to legitimately deduct expenses.
• Optimize Tax Planning: Visiting a tax professional can help you further optimize your tax planning. Consult Growthinfy’s expert tax consultation services for professional advice.

Conclusion

In India, Capital Gains Tax includes short-term capital gains tax and long-term capital gains tax. Careful planning helps you manage taxes (not eliminate). Knowing the rates Banking on, understanding tax rates between long and short-term capital gain tax, keeping in mind the indexation (if eligible), and exempting benefits in sections 54, 54F, and 54EC can significantly reduce taxes. Additionally, Budget 2024 also may be impacting tax. Being informed about the changes, maintaining accurate records, and compliance will all help maximize your savings!