Capital Gains Tax In India 2025: Rates, Exemptions And Planning Tips
Capital Gains Tax in India has come to play an integral role in financial planning, but first, investors need to understand what financial assets are. Financial investments are assets that provide investors with opportunities to grow their money.
However, investors must understand that all investments may not produce the same results. Some investments earn more income than gains, while others do the opposite. Thus, it is crucial to balance your portfolio through diversification.
You must be careful when investing and set clear financial goals. Defining your investment objectives allows you to align your investments and their returns. These returns may come either through income or gains.
Difference Between Gains And Income
An asset can produce revenue or income. When you invest, the returns can be earnings (interest) or growth (capital gains or dividends). Some assets offer both income and gains.
The following comparison of income and gains shows how they impact returns from your investments:
Particulars | Income | Gains |
Meaning | It is the extra amount of money earned over the regular principal of the investment. | It is the positive difference between the purchase and sale price of an investment. |
Frequency | It can be regular or irregular. As per the asset type and management’s discretion. | Only once, at the time of sale of the investment. |
Types | Interests, dividends, etc. | Short-term gain and long-term gain. |
Taxation | It is taxable for some assets under the head of ‘Income under other sources.’ However, the Income Tax Act, 1961, also provides some deductions. | It is taxed under the separate head of ‘income from capital gains.’ |
Market Volatility | Income is not adversely/directly affected by market volatility. It is as per the company’s decision. | Market volatility affects the selling price of the investment. It, in turn, affects the gains. |
Example | You receive INR 4,000 as dividend income from the fund in one year. This is considered regular income and therefore will be taxed (if applicable) under "Income from Other Sources." | After 2 years, you sell the mutual fund units for INR 130,000. Your capital gain = INR 130,000 - INR 100,000 = INR 30,000. This is a long-term capital gain (LTCG) and is taxed under "Income from Capital Gains." |
The Budget 2024 made some headlines with changes in capital gain taxes. It has some crucial announcements, which can affect the investment planning of investors. Let us understand these amendments in detail.
What Are Capital Gain Taxes?
Understanding capital gain taxes starts with the question of what capital assets are.
Capital assets can be understood with the help of certain characteristics such as orientation of the investment, income and gains attractiveness, marketability etc. There are several types of capital assets, such as house property, land, rights, patents, jewellery, market securities, paintings, etc.
Capital gain is the positive difference between the purchase and sale/transfer price of such capital assets. Capital gains is a taxable income, so assets acquired in the previous fiscal year qualify for taxation during the ongoing financial year.
The Income-tax Act, 1961, also lists certain assets which are not considered as capital asset under Section 2(14) as follows:
i) Stock-in-trade, consumable goods or raw materials for business purposes
ii) Personal effects - movable properties for personal use like clothes, paintings, etc.
iii) Agricultural land as per the jurisdiction of the municipal corporation.
iv) Specified gold bonds in the act1.
Classification Of Capital Gain Taxes
The capital gain taxes are classified based on the holding period of the concerned asset before its transfer or sale. In the Budget 2024, this classification was changed for some assets. Accordingly, gains from the transfer or sale of an asset can be classified as a short-term capital gain or a long-term capital gain.
1. Short-term Capital Gain
For listed assets like equity shares, the holding period has to be less than 12 months to be classified as a short-term capital gain2. This period is 24 months for assets like gold, bonds and debentures. For any other unlisted assets and immovable property (house, land, building, etc), this period is kept unchanged at 24 months. A short-term capital gain tax is applicable on the same.
2. Long-term Capital Gain
Gains from equity or equity-oriented funds having a holding period of more than 12 months are known as long-term capital gains. Gains from other assets with holding periods of more than 24 months are classified as long-term capital gains.
Capital gain tax classification of inherited assets is done by accounting for the period when the asset was held by its previous owner. These assets are inherited or received in a will or gift.
The holding period for assets like bonus shares transferred by the company to existing shareholders will be classified based on the date of allotment.
How Bonds And Debt Instruments Are Taxed
Bonds and debt instruments earn two types of income, which are interest and capital gains.
Tax on Bonds
Bonds earn interest income, such as corporate bonds, government securities, and tax-free bonds. The interest income will be from sources and taxed at month, theyate. Bonds listed that are sold after 12 months will get taxed at 10% on long-term capital gain (LTCG).
Unlisted bonds are sold, and after a holding period of over 36 months, they will have a flat rate of 20% and not be indexed as gains. Tax-free bonds have exempt interest income, but gains on sale are a taxable event.
Tax on Debt Instruments
Debt instruments such as non-convertible debentures (NCDs), treasury bills, and commercial papers will also earn interest, taxable at slab rates. Any gain realized on sale whereby maturity has occurred will be treated as capital gains.
If an instrument is held for less than 36 months, then the gain will be short-term capital gain and taxable at slab rates, or held for more than 36 months, will yield long-term capital gains taxed at 20% and no index. In 2023, there are currently issued new instruments that will not provide index features.
Capital Gain Tax Rates In India
As per the recent amendments in Budget 2024, the short-term and long-term capital gain taxes will be as follows:
Particulars | Short-Term Capital Gain (STCG) | Long-Term Capital Gain (LTCG) |
Listed equity or equity-oriented funds | 20% (on gains exceeding INR1 lakh) | 12.5% (no tax up to INR 1.25 lakhs) |
Unlisted equity and equity-oriented funds | Slab rate | 12.5% |
Listed debt assets | Slab rate | 12.5% |
Debt oriented funds (65%+ investment in debt) | Slab rate | Slab rate |
Other funds and assets | Slab rate | 12.5% |
Property | Slab rate | 20% with indexation 12.5% without indexation* |
Example | If you buy shares for INR 70,000 in Jan 2024 and sell for INR 90,000 in June 2024, the INR 20,000 gain is taxed at 20%, so you will pay INR 4,000 in tax. | If you sell mutual funds after 1 year with a INR 150,000 gain, INR 125,000 is exempt, so the remaining INR 25,000 is taxed at 12.5%, which will be INR 3,125 in tax. |
*Indexation refers to the technique of accounting for the effect of inflation. It determines the acquisition prices after considering the inflation index.
These changes were amended in the recent Finance Act, 2024. The rates are increased compared to the previous tax rates. The primary motive behind the increase in short-term capital gain taxes for equity and equity-oriented funds was to reduce volatility in the market. According to the government, the reduced tax is solely enjoyed by the high net worth individuals (HNIs).
How To Calculate Short-Term Capital Gains Taxes?
For example, an investor purchased listed equity shares worth INR 70,000/- in July 2023. However, assessing the market conditions, these shares were sold at INR 80,000/- in February 2024, within 12 months.
Thus, it will be considered a short-term capital gain of INR 10,000/-.
Tax liability on this short term capital gain = 10,000 * 20% = INR 2000/-
How To Calculate Long-Term Capital Gains Taxes?
An investor purchased listed equity shares worth INR 25,000/- in December 2022. However, he sold these shares in February 2024, at INR 40,000/-. This holding period is more than 12 months. In this situation, it will be considered a long-term capital gain of INR 15,000/-
However, long-term capital gains less than INR 1.25 lakhs are tax-exempted. So, the tax liability in this case would be nil.
Now, let us take another scenario:
An investor purchased some listed bonds of INR 5 lakhs in May 2020. However, she sold them in January 2024 at INR 8 lakhs. This holding period is more than 24 months.
In such a situation, it will be considered long-term capital gain of INR 3 lakhs.
This gain is more than the limit of INR 1.25 lakhs. So, tax liability in this case would be INR 3,750.
TDS And ITR Filing For Capital Gains
TDS may be deducted by the source fully in case you sell property or some asset, such as mutual funds. The buyer will deduct TDS of 1% in case of the sale of property over 50L. In the case of NRI property sales, the TDS is a greater rate of 20% (long-term) and 30% (short-term).
This will also be applicable to the case of mutual fund companies, where they will deduct TDS of 10% in the scenario of long-term capital gain applicable to an NRI.
You have to report the capital gains in our income tax returns each year, and most of the income tax payers will use ITR-2, and older people may use ITR-1 to report minor gains in equity.
The taxpayer will be obliged to report the purchase price, the sale price, the date transacted, and the holding period. Exemptions may also be claimed, i.e., those under section 54, etc., provided you are a qualified person. Such that when you are comparing your TDS to Form 26AS, you do not have mismatches or you receive tax notices.
Effect Of Increased Capital Gains
Investors are worried due to the change in tax rates. The increased taxes on equity and debt mutual funds can negatively impact the overall investor sentiment, as in recent years, mutual funds have become a preferred investment option.
Changes were also made regarding the term ‘Specified Mutual Fund’. Due to this, the tax rules on debt mutual funds were changed. The term now includes only the mutual funds that allocate more than 65% of its funds in debt and money market instruments. Moreover, the indexation benefit on debt mutual funds was removed.
Deductible Expenses
Investors can claim certain deductions from their capital gain which can potentially lower their tax liability.
1. House Property Sale: Deduct these expenses from the total sale price:
- Brokerage, commission or stamp paper cost.
- Travelling expenses for any transfer procedure.
- For inherited property- expense related to will, succession certificate, executor, etc. (in some cases)
2. Sale of Shares: Only the broker’s commission, no Security Transaction Tax (STT).
3. Sale of Jewellery: Cost of any broker’s service is deductible.
Indexation Removed
Indexation helps investors determine the effect of inflation on their purchase price. It is processed with the help of the Cost Inflation Index (CII) in India. The indexed cost of acquisition/improvement reduces the final gain amount for taxation purposes. In Budget 2024, this indexation benefit was removed for all the asset classes.
The inflation index is calculated with the help of CII. For example:
Purchase period = January 2022.
Sale period = March 2024
Purchasing year CII = 317
Sale year CII = 348
Inflation Index = Sale year CII/ Purchase year CII
Thus, inflation index = 1.09 (348/317)
Indexation and norm changes in debt mutual funds confused investors, and the question often asked was - How will this change in income tax rule affect the taxation of debt mutual funds?
Let us understand this with a brief hypothetical example:
Type of Investment | Balanced hybrid fund (40%-60% debt) |
Purchase date and price | January 1, 2022. INR 2 lakhs/- |
Sale date and price | March 1, 2024. INR 4.5 lakhs/- |
Indexed cost of acquisition (inflation index as calculated above) | INR 2 lakhs/- * 1.09 = INR 2.18 lakhs/- |
Holding period | 28 months - Long-term capital gain |
Long-term capital tax with indexation (before)
| INR 4.5 lakhs - INR 2.18 lakhs = INR 2.32 lakhs/- Tax exemption was INR 1 lakhs So, gain = 2.32 lakhs - 1 lakhs = 1.32 lakhs Tax liability = 1.32 lakhs * 20% = INR 26,400/- |
Tax without Indexation (After) | INR 4.5 lakhs - INR 2 lakhs = INR 2.5 lakhs/- Tax exemption was INR 1.25 lakhs So, gain = 2.5 lakhs - 1.25 lakhs = 1.25 lakhs Tax liability = 1.25 lakhs * 12.5% = INR 15,625/- |
Similarly, indexation benefit removal affected the immovable properties as indexed costs reduce significant gains for taxation. However, after discussions in the Lok Sabha, amendments were made to provide an option to pay with long-term capital gain with or without indexation as per old and new tax rates.
Let us understand it with this example:
Purchase Date and Price | January 1, 2022. INR 60 lakhs/- |
Indexed cost of acquisition (inflation index as calculated above) | INR 60 lakhs/- * 1.09 = INR 65.4 lakhs/-
|
Sale date and price | March 1, 2024. INR 70 lakhs/- |
Holding period | 28 months - Long-term capital gain |
Tax with indexation (before) Long-term capital tax | INR 70 lakhs - INR 65.4 lakhs = INR 4.6 lakhs/- Tax exemption was INR 1 lakhs Taxable Gain = INR 4.6 lakhs - 1 lakhs = INR 3.6 lakhs/- INR 3.6 lakhs * 20% = INR 72,000/- |
Tax without Indexation (After) | INR 70 lakhs - INR 60 lakhs = INR 10 lakhs/- Tax exemption was INR 1.25 lakhs Taxable Gain = INR 10 lakhs - 1.25 lakhs = INR 8.75 lakhs/- INR 8.75 lakhs * 12.5% = INR 1.09 lakhs/- |
There has been a substantial increase in the tax liability after the indexation effect when it comes to property as an investment option. An investor must therefore thoroughly evaluate before choosing between the new and old schemes.
Property investors can also claim exemption benefits on capital gains tax payments. Some exemptions are as follows:
1. Section 54: Exemption on sale of house property on purchase of another house property (Exemption up to INR 2 crore capital gain)3
2. Section 54B: Exemption on capital gains from transfer of land used for agricultural purposes. (It can help in saving taxes upon the sale of an agricultural land.)
3. Section 54D: Capital gains on the transfer of land and building used for the industrial undertaking.
4. Section 54F: Exemption on capital gains on the sale of any asset other than a house property (These gains can be from any property other than one for residential purposes).
5. Section 54EC: Exemption on sale of house property upon reinvesting in specific bonds. (Provided this investment is less than INR 50 lakhs)4
When Can You Invest In A Capital Gain Account Scheme?
Capital gain account scheme, 1988 helps investors claim exemptions on capital gains on a property. Under the scheme, investors can deposit their gains from agricultural land in the capital gain account scheme to avail exemption benefits. The account should be opened before filing the income tax return.
Smart Tax Planning Strategies For Investors
The following are the tips to conduct smart tax planning to enable you to save on taxes in terms of capital gains and gain true compliance:
1. Tax-Loss Harvesting
One can sell investments in a loss-making state to counter the profits accrued on other capital gains. This will save you some amount of tax that you would be paying in the same financial year. Both the long-term and short-term gains may be reduced by short-term losses. Hence, this approach can be best applied at the end of the year in the portfolio review.
2. Exemptions Utilization
Section 54 saves the tax on the gain of property by reinvestment in another residential property. Alternatively, invest in a 54EC bond up to Rs 50 lakh within 6 months of the sale. One can enjoy the long-term capital gain tax fully or partially through these investments. This suits the real estate investors who are willing to put their taxes on hold illegally.
3. Match Sales to Financial Year
You can allow a 1.25 lakh LTCG exception in the current year by selling prior to March 31. You may buy the same investment back after April 1, so your holding period would start anew. This is also commonly referred to as tax-gain harvesting. It allows you to secure gains tax-free up to the limit that is set yearly.
4. Prefer Long-Term
Longer-held assets are taxed at a lower rate of long-term capital gains. Give more than 12 months to get equity and more than 24-36 months to own property/bonds. Higher slab/flat rates that are up to 30% will be charged on short-term gains. Waiting out an extra couple of months can save you a considerable sum in taxes.
Conclusion
Understanding capital gains tax in India for 2025 is essential for smarter investment planning. The Budget 2024 introduced major changes such as removal of indexation benefits for most assets and a revised taxation regime for property gains, making your choice between flat tax rates and indexed taxation more critical than ever.
By using exemptions under Sections 54 and 54EC, planning your holding period, selling assets in the right financial year, and applying tax saving strategies like tax loss harvesting, you can significantly reduce your short-term capital gains and long-term capital gains tax liability. NRIs should be mindful of TDS rules and the new provisions under the latest Income Tax Bill.
With a clear understanding of capital gains tax slabs, indexation rules, and available exemptions, you are better equipped to optimise your post-tax returns in 2025 and beyond.
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References:
1. The Income Tax Act, 1961 <https://tinyurl.com/incometaxact1>
2. Memorandum Explaining The Provisions In The Finance Bill, 2024 <https://tinyurl.com/thefinancebill>
3. The Income Tax Act, 1961<https://tinyurl.com/incometaxact1>
4. The Income Tax Act, 1961<https://tinyurl.com/incometaxact1>
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