Every time you sell a property, equity share, mutual fund, or gold and walk away with a profit, the Income Tax Department wants a share of that gain. That's capital gains tax in India — and if you're not tracking it, you could be paying more than necessary or filing incorrectly.
The good news: the rules are structured and the exemptions are generous — if you know how to use them. This article covers every angle of capital gains taxation: what qualifies as a capital asset, how holding periods determine your tax rate, what Budget 2024 changed, what Budget 2026 has now added, how to calculate your actual liability with worked examples, and which exemption sections can legally bring your tax bill down to zero.
Capital gains tax is the tax levied on profits earned from selling or transferring capital assets. Under the Income Tax Act, these gains are taxable in the financial year the asset is sold — not when the money is received.
Capital assets include a wide range: land, buildings, house property, vehicles, machinery, jewellery, patents, trademarks, leasehold rights, shares in Indian companies, and associated rights like management or control. Both tangible and intangible property can qualify.
What Does NOT Count as a Capital Asset?
Not everything you own and sell attracts capital gains tax. The following are explicitly excluded:
If your asset falls into any of these categories, gains from its sale are not taxable as capital gains.
Whether your gain is short-term or long-term depends entirely on how long you held the asset before selling it. That holding period directly determines your tax rate — so this classification matters a great deal.
Asset Type
Short-Term (STCG)
Long-Term (LTCG)
Listed equity shares, equity mutual funds, units of business trusts
≤ 12 months
> 12 months
Property, gold, unlisted shares, and other assets
≤ 24 months
> 24 months
Listed equity shares and equity-oriented mutual funds get a shorter threshold — just 12 months. Hold them longer and your gains qualify as long-term. Everything else — property, gold, unlisted shares — needs more than 24 months to qualify for long-term treatment.
The rate you pay depends on the asset type and whether the gain is short-term or long-term.
Holding Period
Tax Rate
Listed equity shares
≤ 12 months (STCG)
20%
> 12 months (LTCG)
12.5% (after Rs 1.25 lakh exemption)
Property
≤ 24 months (STCG)
Applicable slab rates
> 24 months (LTCG)
12.5% without indexation OR 20% with indexation
Debt mutual funds
Any period (purchased after Apr 2023)
Slab rates
Tax Rates on Equity and Debt Mutual Funds
Equity funds — those investing more than 65% of their portfolio in equities — and debt funds are taxed differently.
Fund Type
STCG
LTCG
Equity funds
12.5% (Rs 1.25 lakh exemption applies)
Debt funds
12.5%*
Important note on debt funds: Any debt mutual fund, market-linked debenture, or unlisted bond purchased on or after April 1, 2023, is always treated as short-term — regardless of how long you hold it. Gains are taxed at your applicable slab rate, not at LTCG rates.
Budget 2024 introduced the most significant restructuring of capital gains tax rates in recent years. Understanding these changes is essential because Budget 2026 kept them fully intact.
For equity and equity mutual funds:
For other assets (property, gold, unlisted shares):
This choice between the two methods only applies to individual and HUF taxpayers for real estate transactions where the transfer date falls after July 23, 2024.
Finance Minister Nirmala Sitharaman presented Budget 2026 on February 1, 2026. The core capital gains tax structure — LTCG at 12.5%, STCG at 20%, and the Rs 1.25 lakh annual exemption — was kept unchanged. Business Standard However, Budget 2026 introduced two significant changes that every investor needs to know.
1. Buyback Proceeds Now Taxed as Capital Gains
This is the most impactful capital gains change in Budget 2026. Budget 2026 reclassifies income from share buybacks as capital gains instead of dividend income. Buyback proceeds are now treated as capital gains for shareholders — for shares held over one year, LTCG is taxed at 12.5% with the Rs 1.25 lakh exemption; short-term gains remain taxable at 20%. Business Today
Why this matters: Previously, investors received the entire buyback amount and paid tax on it as dividend income at slab rates — which could go as high as 42.74% for high earners. They then had to claim a capital loss equal to acquisition cost. That created a messy, burdensome process particularly for long-term shareholders.
Now, you pay tax only on your net gain — the difference between the buyback price and your original purchase cost. That's a structurally fairer outcome.
The promoter carve-out: An extra buyback tax applies to promoters — 22% for domestic corporate shareholders and 30% for other promoters Business Today — specifically to prevent buybacks from being used as a tax arbitrage tool.
2. Sovereign Gold Bond (SGB) Tax Exemption — Now Restricted
This is the part most SGB investors haven't fully absorbed yet. Budget 2026 tightly restricts the capital gains exemption on SGBs. From April 1, 2026, only investors who subscribed to SGBs at the time of original issuance and held them continuously until maturity will be eligible for zero capital gains tax on redemption. Outlook Business
As per the Finance Bill 2026, the exemption will not apply if an investor has acquired SGBs through the secondary market. From FY 2026–27 onwards, only those investors who subscribed to SGBs at the time of original issuance and held them continuously until maturity will be eligible for capital gains tax exemption on redemption.
What this means for secondary buyers: Where the exemption is unavailable, long-term capital gains tax at 12.5% will apply — for example, a Rs 10 lakh gain would attract a tax of Rs 1.25 lakh, excluding surcharge and cess, potentially pushing the effective tax burden much higher. Outlook Business
The government's stated objective is to restrict the benefit to long-term original investors and prevent arbitrage opportunities that arose when investors bought SGBs at a premium in the secondary market purely to capture tax-free redemption gains.
3. New Income Tax Act 2025 — Capital Gains Sections Renumbered
From April 1, 2026, the Income Tax Act 2025 will come into effect, replacing the six-decade-old 1961 law. The new legislation is revenue neutral, with no changes to tax rates, and focuses on simplifying direct tax laws. Taxation of short-term and long-term capital gains is governed by Sections 196 and 198 under the new Act, replacing the familiar Section 111A and 112A. The underlying rates and rules remain the same — only the section numbers have changed.
Capital gains can create significant tax liability. The Income Tax Act provides structured exemptions that can reduce or eliminate this burden — provided specific conditions are met.
Section 54: Exemption on Sale of House Property
When you sell a residential house property and reinvest the long-term capital gains into buying or constructing another house, Section 54 provides an exemption.
Key conditions:
If capital gains exceed Rs 2 crore: Only one residential house can be purchased (within one year before or two years after sale) or constructed (within three years after sale).
Section 54F: Exemption on Gains from Any Asset Other Than a House
Section 54F applies when you sell a long-term capital asset that is not a house property and reinvest the proceeds into a residential house.
Key differences from Section 54:
Section 54EC: Exemption via Reinvestment in Specified Bonds
If you'd rather not buy another property, Section 54EC lets you reinvest capital gains from property sale into specified bonds.
Eligible bonds: National Highway Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC)
Section 54B: Exemption on Agricultural Land Transfer
Urban agricultural land used for farming — by an individual, their parents, or HUF — for at least two years before sale qualifies for exemption under Section 54B on both STCG and LTCG.
Conditions:
Section 54D: Exemption for Compulsorily Acquired Industrial Land or Building
This section applies specifically to industrial undertakings. If land or building used for industrial purposes is compulsorily acquired, the capital gains are exempt if reinvested in another land, building, or new industrial undertaking within three years.
Amount of exemption:
Capital Gains Account Scheme (CGAS)
Can't complete reinvestment before your ITR filing deadline of July 31 (for FY 2025-26)? The Capital Gains Account Scheme is your backup.
Deposit your uninvested capital gains in a PSU bank or approved bank under CGAS 1988 before filing. This amount qualifies as an exemption — no tax is payable on the deposited amount. If the money is not subsequently invested within the stipulated period, it gets treated as short-term capital gains in the year the specified period expires.
The calculation method differs between short-term and long-term gains. Here are the exact formulas.
Key Terms
Full value of consideration: The total amount received (or receivable) from the sale — taxable in the year of transfer even if payment hasn't arrived yet.
Cost of acquisition: The original purchase price of the asset.
Cost of improvement: Any capital expenditure spent on additions or alterations to the asset. Improvements made before April 1, 2001 are excluded from consideration.
Calculating Short-Term Capital Gains
STCG = Full Value of Consideration
– Transfer expenses (brokerage, etc.)
– Cost of acquisition
– Cost of improvement
– Exemptions under Section 54B / 54D
Calculating Long-Term Capital Gains
LTCG = Full Value of Consideration
– Transfer expenses
– Indexed cost of acquisition
– Indexed cost of improvement
– Exemptions under Sections 54, 54B, 54D, 54EC, 54F
Indexed Cost of Acquisition
Indexation adjusts your purchase cost for inflation using the Cost Inflation Index (CII), reducing your taxable gain:
Indexed cost of acquisition = Cost of acquisition × CII (year of transfer) ÷ CII (year of acquisition or FY 2001-02, whichever is later)
For assets acquired before April 1, 2001, use actual cost or Fair Market Value as on April 1, 2001 — whichever the taxpayer prefers.
Indexed cost of improvement = Cost of improvement × CII (year of transfer) ÷ CII (year of improvement)
Deductible Transfer Expenses
Note: Expenses deducted here cannot be claimed again under any other income head.
Mr. X sells his house on August 24, 2025 for Rs 50 lakh. He had purchased it on February 19, 2020 for Rs 25 lakh. As an individual selling after July 23, 2024, he can choose between 12.5% without indexation or 20% with indexation.
Particulars
12.5% Without Indexation
20% With Indexation
Sale Consideration
Rs 50,00,000
Cost of Acquisition
Rs 25,00,000
Rs 31,22,923 (indexed: 25L × 376 ÷ 301)
Long-Term Capital Gains
Rs 18,77,076
Tax Payable
Rs 3,12,500
Rs 3,75,415
In this case, the 12.5% option is more beneficial. However, for property purchased much earlier, indexation benefits grow larger — and the 20% option may work out better.
Mr. X sells listed equity shares on August 24, 2025 for Rs 50 lakh. Original purchase: February 19, 2020 for Rs 25 lakh.
Amount
Cost of Acquisition (no indexation available)
Long-Term Capital Gains u/s 112A
Less: Exemption u/s 112A
Rs 1,25,000
Taxable LTCG
Rs 23,75,000
LTCG Tax @ 12.5%
Rs 2,96,875
The Rs 1.25 lakh exemption applies regardless of whether the sale occurred before or after July 23, 2024.
Mr. Vinay invested Rs 10 lakh in a debt mutual fund in FY 2018-19. He sold it in FY 2025-26 for Rs 18 lakh — a gain of Rs 8 lakh.
Acquired Before 1 Apr 2023
Acquired After 1 Apr 2023
Sale Value
Rs 18,00,000
Cost
Rs 10,00,000
Indexed Cost
Rs 13,42,857 (10L × 376 ÷ 280)
Not applicable
Capital Gains
Rs 4,57,143
Rs 8,00,000
Rs 11,428 (20% on gains above Rs 4L basic exemption)
Rs 20,000 (at slab rate)
Assumes no other income; basic exemption of Rs 4 lakh (new regime) applied first.
Funds purchased before April 2023 benefit from indexation, significantly reducing the taxable gain. Funds purchased after April 2023 lose this advantage entirely — the entire gain is taxed at slab rates.
Mr. Y holds 1,000 shares in a company. He bought them at Rs 200 per share (total cost: Rs 2,00,000). The company announces a buyback at Rs 350 per share (total proceeds: Rs 3,50,000). Shares held for more than 12 months.
Old Treatment (Pre-Budget 2026)
New Treatment (Budget 2026)
Tax Head
Dividend Income
Taxable Amount
Rs 3,50,000 (full proceeds)
Rs 1,50,000 (net gain only)
Applicable Rate
Slab rate (up to 42.74%)
12.5% LTCG
Less: Exemption
None
Rs 1,25,000 (u/s 112A)
Effective Taxable Amount
Rs 3,50,000
Rs 25,000
Approximate Tax
Rs 1,49,590 (at 42.74%)
Rs 3,125
The difference is dramatic for long-term investors. Budget 2026's change makes buybacks significantly more tax-efficient for ordinary shareholders.
Agricultural land doesn't always attract capital gains tax. Here's how the rules work:
Fully exempt — not a capital asset: Agricultural land located in a rural area in India isn't classified as a capital asset. Gains from selling it are not taxed at all.
Taxed as business income: If you're regularly buying and selling agricultural land as part of a business, gains are taxed under "Business and Profession" — not as capital gains.
Section 10(37) exemption: Compensation received from compulsory acquisition of urban agricultural land is entirely exempt from capital gains tax.
If none of the above apply to your situation, Section 54B exemption is available — provided you reinvest in new agricultural land within two years.
Most people skip this — don't. The SGB tax exemption rules changed dramatically in Budget 2026 and the difference between two types of SGB investors is now enormous.
Investor Type
Tax Treatment After Budget 2026
Original subscriber (bought from RBI, held to maturity)
Zero capital gains tax on redemption
Secondary market buyer (bought from stock exchange)
12.5% LTCG applies on gains at maturity
SGB sold before maturity (any investor)
STCG at slab rate (< 12 months) or LTCG at 12.5% (> 12 months)
The practical impact: if you bought SGBs from the NSE/BSE and were counting on a tax-free maturity, that assumption is no longer valid from FY 2026-27 onwards. Secondary market SGB premiums are likely to compress as a result, since the tax advantage that supported those premiums no longer exists for exchange buyers.
No. Indexation is exclusively available for long-term capital assets. Its purpose is to account for inflation over extended holding periods. Short-term capital assets don't qualify for this adjustment, and the indexed cost formula applies only to LTCG calculations.
Yes. NRIs are required to pay capital gains tax on immovable properties sold in India, at the applicable rates — 12.5% LTCG or slab rates for STCG. The buyer must also deduct TDS before making payment to an NRI seller.
If the property is a short-term asset in the NRI's hands, TDS is deducted at the applicable slab rate on the capital gains. If it's a long-term asset, TDS is deducted at 12.5% — the standard LTCG rate.
Capital losses can only be set off against capital gains — not against salary, business income, or any other head. Short-term capital losses can be set off against both STCG and LTCG. Long-term capital losses can only be set off against LTCG. Any unabsorbed capital losses can be carried forward for up to eight assessment years.
Individual and HUF taxpayers have the option to choose between 12.5% without indexation or 20% with indexation, whichever results in a lower tax liability. This choice applies specifically to real estate transactions where the transfer date falls on or after July 23, 2024. Budget 2026 kept this dual-option framework unchanged.
The maximum that can be invested in specified bonds under Section 54EC is Rs 50 lakh per financial year. Eligible bonds include those issued by NHAI, REC, PFC, and IRFC. The lock-in is five years, and investment must happen within six months of the property sale — but before the ITR filing deadline.
Deposit the uninvested amount in a Capital Gains Account Scheme (CGAS) account with an authorised PSU bank before filing your return. The deposited amount is treated as an exemption — no tax is payable on it. If the money remains unspent after the specified investment period, it is taxed as short-term capital gains in the year the period expires.
Yes. The exemption available under both Section 54 and Section 54F is capped at Rs 10 crore. Any capital gains reinvested beyond this ceiling are taxable, regardless of the amount reinvested.
Budget 2026 reclassifies buyback proceeds as capital gains instead of dividend income. Shareholders now pay tax only on their net gain — buyback price minus acquisition cost — rather than on the full amount received. For shares held more than 12 months, LTCG at 12.5% applies with the Rs 1.25 lakh annual exemption. For shares held under 12 months, STCG at 20% applies. Promoters face an additional tax, resulting in effective rates of 22% for domestic corporate promoters and 30% for other promoters.
Only for original subscribers who bought directly from the RBI and held their bonds continuously until maturity. From FY 2026-27 onwards, investors who purchased SGBs from the secondary stock exchange market will pay 12.5% LTCG tax on gains at redemption — the blanket tax-free status for all SGB holders no longer applies.
Capital gains tax in India operates on a well-defined framework — holding period determines classification, classification determines rate, and a series of exemption sections give taxpayers real tools to reduce liability.
Four things to carry from this updated article: the Budget 2024 rate changes remain the baseline — STCG on equity is 20% and LTCG is 12.5%; property sellers after July 23, 2024 still have a genuine choice between indexation and flat rate, and calculating both before deciding is essential; Budget 2026's buyback change means ordinary shareholders now pay tax only on net gains — a meaningful improvement worth factoring into your investment decisions; and if you hold SGBs bought from the stock exchange, the tax-free maturity assumption is no longer valid from FY 2026-27.
If you have capital gains to report this assessment year, start by identifying your holding period, verify which exemptions apply to your asset type, and calculate your liability under both options where applicable. For complex cases — multiple assets, inherited property, buyback proceeds, or NRI status — consult a chartered accountant before filing.
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