Capital gains tax applies when you transfer a capital asset — property, equity, mutual funds, gold, jewellery, ESOP shares, business assets — and the sale price exceeds the indexed cost of acquisition. The classification (short-term vs long-term) and the asset class determine the tax rate, the surcharge, and the available exemptions. This guide explains the rules for FY 2025-26 (AY 2026-27) and walks through the most common computation scenarios.
What is a capital asset?
A capital asset is any property held by a person, whether or not connected with business. It includes:
- Immovable property — land, building, residential house, commercial property.
- Movable property — equity shares, mutual fund units, debentures, gold, silver, jewellery, paintings, art.
- Intangible assets — patents, trademarks, copyright, technical know-how, tenancy rights.
- ESOPs / sweat equity shares.
Excluded from "capital asset" are:
- Stock-in-trade (business inventory).
- Personal movable property like clothes and furniture.
- Agricultural land in rural India.
- Gold deposit bonds issued under the Gold Deposit Scheme, 1999.
- Special Bearer Bonds, 1991.
Short-term vs long-term — holding period
The classification depends on how long you held the asset before transferring it. The holding period differs by asset class.
| Asset | Short-term (STCG) | Long-term (LTCG) |
|---|---|---|
| Listed equity shares, equity-oriented MF units, business trust units | ≤ 12 months | > 12 months |
| Unlisted shares | ≤ 24 months | > 24 months |
| Immovable property (land, building, residential house) | ≤ 24 months | > 24 months |
| Gold, silver, jewellery, debt mutual funds, debentures | ≤ 24 months | > 24 months |
| All other assets | ≤ 24 months | > 24 months |
Tax rates for FY 2025-26
| Asset | STCG | LTCG |
|---|---|---|
| Listed equity / equity-oriented MF (STT paid) | 20% (Budget 2024) | 12.5% on gains above Rs 1.25 lakh (no indexation) |
| Unlisted shares, property, gold, others | Slab rate | 12.5% (no indexation) |
| Property (long-term, sold before 23 July 2024) | Slab rate | 20% with indexation |
From 23 July 2024 onwards (Budget 2024), the LTCG rate for most non-equity assets is 12.5% without indexation. Property acquired before 23 July 2024 and sold after 23 July 2024 has a one-time option: pay 20% with indexation, or 12.5% without — whichever is lower. The lower-tax option is the more common choice in most scenarios.
Surcharge and cess apply on top of the capital gains tax. LTCG on listed equity is exempt from surcharge up to Rs 25 lakh, and the 4% Health & Education Cess applies on the tax + surcharge.
How to compute capital gains
The basic formula is: Sale consideration – (Cost of acquisition + Cost of improvement + Transfer expenses) = Capital gain. For non-equity assets, the cost of acquisition and improvement are adjusted using the Cost Inflation Index (CII) notified by the CBDT. The base year for CII is 2001-02.
Example 1: Listed equity
You bought 1,000 shares of an NSE-listed company in January 2024 at Rs 600 each (total cost Rs 6,00,000) and sold them in March 2026 at Rs 1,200 each (total consideration Rs 12,00,000). The holding period is more than 12 months, so it is LTCG. STT was paid on both purchase and sale.
Gain = Rs 12,00,000 – Rs 6,00,000 = Rs 6,00,000. Exempt up to Rs 1.25 lakh; taxable LTCG = Rs 4,75,000. Tax @ 12.5% = Rs 59,375 + 4% cess = Rs 61,750.
Example 2: Property with indexation (acquired before 23 July 2024)
You bought a flat in 2015 for Rs 50 lakh (CII for 2015-16 = 254, for 2025-26 = 363). You sold it in 2026 for Rs 1.20 crore, paying Rs 2 lakh in broker's commission.
Indexed cost of acquisition = Rs 50,00,000 × (363 / 254) = Rs 71,45,669. Cost of transfer = Rs 2,00,000. Net consideration = Rs 1,18,00,000. Capital gain = Rs 1,18,00,000 – Rs 71,45,669 = Rs 46,54,331.
Tax at 20% with indexation = Rs 9,30,866 + 4% cess = Rs 9,68,101. (You can opt for 12.5% without indexation as the lower-tax option — re-compute and pick whichever is lower.)
Exemptions — Sections 54, 54F, 54EC
- Section 54 — sale of a residential house, purchase / construction of a new residential house within 2 years (purchase) or 3 years (construction). Exemption is proportional if the new house is cheaper; the unutilised portion can be deposited in a Capital Gains Account Scheme (CGAS) before filing the ITR, and withdrawn for the new house within 2 / 3 years.
- Section 54F — sale of any long-term capital asset (other than a residential house) and purchase of a new residential house. The exemption is the lower of (a) LTCG amount, and (b) the cost of the new house. If the new house costs less than the LTCG, only a proportionate exemption is available. Full investment of the net consideration is required for the full exemption.
- Section 54EC — sale of any long-term capital asset and investment in specified bonds (NHAI, REC, IRFC, PFC) within 6 months of sale, for a lock-in of 5 years. Maximum Rs 50 lakh per financial year across all bonds.
Set-off and carry-forward of losses
Capital losses can be set off against capital gains of the same or another category, in the order STCL → LTCG and LTCL → LTCG. Short-term losses can be set off against both short-term and long-term gains; long-term losses can be set off only against long-term gains. Unabsorbed losses can be carried forward for 8 years. Loss from sale of listed equity / equity-oriented MF is allowed only against listed-equity income; it cannot be set off against other income.
Planning tips
- Hold equity for at least 12 months to qualify for LTCG and the Rs 1.25 lakh exemption.
- For property, plan the purchase of the new house before the due date of filing the ITR — using the CGAS window is helpful when possession is delayed.
- Avoid the temptation to front-load profits into a single year — consider booking gains over multiple years to stay within the lower surcharge slabs.
- Use the lower-tax option (12.5% without indexation vs 20% with indexation) on property acquired before 23 July 2024 — run both numbers.
FAQ
Is LTCG on equity exempt up to Rs 1 lakh or Rs 1.25 lakh?
From FY 2024-25 onwards, the exemption is Rs 1.25 lakh per year.
What is the tax on inherited property?
Inherited property is deemed to be acquired on the date of the original acquisition by the previous owner, at the original cost. So if your father bought a house in 2000 for Rs 20 lakh and you sell it in 2026 for Rs 2 crore, the cost of acquisition is Rs 20 lakh (plus the father's CII-adjusted cost, if any).
Are gifts taxable as capital gains?
No. A gift from a relative (under Section 56) is not taxable in the hands of the recipient. The recipient takes the cost of the previous owner's acquisition as their own cost for future capital gains computation.
For a precise capital gains computation, talk to a CA at ABMCO or use our free Capital Gains Calculator.
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