Capital gains tax is an essential aspect of the financial landscape, impacting individuals and businesses alike. This is a tax that individuals or businesses must pay on the profit made from selling assets such as stocks, real estate, or bonds. This tax is applied to the difference between the purchase price and the selling price of an asset. It is crucial for investors and property owners to understand capital gains tax because it directly impacts their financial returns. In India, capital gains tax plays an essential role in regulating wealth transfer and encouraging long-term investments.
In this article, we will explore the types, exemptions, and calculation process of capital gains tax, along with strategies to reduce its impact.
What is capital gains tax?
Capital gains tax (CGT) is a tax imposed on the profit from the sale of an asset. The tax is calculated based on the difference between the selling price and the original purchase price of the asset. For instance, if you sell a stock for Rs. 1,000 that you initially bought for Rs. 800, the Rs. 200 profit is considered a capital gain, which may be taxed. This tax is an integral part of the Income Tax Act in India and applies to individuals, companies, and trusts.
This tax is an integral part of the Income Tax Act in India and applies to individuals, companies, and trusts.
Types of capital gains: Short-term vs. long-term
| Type of capital gain | Holding period | Tax rate |
| Short-term capital gain | Less than 24 months for real estate; less than 12 months for stocks and mutual funds | 30% for real estate; 15% for listed securities with STT |
| Long-term capital gain | More than 24 months for real estate; more than 12 months for stocks and mutual funds | 20% with indexation benefit (before July 23, 2024) or 12.5% without indexation (after July 23, 2024) |
Short-term capital gains (STCG) occur when an asset is sold within a short time of acquiring it, typically within one year for equities and three years for real estate. If a property is sold within this period, profits are taxed heavily, impacting net returns on home investment.
Long-term capital gains (LTCG) are applicable when the asset is held for a longer period. Holding property long-term can lead to lower tax liabilities, making it more favourable for home loan borrowers looking to maximize their investment.
Understanding the distinction between these two types of gains is crucial, as it determines the applicable tax rate.
Calculation of capital gains tax: Step-by-step guide
- Determine the purchase price of the asset (including any additional costs like broker fees or renovation expenses for property).
- Calculate the selling price of the asset.
- Find the difference between the selling price and the purchase price; this is your capital gain.
- Apply the relevant tax rate based on whether the gain is short-term or long-term.
- Deduct any exemptions that may apply (such as exemptions for residential property).
- Pay the applicable tax based on the computed capital gain.
By following these steps, you can determine your capital gains tax liability and ensure timely payment.
Exemptions under capital gains tax
In India, the Income Tax Act provides several exemptions on capital gains tax to help taxpayers reduce their liabilities when selling assets. These exemptions, applicable as of January 2025, cater to various asset types and investment conditions.
Under Section 54, individuals selling residential property can reinvest their capital gains in a new residential property to claim exemptions, provided the purchase is made within one year before or two years after the sale, or the construction is completed within three years. This exemption applies to gains up to Rs. 10 crore. Similarly, Section 54F allows exemptions on long-term assets (excluding residential property) if the entire sale proceeds are reinvested in a residential property within the specified time limits.
Recent updates in the Union Budget 2024 have increased the exemption limit for long-term capital gains to Rs. 1.25 lakh and shortened the holding period for real estate to qualify as long-term from 36 to 24 months. Taxpayers must ensure compliance with these conditions to maximise benefits and plan their finances efficiently.
Capital gains tax on different assets
| Asset type | Holding period | Short-term capital gain tax | Long-term capital gain tax |
| Listed equity shares | Less than 12 months | 20% | 12.5% on gains exceeding Rs. 1.25 lakh |
| Equity-oriented mutual funds | Less than 12 months | 20% | 12.5% on gains exceeding Rs. 1.25 lakh |
| Debt mutual funds | Less than 36 months | Taxed as per income slab | Taxed as per income slab |
| Real estate | Less than 24 months | Income tax slab rates | 12.5% without indexation benefits |
| Bonds and Unlisted Shares | Less than 24 months | Income tax slab rates | 12.5% without indexation benefits |
Each asset type has specific rules regarding capital gains tax. While the tax rates may vary, the fundamental principle remains the same: the longer you hold an asset, the lower your tax liability on capital gains.
Capital gains tax on real estate transactions
Real estate transactions often involve significant capital gains, and understanding how tax applies to these transactions is essential. In India, the capital gains tax on real estate depends on whether the asset was held for a short or long period.
If the property is sold within 24 months of purchase, the gain is considered short-term and taxed at the seller’s applicable income tax slab rate, making them more expensive.
If the property is held for more than 24 months, it qualifies for long-term capital gains tax and offers two taxation options: a 12.5% rate without indexation or a 20% rate with indexation, which adjusts the purchase price for inflation using the Cost Inflation Index (CII).
The 2024 Union Budget increased the LTCG exemption limit from Rs. 1 lakh to Rs. 1.25 lakh, providing additional relief for taxpayers. Exemptions are also available under Section 54, allowing reinvestment of gains into another residential property or agricultural land to reduce tax liability. Alternatively, gains can be reinvested in specified bonds under Section 54EC.
Capital gains tax filing process in India
1. File the Income Tax Return (ITR) online or offline, selecting the appropriate ITR form based on your source of income for the assessment year.
2. Fill in the necessary details, starting with general information in Part A (such as name, PAN, and address).
3. Report the sale of assets and the resulting capital gains in the capital gains section of the form. Specify the details of each asset sold, including the full value consideration, acquisition cost, and transfer expenses.
4. Provide details of the purchase and sale price and any exemptions claimed.
5. Pay the calculated tax through the online portal or through bank challan.
6. Verify your return electronically or by sending a signed hard copy to the CPC (Centralised Processing Centre).
By following these steps, individuals can ensure that they comply with tax laws and avoid penalties. Ensure you submit before the due date, which varies for audited and non-audited entities.
Strategies to Reduce Capital Gains Tax Liability
- Hold assets for the long term: This can reduce the tax rate from short-term to long-term.
- Reinvest gains in specified assets: Taking advantage of exemptions under sections like 54 can help avoid tax.
- Offset gains with losses: Use capital loss to set off capital gains and reduce tax liability.
- Use indexation benefit: For long-term assets like real estate, using the cost inflation index can lower taxable gains.
By employing these strategies, individuals can reduce their tax burden and enhance the returns on their investments.
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