Capital Gains Tax (CGT) is a tax imposed on the profit earned from the sale or transfer of a capital asset. In simpler terms, when an individual, company, or entity sells an asset - like property, stocks, mutual funds, or gold for more than its purchase price, the gain or profit is called a capital gain, and the government levies tax on this profit.
Key Features of Capital Gains Tax in India
1. Capital Asset:
A capital asset includes almost all types of property, whether movable or immovable, tangible or intangible. Common examples are:
Land or building
Shares and securities
Mutual fund units
Gold, silver, or other precious metals
Intellectual property like patents or copyrights
Certain assets, like stock-in-trade of a business or personal items under a specific limit, may be exempt.
2. Calculation of Capital Gain:
Capital gain is calculated as:
Capital Gain = Sale Price of Asset – (Cost of Acquisition + Expenses on Transfer)
Cost of Acquisition: The price paid to acquire the asset.
Expenses on Transfer: Any costs incurred to sell the asset, such as brokerage, legal fees, or registration charges.
3. Types of Capital Gains:
Capital gains are classified based on the holding period of the asset:
Short-Term Capital Gain (STCG): If the asset is held for a shorter period than prescribed under the Income Tax Act.
For listed shares and equity mutual funds: less than 12 months.
For immovable property: less than 24 months (recently revised to 24 months for properties acquired after April 1, 2017).
Long-Term Capital Gain (LTCG): If the asset is held longer than the threshold period.
4. Tax Rates:
The tax rates differ based on the type of asset and whether the gain is short-term or long-term.
STCG on equity shares or equity mutual funds: 15% (plus applicable cess)
LTCG on equity shares and equity mutual funds: 10% on gains exceeding ₹1 lakh in a financial year
STCG on other assets (like real estate): Added to income and taxed as per the individual’s slab rate
LTCG on other assets (like property, debt funds): 20% with indexation benefits (for inflation adjustment)
5. Exemptions and Deductions:
Certain exemptions are available under the Income Tax Act:
Section 54: Exemption on sale of residential property if reinvested in another residential property
Section 54EC: Exemption if LTCG is invested in specified bonds within 6 months of sale
Section 54F: Exemption on sale of any long-term capital asset (other than a residential house) if proceeds are invested in a residential house
Purpose of Capital Gains Tax
Revenue Generation: CGT is a significant source of income for the government.
Regulate Speculation: Taxing capital gains discourages excessive short-term speculation in markets like real estate or equity.
Promote Long-Term Investments: Lower LTCG rates encourage individuals and businesses to hold assets longer, supporting stable economic growth.
Example of Capital Gains
1. Example 1 – Sale of Property:
Mr. A buys a house for ₹50 lakh in 2015 and sells it for ₹80 lakh in 2025.
Sale Price: ₹80 lakh
Cost of Acquisition: ₹50 lakh
Expenses on Transfer: ₹2 lakh (legal fees, brokerage)
Capital Gain = 80 – (50 + 2) = ₹28 lakh
Since the property was held for more than 24 months, this is a long-term capital gain, and Mr. A may pay 20% LTCG with indexation or claim exemptions if reinvested as per Section 54.
2. Example 2 – Sale of Equity Shares:
Ms. B buys shares for ₹2 lakh and sells them within 6 months for ₹2.5 lakh.
Short-term capital gain = ₹50,000
Tax = 15% of ₹50,000 = ₹7,500 (plus cess)
Key Points to Remember
CGT applies only on profit, not on the total sale value.
Holding period determines whether the gain is short-term or long-term.
Exemptions and deductions can significantly reduce tax liability.
Capital gains can arise from any form of capital asset, including property, shares, bonds, and gold.
Indexation benefits for LTCG on non-equity assets adjust the cost of acquisition for inflation, reducing the taxable gain.
Dear client,
For understanding the concept of capital gains, it is important to understand the concept of capital assets and its sale attract capital gains tax. They are classified as short-term or long-term based on the holding period, and taxed differently. Long-Term Capital Gains tax rate is 12.5% and Short-Term Capital Gains tax rate is 20%.
Capital Gains Tax
Capital gains tax in India is the tax levied on profits earned from the sale of capital assets such as property, stocks, or mutual funds. As this gain is considered income the same is taxable in the year the asset is transferred. There are two types of capital gains based on the holding period of the assets:
Short-Term Capital Gains (STCG): This is with regard to the assets held for less than 12 months in case of equity shares, units of equity-oriented mutual funds, and units of business trust. In case of other assets, the holding period is 24 months.
Long-Term Capital Gains (LTCG): This is with regard to the assets held over 12 months in case of equity shares, units of equity-oriented mutual funds and units of business trust. In case of these assets, the holding period is 24 months.
Exceptions to Capital Asset
a. Any stock, consumables or raw material, held for the purpose of business or profession
b. Personal goods such as clothes and furniture held for personal use
c. Agricultural land in rural India
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by the Central Government
e. Special bearer bonds (1991)
f. Gold Deposit Bond issued under the Gold Deposit Scheme (1999) or deposit certificates issued under the Gold Monetization Scheme, 2015 and Gold
Classification of Capital Assets
1. STCA ( Short-Term Capital Asset )
An asset held for a period up to 24 months is a Short-Term Capital Asset. So, if the asset is sold within a period of 24 months of purchasing, then it would be called as a Short-Term Capital Asset.
Some assets are considered Short-Term Capital Assets when these are held for 12 months or less. These assets are:
a. Equity or preference shares in a company listed on a recognized stock exchange in India
b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
c. Units of equity oriented mutual fund, whether quoted or not
d. Zero coupon bonds, whether quoted or not
2. LTCA (Long-Term Capital Asset)
An asset held for more than 24 months is a long-term capital asset. If the asset is sold after a period of 24 months of purchasing, then it would be called as a Long-Term Capital Asset.
Capital assets such as land, building and house property shall be considered as Long-Term Capital Asset if the owner holds it for a period of 24 months or more. These include if held for 24 or more months
a. Equity shares in a company listed on a recognized stock exchange in India
b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
c. Units of equity oriented mutual fund
Capital gains tax is the tax which is applied on the profit on sale of capital assets such as land, building and stocks. It is applied only on the profit and not the total sale value.
I hope this answer was helpful. For any further queries please do not hesitate to contact us.
Dear client,
Capital Gains Tax is a tax levied under the Income-tax Act, 1961 on the profit or gain arising from the transfer of a capital asset by a taxpayer. A capital asset includes property of any kind, such as land, building, house property, shares, securities, mutual funds, jewellery, etc., whether or not connected with business or profession. The tax is attracted only when there is a transfer of the asset, which includes sale, exchange, relinquishment, or compulsory acquisition as defined under Section 2(47) of the Act.
For the purpose of taxation, capital gains are classified into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the period of holding of the asset. The rate of tax and available benefits depend on this classification. STCG is generally taxed at the applicable income tax slab rates, with certain exceptions such as STCG on equity shares or equity-oriented mutual funds being taxed at 15% under Section 111A. LTCG is usually taxed at 20% with indexation under Section 112, or at 10% without indexation under Section 112A for specified equity assets exceeding ₹1 lakh. The Act also provides exemptions and reliefs under Sections 54, 54F, 54EC, etc., subject to fulfillment of prescribed conditions.
I hope this answer was helpful. For further queries, please do not hesitate to contact us.
Thank you.
