Understand the capital gains tax in India from basic concepts to advanced exemptions
Vanshika verma | Apr 27, 2026 |
A Complete Guide to Capital Gains Tax in India
In India, when a person sells assets like shares, mutual funds, property, gold, or bonds for a profit, that profit is known as a capital gain. The government charges a tax on this profit, which is called the capital gains tax.
Let’s understand the term ‘capital gains’ in more detail:
Capital Gains Tax: It is the tax you pay on the profit you make when you sell something valuable. For example, if you buy a house, gold, or shares at a lower price and later sell them at a higher price, the extra money you earn is called a capital gain. The government taxes this profit.
Capital Assets: These are the valuable things you own, such as property, shares, mutual funds, gold, jewellery, or even certain rights like patents or trademarks. When you sell any of these and make a profit, that profit is taxed as capital gains.
You can think of “not capital assets” as items that are excluded from capital gains taxation. In simpler terms, these are things the law does not treat as investments for capital gain purposes. The following is on the list:
Business-related stock or materials: Items like stock-in-trade, raw materials, or consumables used in business
Personal-use items: Things meant for personal use, like clothes or household furniture, aren’t treated as capital assets.
Rural agricultural land in India: Land located in rural areas is excluded because it’s tied to agriculture, not investment activity.
Certain government gold bonds: Old gold bonds issued by the government (like 6½% Gold Bonds 1977, 7% Gold Bonds 1980, etc.) are specifically exempt.
Special Bearer Bonds (1991): These were issued under a special scheme and are not treated as capital assets.
Gold deposit-related certificates: Gold Deposit Bonds (1999) and certificates under Gold Monetisation Schemes (2015, 2019) are also excluded.
Capital assets are divided into short-term and long-term based on how long you hold them before selling.
Listed shares & equity mutual funds:
Other assets (property, gold, unlisted shares, etc.):
Capital gains are generally classified based on how long an asset is held. If held for a longer period, the gain is treated as long-term, and if held for a shorter period, it is treated as short-term.
However, there are certain exceptions where the holding period does not matter. In such cases, even if the asset is held for a long time, the gain is still treated as short-term. This mainly applies to assets like depreciable business assets, such as machinery or commercial buildings and market-linked debentures.
Capital gains tax depends on how long you hold an asset before selling it:
| Asset Type | Holding Period | Tax |
| Listed Equity Shares | Up to 12 months | 20% tax on profit |
| More than 12 months | 12.5% tax, but only after Rs 1.25 lakh profit is exempt | |
| Property | Up to 24 months | Tax as per your income slab |
| More than 24 months | 12.5% tax or 20% with indexation (adjusting for inflation) | |
| Debt Mutual Funds | Any period (after Apr 2023) | Tax as per your income slab |
An equity mutual fund invests at least 65% of its assets in equities. If you sell equity mutual fund units within a short period, the profit is called Short-Term Capital Gain (STCG) and is taxed at 20%. If you hold the investment for more than 12 months, the profit becomes Long-Term Capital Gain (LTCG) and is taxed at 12.5%, but only the gains above Rs 1.25 lakh in a financial year are taxed; gains up to that limit are exempt.
Capital gains tax can become quite high when you sell assets such as property, land, or investments. However, the Income Tax Act provides multiple exemptions under Sections 54 to 54F and 54EC, which can reduce or eliminate tax if certain conditions are met. The following are the exemptions:
1. Section 54: Exemption on Sale of House Property
If you sell a residential house and earn long-term capital gains, you can avoid tax if you reinvest in another house.
2. Section 54F: Exemption on Sale of Any Asset (Except House)
If you sell any long-term asset other than a house, you can claim an exemption by buying a house.
3. Section 54EC: Exemption by Investing in Bonds
You can save tax by investing capital gains into certain government-approved bonds. The following are the eligible bonds:
Investment must be made within 6 months of sale. Lock-in period is 5 years. Bonds cannot be sold for 5 years.
4. Section 54B: Sale of Agricultural Land
If you sell agricultural land and reinvest in another agricultural land, you can get an exemption.
5. Capital Gains Account Scheme (CGAS)
If you cannot invest before the tax return deadline. Deposit the capital gains in a Capital Gains Account in a PSU bank. This will allow you to still claim the exemption. If not used within the time limit, it becomes taxable in the year it expires.
Capital gains depend on how long you hold the asset.
Key Terms
1. Full Value of Consideration
2. Cost of Acquisition
3. Cost of Improvement
1. Begin with the full value of consideration
2. Deduct the following things:
3. From this resulting number, deduct exemptions provided under sections 54B/54D.
4. This amount is a short-term capital gain to be taxed
1. Start with the full value of consideration
2. Deduct the following:
3. From this resulting number, deduct exemptions provided under sections 54, 54D, 54EC, 54F and 54B.
A. Sale of house property
When you sell a house, you can subtract certain costs from the selling price before calculating profit (capital gains), such as the following:
B. Sale of shares
When you sell shares, you can deduct the following:
C. Sale of jewellery
When jewellery is sold:
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