Budget 2026 Updates
Share buybacks to be taxed as capital gains for all shareholders.
Promoters to pay additional buyback tax, ensuring equitable taxation.
Income Tax Act 2025 Update
- The Income Tax Act, 2025 have replaced the terms Previous Year & Assessment Year with the term Tax Year. For example, if the income was earned in the year 2025-26, it will be called Tax Year 2025-26. However, since many taxpayers are still familiar with the terms Financial Year (FY) and Assessment Year (AY), this guide continues to use them for easier understanding.
- The new Income Tax Act has renumbered most of the sections and simplified them by reducing the number of sections, schedules, etc.
You can refer to the complete section mapping of Income Tax Act 1961 vs Income Tax Act 2025 here.
What is a Capital Gain Tax?
Capital gains tax in India is a tax imposed on the profits realized from the sale of capital assets such as stocks, bonds, real estate, and other investments. It is the tax applied to the difference between an asset's purchase price (or "cost basis") and its selling price.
When you sell an asset for more than you paid for it, you have a capital gain. Conversely, if you sell an asset for less than you paid for it, you have a capital loss. Capital gains tax in India is typically only applied to capital gains, not to the total amount received from the sale.
There are two types of capital gains: short term capital gains and long-term capital gains. Such gains are taxable only in the year of transfer of the capital asset.
It is mandatory for taxpayers to file their income tax returns for capital gains by submitting right ITR form to the Income Tax Department.
To understand capital gains, you need to understand the concept of capital assets.
Types of Capital Gains: Short-Term vs. Long-Term
Now that you have understood what capital assets are and their types, it’s time to understand the types of capital gains. Capital gains are divided into short-term capital gains and long-term capital gains –
What is Short-term Capital Gain Tax?
Short-term capital gains (STCG) are the profits you earn when you sell off your capital assets within one year of holding them. Note that the holding period varies as per the capital asset.
Short-term capital gains on listed equity shares and equity mutual funds are taxed at 20%. However, short-term capital gains earned from assets such as gold, silver, house property, or land are taxed as per the taxpayer’s applicable income tax slab rates.
What is Long-term Capital Gain Tax?
Long-term capital gain tax (LTCG) are the profits you earn when you sell off your capital assets after holding it for a certain period of time. Note that the period of holding for different assets to be claimed as long-term assets varies according to the asset.
- Long-term capital gains are 12.5% over and above Rs 1.25 lakhs on the sales of long-term capital assets.
What are Capital Assets?
Capital assets are the property you own and can be transferred, like land, buildings, shares, patents, trademarks, jewelry, leasehold rights, machinery, vehicles, etc.
Here is a list of assets that do not fall under the category of capital assets:–
- The stock of consumables or raw materials held for use in business or profession.
- Personal belongings meant for personal use like clothes, furniture, etc.
- A piece of agricultural land is located in a rural area.
- Special bearer bonds, 6.5% gold bonds (1977), 7% gold bonds (1980), or national defense gold bonds (1980) which the Central Government has issued.
- Gold deposit bond (1999), issued under the gold deposit scheme or deposit certificate issued under the Gold Monetisation Scheme, 2015, notified by the Central Government.
What are the Different Types of Capital Assets?
Capital assets are divided into two types based on the period after which they are sold. The types of capital assets are as follows –
- Short-term Capital Assets
- Long-term Capital Assets
What are Short-term Capital Assets?
Short-term capital assets are those held for less than or equal to 24 months. This means that if you sell off the asset within 24 months of buying it, it would be called a short-term capital asset. However, in some cases, the holding period is reduced to 12 months. These cases include the following –
| Capital Asset |
Holding Period |
| Immovable property like houses, land, and buildings and unlisted shares |
24 months |
| Equity Shares of a company listed on the stock exchange, units of UTI, zero-coupon bonds, and equity-oriented mutual funds. |
12 months |
What are Long-term Capital Assets?
Long-term capital assets are those held for more than 24 months and then sold off. Immovable property sold after 24 months would be categorized as a long-term capital asset. In the case of equity shares, securities, mutual fund units, etc., however, the holding period of 12 months is applicable. If sold off after 12 months, they would be called long-term capital assets.
Generally, the holding period of capital assets to be considered as long-term is 24 months. However, there are certain exceptions to this rule. Here’s a summary of different types of capital assets and the period of holding, after which they are considered long-term capital assets
Capital Gains Tax Rates
1. Tax on Capital Gains
| Tax Type |
Condition |
Applicable Tax |
| Long-Term Capital Gains (LTCG) |
- Listed equity shares (STT paid on both purchase and sale)
- Equity-oriented mutual funds (STT paid on sale) |
12.5% on gains exceeding ₹1.25 lakh |
|
Land/Building (Individuals & HUFs) |
12.5% without indexation
OR
20% with indexation (for property purchased before 23rd July 2024) |
|
Land/Building (Other persons) |
12.5% without indexation |
|
Others |
12.5% |
| Short-Term Capital Gains (STCG) |
STT not applicable (real estate and other assets) |
Taxed as per individual’s slab rate |
|
STT applicable (Listed equity shares and debt mutual funds) |
20% |
3. Tax Rates on Equity and Debt Mutual Funds
| Funds |
STCG |
LTCG |
| Debt Funds* |
As per slab rate |
12.5% (only for certain debt fund units acquired before 1 April 2023 and held for more than 24 months) |
| Equity Funds |
20% |
12.5% on gains exceeding ₹1.25 lakh |
Note: Debt mutual fund units acquired on or after 1 April 2023 are generally taxed at the investor's slab rate irrespective of the holding period.
How to Calculate Capital Gains?
Capital gains are calculated differently based on how long you hold the asset before selling. Assets held for a shorter duration are subject to short-term capital gains (STCG), while assets held longer attract long-term capital gains (LTCG).
Key Terms
| Term |
Meaning |
| Full Value Consideration |
The total amount received or to be received by the seller for transferring the asset. Tax applies in the year of transfer, even if no amount is received. |
| Cost of Acquisition |
The price paid by the seller to acquire the asset. |
| Cost of Improvement |
Capital expenses incurred by the seller to improve or modify the asset. |
Note:
- If the asset was inherited or gifted, the cost of acquisition/improvement of the previous owner is also considered.
- Expenses made before 1st April 2001 are not considered for cost of improvement.
How to Calculate Short-Term Capital Gains (STCG)
Formula:
STCG = Sale value of an asset – (cost of acquisition + expenses incurred in the course of transfer/sale + cost of asset improvement)
How to Calculate Long-Term Capital Gains (LTCG)
Formula:
Long-Term Capital Gain = Full Value Consideration
- Expenses exclusively for the transfer
- Cost of Acquisition
- Cost of Improvement
- Eligible Exemptions (u/s 54, 54EC, 54F, 54B, etc.)
Note: Expenses allowed for deduction from sale proceeds must be directly related to the sale and are allowed only once (not under other income heads).
Deductible Expenses
| Asset Type |
Allowable Deductions |
| House Property |
Brokerage/commission, stamp duty, travel costs, inheritance-related legal costs (where applicable) |
| Shares |
Broker's commission only (STT is not deductible) |
| Jewellery |
Broker's commission (if services are used to find a buyer) |
Example Calculations
Scenario 1: Long-Term Capital Gain on Sale of Property
Ms. Riya sold her residential property on 18th September, 2025 for Rs. 72 Lakhs. She had purchased the property on 12th January, 2018 for Rs. 32 Lakhs. Since she is an individual selling a property after 23rd July, 2024, she can choose between:
- 12.5% tax without indexation, or
- 20% tax with indexation
Her capital gains under both options are calculated below:
| Particulars |
12.5% Without Indexation (1) |
20% With Indexation (2) |
| Sale Consideration |
72,00,000 |
72,00,000 |
| Cost of Acquisition (Indexed for column 2 – 32,00,000 × 376 / 280) |
32,00,000 |
42,97,143 |
| Long-Term Capital Gains |
40,00,000 |
29,02,857 |
| Tax on Long-Term Capital Gains |
5,00,000 |
5,80,571 |
In this case, the option of 12.5% without indexation is more beneficial for the taxpayer. However, where the property was purchased much earlier, the indexed cost may increase significantly, making the 20% with indexation option more beneficial.
Scenario 2: Long-Term Capital Gain on Sale of Equity Shares
Mr. Arjun sold his listed equity shares on 15th October, 2025 for Rs. 40 Lakhs. He had purchased these shares on 10th June, 2020 for Rs. 18 Lakhs.
The calculation of long-term capital gains is as follows:
| Particulars |
Sold on 15th October, 2025 |
| Sale Consideration |
40,00,000 |
| Cost of Acquisition |
18,00,000 |
| Long-Term Capital Gains u/s 112A |
22,00,000 |
| Less: Exemption u/s 112A |
Less: Exemption u/s 112A |
| Taxable Long-Term Capital Gains |
20,75,000 |
| LTCG Tax @ 12.5% |
2,59,375 |
The exemption of Rs. 1.25 Lakhs under Section 112A is available irrespective of the date of sale.
Scenario 3: Capital Gains on Sale of Debt Mutual Funds
Suppose Ms. Neha invested Rs. 12,00,000 in a debt mutual fund.
- In Scenario 1, the investment was made in FY 2019-20 and sold in FY 2025-26 for Rs. 20,00,000.
- In Scenario 2, the investment was made in FY 2023-24 and sold in FY 2025-26 for the same amount.
The capital gains tax implications are as follows:
| Particulars |
Scenario 1: Acquired before 1/4/2023 |
Scenario 2: Acquired on or after 1/4/2023 |
| Sale Value |
₹20,00,000 |
₹20,00,000 |
| Cost of Acquisition |
₹12,00,000 |
₹12,00,000 |
| Capital Gains |
₹8,00,000 |
₹8,00,000 |
| Nature of Gain |
Long-Term Capital Gain (held for more than 24 months) |
Taxed as Short-Term Capital Gain irrespective of holding period |
| Tax Rate |
12.5% (without indexation) |
Taxed as per applicable income tax slab rate |
| Tax Payable |
₹1,00,000 (₹8,00,000 × 12.5%) |
Depends on the taxpayer's slab rate |
In Scenario 1, since the debt mutual fund units were acquired before 1 April 2023 and held for more than 24 months, the gains qualify as long-term capital gains and are taxed at 12.5% without indexation benefit. In Scenario 2, since the units were acquired on or after 1 April 2023, the gains are treated as short-term capital gains and taxed at the investor's applicable income tax slab rate, regardless of the holding period.
Section 87A Rebate on Capital Gains
Rebate on LTCG from Unlisted Equity Shares and Mutual Funds
If an individual's total income has any long-term capital gain under section 112A from the sale of equity shares or equity-based mutual funds. Such an individual will not be eligible for a section 87A rebate on such income in both the old and the new regimes.
As per section 112A of the Income Tax Act, the gains from the sale of listed equity shares or equity mutual funds are taxed at 12.5% if the amount exceeds Rs. 1.25lakh in a financial year.
Rebate Under Other Capital Gains
Rebate u/s 87A can be claimed in the case of long-term capital gains from other assets such as real estate, unlisted shares.
Rebate Under STCG from Equity Shares and Mutual Funds
There is no restriction on claiming rebate u/s 87A on STCG arising from the sale of equity shares and mutual funds. Therefore, you can claim a section 87A rebate on your short-term capital gains on equity shares and mutual funds.
How are Inherited Capital Assets Classified?
When acquiring an asset through gift, will, succession, or inheritance, the duration for which the previous owner held the asset is considered.
- For bonus shares or rights shares, the holding period starts from the date of allotment of bonus shares.
- This consideration applies to determining whether the asset qualifies as short-term or long-term capital asset.
Tax Exemption on Capital Gain
Because capital gains tax tends to erode a significant portion of earnings, it becomes critical for individuals to utilize tax-saving strategies to help them reduce their tax liability. To assist individuals in minimizing their capital gains tax liability, the government provides a list of exemptions under capital gains. These tax exemptions are known as capital gains exemptions.
Exemption Under Section 54: Sale of House Property on Purchase of Another House Property
If the Long-term Capital gain does not exceed Rs. 2 crores, then two house properties can be acquired. But this benefit is available once in a lifetime to a taxpayer.
The taxpayer is only required to invest the amount of capital gain, not the complete sale proceeds.
The exemption under Section 54 will be limited to the total capital gain on sale if the purchase price of the new property is higher than the number of capital gains.
The following conditions must be met to enjoy the benefit:
- The new property can be purchased either one year before or two years after the previous property has been sold.
- Gains can also be invested in property construction, but construction must be completed within three years of the sale date.
- Only one house property could be purchased or built with capital gains to qualify for this exemption.
- Please remember that this exemption can be revoked if the new property is sold within three years of its purchase or completion of construction.
Exemption Under 54B: Transfer of Land Used for Agricultural Purposes
An exemption is available under Section 54B when you make short-term or long-term capital gains from the transfer of land used for agricultural purposes – by an individual, the individual's parents, or a Hindu Undivided Family (HUF) – for two years before the sale.
The lesser of the capital gain on the sale of agricultural land or the investment in new assets is exempt from tax. You must reinvest in new agricultural land within two years of the transfer date.
- The new agricultural land purchased to claim capital gains exemption should not be sold within three years of its purchase date.
- If you cannot purchase agricultural land before the due date for filing your income tax return, the amount of capital gains must be deposited in any branch (except rural branches) of a public sector bank or IDBI Bank before the due date.
- Exemptions can be claimed for the amount deposited. If the amount deposited under the Capital Gains Account Scheme was not used to purchase agricultural land, it should be treated as capital gains of the year in which the period of two years from the date of sale of land elapsed.
Exemption Under Sections 54 E, 54EA, and 54EB – Profits from Investments in Certain Securities
This capital gains exemption applies to capital gains derived from the transfer of long-term capital assets. Individuals can take advantage of such long-term capital gain exemptions if they reinvest in securities such as targeted debentures, UTI units, government securities, government bonds, etc.
The following conditions must be met–
- Individuals must reinvest in such new securities within six months of the transfer of capital assets.
- If the individual plans to sell the new securities before 3 years, the previously offered exemption would be deducted from the total cost to determine the capital gains.
It is important to note that any loan availed against these securities before 3 years would be treated as a capital gain.
Exemption Under Section 54EC – Profits from the Sale of a Long-term Capital Asset are Exempt from Tax if Reinvested in Specific Long-term Assets.
Long-term capital gains on the sale of long-term assets would be qualified for long-term capital gain exemption under section 54EC. Individuals will be eligible for such exemptions if they reinvest their proceeds in bonds of either the Rural Electrification Corporation Limited (RECL) or the National Highways Authority of India (NHAI).
Note: Reinvestment in Indian Renewable Energy Development Agency (IREDA) bonds is now also eligible for section 54EC exemption
Such capital exemptions are available if and only if the following conditions are met:
- Individuals reinvest the proceeds into specified assets within six months of the asset's sale.
- Capital gains should not exceed the amount invested. If only a portion of the gains were reinvested, the capital gain exemption would apply only to the reinvested amount.
Exemption Under Section 54F: Capital Gains on the Sale of Any Asset Other Than a Home.
Exemption under Section 54F is available when capital gains are realized from the sale of a long-term asset, other than a home. To qualify for this exemption, you must invest the entire sale consideration, not just the capital gain, in purchasing a new residential house property. Purchase the new property either one year before or two years after the date of sale. You can also use the profits to fund the construction of a home. The construction, however, must be completed within three years of the date of sale.
Only one house property could be purchased or built from the sale consideration to claim this exemption. This exemption can be revoked if the new property is sold within three years of purchase. If you meet the conditions mentioned and invest the sale proceeds in the new house, the entire capital gain will be tax-free.
However, if you invest a portion of the sale proceeds, the capital gains exemption will be calculated as follows: Long-term Capital gains x Cost of new house /net consideration = capital gains x cost of new house /net consideration.
Exemption under Section 54D: Capital Gains on Transfer of Land and Building which is used for Industrial Undertaking
Section 54D of Income-tax Act provides exemption in respect of capital gain which arises during the compulsory acquisition of land or building forming part of an industrial undertaking. This exemption can be availed when there is a compulsory acquisition of land and buildings used for an industrial undertaking.
However this is available only once in a life time.
Amount of exemption = Lower of Capital Gain Or Cost of New Asset/ Deposit Amt
Amendment to Section 54 - Capital Gain Exemption
Revised Section 54
For individuals or Hindu Undivided Families (HUFs) selling a residential house property (Long Term Capital Asset), the exemption on capital gains will be limited to Rs. 10 crore.
Even if the new house purchased exceeds this limit, the maximum exemption allowed will be capped at Rs. 10 crore. For instance, if the capital gain is Rs. 18 crore and the individual buys a new house worth Rs. 18 crore, the exemption will be restricted to Rs. 10 crore.
Revised Section 54F
Similarly, for individuals or HUFs selling a capital asset other than residential property (Long Term Capital Asset), the maximum exemption on capital gains will also be limited to Rs. 10 crore. Any investment exceeding this limit will not be considered for exemption. A provision is added to exclude the portion of net consideration exceeding Rs. 10 crore from the calculation of exemption under this section.
For example, if the consideration from selling a plot is Rs. 15 crore, with a capital gain of Rs. 8 crore, and the individual invests Rs. 12 crore in a new residential house, the exempted gain will be calculated as Rs. 8 * 10/15 = Rs. 5.33 crore, and the taxable amount will be Rs. 8 - 5.33 crore = Rs. 2.67 crore.
These amendments also apply to the provisions related to Capital Gains Accounts Scheme (CGAS), ensuring that the maximum exemption allowed is restricted to Rs. 10 crore. These changes aim to streamline and regulate the exemption provisions under the capital gains head.
Capital Gain Account Scheme
Investing capital gains within the deadline to qualify for exemption can be challenging due to complexities in property acquisition. Recognizing this, the Income Tax Department offers the Capital Gains Account Scheme (CGAS). This scheme allows taxpayers to deposit their capital gains, even if they haven't yet identified an investment property, and claim exemption from capital gains tax on sale of assets when filing their return by July 31st.
How to File ITR for Capital Gains and Claim Exemptions
If you have any capital gains in the previous year, you must mandatorily file ITR. Capital gains/losses during the year have to be reported in ITR-2 or ITR-3. If your long-term capital gains do not exceed Rs.1.25 lakhs, you can also report them in ITR-1 and ITR-4. You can also claim the available exemptions while filing your ITR.
Guide to Download Capital Gain Statements from Brokers and Upload on Tax2win
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