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Capital gains arise when a taxpayer sells or transfers a capital asset such as land, building, shares, mutual funds, jewellery, bonds or other investment assets. The gain is taxable under the head “Capital Gains” if the transaction is covered by the Income-tax Act.
Capital gains are important because different assets have different holding periods, tax rates, exemptions and reporting requirements. Correct classification is necessary while filing the Income-tax Return.
What is a Capital Asset?
A capital asset generally means property of any kind held by a taxpayer, whether or not connected with business or profession. Examples include:
- Land and building
- Residential house property
- Listed or unlisted shares
- Equity mutual funds and debt mutual funds
- Bonds, debentures and government securities
- Jewellery, artwork and similar valuable assets
- Business rights, patents, trademarks and other intangible assets
Important: Not every property is treated as a capital asset. Stock-in-trade, certain personal effects and rural agricultural land in India are generally excluded, subject to conditions.
When is Capital Gain Taxable?
Capital gain is generally taxable when there is a transfer of a capital asset. Transfer includes sale, exchange, relinquishment, compulsory acquisition, conversion into stock-in-trade and certain transactions involving immovable property.
The basic formula is:
| Full value of sale consideration | Sale value or deemed sale value, as applicable |
| Less: Transfer expenses | Brokerage, commission, legal charges, etc. |
| Less: Cost of acquisition | Purchase cost or eligible substituted cost |
| Less: Cost of improvement | Capital improvement cost, if eligible |
| Less: Eligible exemption | For example, sections 54, 54B, 54EC or 54F |
| Taxable capital gain | Amount chargeable to tax |
Short-Term and Long-Term Capital Gains
Capital gains are classified as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) based on the holding period of the asset.
Holding Period for Transfers on or after 23 July 2024
| Asset type | Long-term if held for more than |
| Listed equity shares | 12 months |
| Units of equity-oriented mutual funds | 12 months |
| Units of business trust | 12 months if listed; 24 months if unlisted |
| Unlisted shares | 24 months |
| Land or building | 24 months |
| Other capital assets | 24 months, subject to specific exceptions |
Check before filing: Depreciable assets, market-linked debentures, specified mutual funds, unlisted bonds and unlisted debentures may be treated as short-term capital assets irrespective of the holding period.
Tax Rates on Capital Gains for AY 2026-27
| Type of capital gain | Applicable rate | Key condition |
| STCG under section 111A | 20% | STT-paid listed equity shares, equity-oriented mutual funds or business trust units transferred on or after 23 July 2024 |
| Other STCG | Normal slab rate | Where special capital gain rate is not applicable |
| LTCG under section 112A | 12.5% on gains exceeding ₹1,25,000 | STT-paid listed equity shares, equity-oriented mutual funds or business trust units |
| Other LTCG under section 112 | Generally 12.5% | For transfers on or after 23 July 2024, generally without indexation |
Health and Education Cess and surcharge, wherever applicable, are added separately.
Indexation Rules after 23 July 2024
Indexation adjusts the cost of acquisition and improvement for inflation. However, for long-term capital assets transferred on or after 23 July 2024, indexation has generally been removed.
Exception for land and building: Resident individuals and HUFs selling land or building acquired before 23 July 2024 can compare tax under the new rule of 12.5% without indexation with tax under the old rule of 20% with indexation. If the old indexed method gives a lower tax, the excess tax under the new method is ignored.
Example: Indexation Relief for Land
Mr. A, a resident individual, purchased land before 23 July 2024. He sells it during FY 2025-26.
| Sale value | ₹60,00,000 |
| Cost / eligible base cost | ₹10,00,000 |
| Indexed cost using CII 2025-26 of 376 and base CII 2001-02 of 100 | ₹37,60,000 |
| LTCG under old indexed method | ₹22,40,000 |
| Tax at 20% under old method | ₹4,48,000 before cess and surcharge |
| Tax under new method: ₹50,00,000 × 12.5% | ₹6,25,000 before cess and surcharge |
In this case, the old indexed method gives a lower tax. Therefore, the excess tax under the new method may be ignored, subject to eligibility and correct reporting.
Example: LTCG on Listed Equity Shares
Suppose a taxpayer sells listed equity shares after holding them for more than 12 months and earns a long-term capital gain of ₹2,00,000. If section 112A applies:
| Total LTCG | ₹2,00,000 |
| Less: Threshold under section 112A | ₹1,25,000 |
| Taxable LTCG | ₹75,000 |
| Tax at 12.5% | ₹9,375 before cess and surcharge |
Common Capital Gain Exemptions
The Income-tax Act allows exemption from capital gains if the taxpayer reinvests the capital gain or sale consideration in specified assets within the prescribed time. Conditions differ for each section.
| Section | Applies to | Investment required | Key condition |
| Section 54 | Individual or HUF selling a long-term residential house | Purchase or construction of another residential house in India | Generally purchase within 1 year before or 2 years after sale, or construct within 3 years after sale |
| Section 54B | Individual or HUF selling eligible agricultural land | Purchase of another agricultural land | New agricultural land should generally be purchased within 2 years |
| Section 54EC | Long-term capital gain from land or building | Specified bonds such as NHAI/REC or notified bonds | Investment within 6 months; exemption limit ₹50 lakh; bonds generally have a 5-year lock-in |
| Section 54F | Individual or HUF selling any long-term capital asset other than a residential house | Investment of net consideration in a residential house in India | Taxpayer should satisfy ownership and reinvestment conditions |
Capital Gains Account Scheme: If the reinvestment is not completed before the due date of filing the return, eligible taxpayers may need to deposit the unutilised amount in the Capital Gains Account Scheme to preserve the exemption claim.
Set-off and Carry Forward of Capital Loss
Capital loss cannot be set off against salary, house property income, business income or income from other sources. It can be adjusted only against capital gains.
| Type of loss | Set-off allowed against | Carry forward |
| Short-term capital loss | Short-term or long-term capital gains | Up to 8 assessment years, subject to return-filing conditions |
| Long-term capital loss | Long-term capital gains only | Up to 8 assessment years, subject to return-filing conditions |
Important filing point: If you want to carry forward capital loss, file the Income-tax Return within the due date under section 139(1). A belated return may restrict carry-forward of such loss.
Which ITR Form is Used for Capital Gains?
For individuals and HUFs, capital gains are generally reported in:
- ITR-2: For individuals/HUFs having capital gains but no business or professional income.
- ITR-3: For individuals/HUFs having business or professional income along with capital gains.
- ITR-4: Generally not suitable where the taxpayer has short-term capital gains or long-term capital gains under section 112A exceeding ₹1,25,000.
Documents Needed for Reporting Capital Gains
- Broker capital gain statement
- Mutual fund capital gain statement
- Contract notes for purchase and sale of shares
- Property sale deed and purchase deed
- Stamp duty value details, if property is sold
- Cost of improvement proofs
- Valuation report, if applicable
- Proof of reinvestment for exemption claims
- Capital Gains Account Scheme deposit proof, if applicable
Common Mistakes to Avoid
- Treating all equity long-term gains as exempt
- Using old 15% STCG rate for section 111A transactions after 23 July 2024
- Applying indexation to all long-term capital assets after 23 July 2024
- Ignoring the ₹1,25,000 threshold under section 112A
- Not reporting capital gains because TDS was not deducted
- Using ITR-1 where capital gain schedules are required
- Claiming exemption under sections 54/54EC/54F without checking conditions
- Missing capital loss carry-forward due to late return filing
How Capital Gains are Reported in myITreturn
In myITreturn, taxpayers can report capital gains by entering the details of sale, purchase, expenses, improvement cost and eligible exemptions. Depending on the asset type, the platform may ask for details such as ISIN, date of purchase, date of sale, sale consideration, cost and exemption claim.
For capital gains from property, keep the sale deed, purchase deed, stamp duty value and reinvestment proofs ready. For listed shares and mutual funds, keep the broker or mutual fund capital gain statement ready before filing.
Conclusion
Capital gains taxation depends on the type of asset, holding period, date of transfer, applicable tax rate, indexation eligibility and exemption conditions. The rules changed significantly for transfers on or after 23 July 2024, so taxpayers should avoid relying on older rates and older indexation examples while filing returns for AY 2026-27.
Before filing, verify whether the gain is short-term or long-term, whether a special tax rate applies, whether any exemption is available, and whether the correct ITR form is being used.
FAQs
1. Are long-term capital gains on listed shares fully exempt?
No. Long-term capital gains covered by section 112A are taxable at 12.5% on gains exceeding ₹1,25,000 for transfers on or after 23 July 2024, subject to conditions.
2. What is the tax rate on short-term capital gains from listed equity shares?
If section 111A applies and the transfer is on or after 23 July 2024, the applicable rate is 20%, plus cess and surcharge wherever applicable.
3. Is indexation available on sale of property?
For transfers on or after 23 July 2024, indexation is generally removed. However, resident individuals and HUFs selling land or building acquired before 23 July 2024 may get grandfathering relief by comparing tax under the old indexed method and new 12.5% method.
4. Can capital loss be set off against salary income?
No. Capital loss cannot be set off against salary income or other heads of income. It can be set off only against capital gains, subject to the rules for short-term and long-term capital loss.
5. Which ITR should I use if I have capital gains?
Individuals and HUFs generally use ITR-2 if they do not have business or professional income. If they also have business or professional income, ITR-3 is generally applicable.
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