If you earn an income in a financial year, such an income is subject to income tax. You might earn an income from a business, profession, employment, house property, etc. one such source of income that is recognized by the Income Tax Act, 1961 is capital gains. These gains are also taxed under the concept of capital gains tax in India. Let’s understand what capital gains and capital gains tax in India are all about.

What is capital gains tax in India?

When you own financial assets and you incur a profit when you sell such assets, the income that you get is called a capital gain from a tax perspective. This capital gain that you earn is chargeable to your taxable income under the heading ‘Income from Capital Gains’. The tax that you, then, pay on the capital gains that you have incurred, is called the capital gains tax. So, in simple terms, capital gains tax in India is the income tax that you pay on capital gains, i.e. gains earned from selling a capital asset.

What are capital assets?

To understand when a capital gains tax would be applicable, you need to understand the meaning of ‘capital assets’, i.e. assets whose sale would attract a capital gains tax. Capital assets are those that you own and from which you can earn an income. Some of the examples of capital assets include house property, jewellery, land and building, goodwill, trademark, patent, vehicle, equipment, investments, etc. The following, however, are excluded from the purview of capital assets –

  • Raw materials, stock of goods or consumables that are owned for the purpose of business or profession.
  • Special bearer bonds (the year 1991)
  • Agricultural land in a rural area. Rural area in this context would mean an area that is not under the jurisdiction of a cantonment board or municipality and which has a population of more than 10,000. Furthermore, it should not fall within the following distances –
  • Distance as viewed aerially

    The population as per the last census

    Within 2 kilometres from the local limit of a municipality or a cantonment board

    If the population of the cantonment board or municipality is between 10,001 and 99,999

    Within 6 kilometres from the local limit of a municipality or a cantonment board

    If the population of the cantonment board or municipality is between 1,00,001 and 9,99,999

    Within 8 kilometres from the local limit of a municipality or a cantonment board

    If the population of the cantonment board or municipality is more than 10 lakhs

  • Personal belongings like clothes, furniture, etc.
  • Gold deposit bonds or gold deposit certificates
  • 6.5% or 7% gold bonds or national defence gold bonds issued by the Indian Government

What are the different types of assets?

Capital gains in India can be of two types – long term and short term capital gains. Accordingly, the taxation is also long term and short term. The concept of long term and short term depends on the type of asset and for how long you hold on to it before selling. If you hold the asset for a long term, it becomes a long term capital asset and if it is for the short term it becomes a short term capital asset.

Here’s a look at how different assets are classified as long term and short term capital assets depending on their respective holding periods –

Type of asset

Holding period

Type of asset for taxation purposes – long term or short term

Immovable property like land, house property or building

Less than 24 months

Short term capital asset

24 months or above

Long term capital asset

Other assets 

Less than 36 months

Short term capital asset

More than 36 months

Long term capital asset

  • Equity or preference shares of a listed company
  • Zero-coupon bonds
  • Debentures, bonds, or other securities listed on a recognized stock exchange
  • Units of equity mutual funds
  • Units of UTI

Less than 12 months

Short term capital asset

More than 12 months

Long term capital asset

Gains earned from the sale of short term capital assets are taxed as short term capital gains and those from long term capital assets are taxed as long term capital gains.

Rate applicable for tax on capital gains

Long term and short term capital gains in India are taxed differently. The tax rate depends on the type of asset and the conditions applicable on sale. Here are the applicable rates of tax on capital gains –

Type of gain

Rate of tax

Short term capital gains when Securities Transaction Tax is not applicable 

The gains are clubbed with your income and taxed at your slab rate

Short term capital gains when Securities Transaction Tax is applicable

15%

Long term capital gains on equity shares or equity mutual funds

10% if returns exceed INR 1 lakh

Long term capital gains on other assets

20%

Taxation on equity and debt mutual funds

In the case of equity and debt funds, understanding taxation is important. Though the above table shows the tax rates, let’s understand the taxation more clearly –

  • Equity mutual funds

    Mutual funds which have at least 65% exposure in equity are called equity mutual funds and are taxed as follows –

    Period of holding 

    Tax rate

    Less than 12 months

    15%

    12 months or more

    Tax-free up to INR 1 lakh. Excess returns are taxed at 10%

  • Debt mutual funds

    Mutual funds which don’t have 65% equity exposure in their portfolio qualify as debt mutual funds. Such funds are taxed as follows –

    Period of holding 

    Tax rate

    Less than 36 months

    Taxed at your slab rate

    36 months or more

    Taxed at 20% with indexation 

How to compute tax on capital gains – both long term and short term?

Before calculating the tax on capital gains, there are some aspects of calculation that you should know about. These aspects are as follows –

  • Full value of consideration 

    The amount of money received when you transfer the capital asset to another individual is called the full value of consideration.

  • Cost of acquisition 

    The cost incurred when you buy the capital asset.

  • Cost of improvement 

    Expenses are incurred when you make any alterations or modifications to the asset to improve it. Moreover, if you buy the asset from the previous owner and the previous owner incurred any alteration cost, such cost would also be included in the cost of improvement of the asset.

    Now that you know these concepts, let’s understand how capital gains in India are computed –

  • Calculation of short term capital gains

    To calculate the short term capital gain, the formula is as follows –

    Full value of consideration – (cost of acquisition + cost of improvement + expenses incurred on transferring or selling the asset)

    For example, say you have a house property which you bought for INR 50 lakhs. You incurred INR 2 lakhs on improving the property and then you sold the property at INR 75 lakhs. The brokerage paid on the sale was INR 1 lakh.

    In this case, short term capital gain would be calculated as follows –

    75 lakhs – (50 lakhs + 2 lakhs + 1 lakh)

    = INR 22 lakhs

  • Calculation of long term capital gains

    Long term capital gains are calculated using the following formula –

    Full value of consideration – (indexed cost of acquisition + indexed cost of improvement + expenses incurred on transferring or selling the asset)

    Furthermore, if you are eligible to claim tax exemption under Sections 54, 54B, 54EC and 54F, the exemption should be deducted from the amount to compute the taxable value of long term capital gain.

The concept of indexation

Long term capital gains give you the benefit of indexation wherein you can adjust the purchase price and the cost of improvement with the applicable inflation rate of the economy. This enhances the costs incurred on the assets and reduces the gain amount thereby reducing your tax liability. The indexation is calculated using the following formula –

Indexed cost = actual cost * CII of the year of sale of the asset/ CII in the year of purchase of the asset

CII means the Cost Inflation Index which shows the inflated rates and is published every year by the Government. Moreover, the financial year 2001-02 is taken as the base year and if you acquired an asset before 2001-02, the CII of 2001-02 would be considered for calculating the indexed cost.

Using the capital gains tax calculator

Rather than doing the mathematical calculations yourself, you can use the capital gains tax calculator for calculating the capital gains that you have incurred and the tax liability on the same. The calculator is an online tool wherein you need to provide the following details –

  • The type of asset
  • Cost of acquisition
  • Cost of improvement, if any
  • The expenses incurred on transfer of the asset
  • Date of purchase
  • Date of sale
  • Your tax slab rate, etc.

The calculator would, then, calculate the capital gains in India, both short term and long term, and also help you calculate your tax liability. 

Capital gains tax in India on property

Property is one of the most common capital assets that is transferred by taxpayers to earn again. The capital gain on the transfer of property can be long term or short term in nature depending on the holding period. Long term capital gains give you the benefit of indexation which reduces the tax liability.

Moreover, you can claim exemptions on the capital gains earned from the transfer of property. Section 54 of the Income Tax Act, 1961 and its sub-sections allow exemptions depending on the usage of the capital gains that you earn from the transfer of property. These exemptions are explained in detail below.

Exemption on tax on capital gains

The capital gains that you earn from the sale of an asset are allowed as a tax exemption if you fulfil some criteria. Moreover, the gain earned from the transfer or sale of agricultural land in rural areas is not taxed in your hands since agricultural land in such areas does not constitute an asset. For other types of assets, the capital gains that you earn can be claimed as an exemption under the following sections of the Income Tax Act, 1961 –

  • Section 54
  • Section 54B
  • Section 54EC
  • Section 54F

Let’s have a look at the exemptions offered by each of these sections in detail.

Exemption available under Section 54

Exemption under Section 54 is available if the capital gains earned from selling a house property are invested into buying or constructing another house property. You can claim exemption on investing or constructing two house properties. Some of the conditions of the exemption are as follows –

  • You can avail of this exemption once in your life.
  • The capital gains should not exceed INR 2 crores
  • If the cost of the house property is higher than the capital gain, the exemption would be allowed only on the capital gain invested into the property
  • The new property should be bought either 1 year before or 2 years after the property is sold
  • In the case of construction, the construction should be completed within 3 years from the sale of the property
  • The new property should not be transferred within 3 years of purchase or completion of construction

Exemption available under Section 54B

If you sell or transfer land used for agricultural purposes, the capital gains earned can be claimed as an exemption under Section 54B. The conditions for claiming exemption under this section are as follows –

  • An individual, his parents or a Hindu Undivided Family can claim the exemption
  • The land should be used for agricultural purposes for at least 2 years before the sale
  • The amount of exemption would be the capital gain incurred or the amount invested in the new asset, whichever is lower.
  • A new agricultural land should be purchased with the sale proceeds within 2 years of sale
  • The land acquired should not be sold for at least 3 years from the date of sale
  • If you are unable to invest the sale proceeds in agricultural land, you should deposit the amount in the capital gains deposit account in a public sector bank or IDBI Bank

The exemption is available under Section 54F

 If you sell any other asset besides a house property, the capital gains from the sale of such assets can be exempted if you invest the proceeds into another house property. The conditions for exemption are as follows –

  • The entire sale proceeds should be invested in the property, not only the capital gains
  • The new property should be purchased either a year before or within 2 years from the date of sale of the asset
  • If you invest the proceeds in construction, the construction should be completed within 3 years
  • The property bought or constructed should not be sold within 3 years
  • If only a portion of the sale proceeds is invested in the house property, the capital gains exempted would be calculated as follows –

Exempted value = capital gains * cost of acquisition / net consideration

Exemption available under Section 54EC

Exemption under this section is available if you invest the capital gains earned from the property and reinvested into specified bonds. These bonds are as follows –

  • Bonds issued by the National Highway Authority of India (NHAI) up to INR 50 lakhs
  • Bonds issued by Rural Electrification Corporation (REC) up to INR 50 lakhs

You cannot redeem the bonds within 5 years. Moreover, to invest in the bonds, you have a time of 6 months or the tax filing deadline, whichever is earlier. 

Tax on capital gains on the sale of agricultural land

In the case of agricultural land, you can claim exemption from capital gains tax on the capital gains earned from the sale of the land. To claim the exemption, the following conditions should be met –

  • If the agricultural land is located in a rural area, the exemption is allowed on the capital gains earned on such a sale.
  • If you buy and sell agricultural land as a part of business activities, you don’t incur capital gains tax. The gains earned from the sale of such land would be taxed under the head ‘Income from business or profession’.
  • If you receive compensation from the compulsory acquisition of urban agricultural land, the capital gains on such compensation are exempt from tax under Section 10(37) of the Act.
  • In other cases, exemption on agricultural land is allowed under Section 54B

Alternative methods to save taxes

There are other ways of saving tax on the income that you earn in a financial year, including capital gains. These methods include the following –

  • Section 80C of the Income Tax Act, 1961 allows an exemption for investments made towards life insurance premiums, ELSS schemes, PPF, EPF, NSC, NPS, SCSS, SSY, etc. Moreover, if you pay tuition fees towards children’s education or home loan repayment, the same would also qualify for deduction under this section. The limit of deduction is INR 1.5 lakhs.
  • Section 80CCD (1B) allows an additional deduction of INR 50,000 if you invest in the NPS scheme for retirement planning.
  • Section 80D allows deduction of up to INR 25,000 for health insurance premiums. In the case of senior citizens, the deduction is INR 50,000. You can claim an additional deduction of INR 50,000 for premiums paid for senior citizen parents.
  • The interest income from a savings account is also allowed as a deduction up to INR 10,000 under Section 80TTB.
  • If you pay a home loan, the interest paid is allowed as an exemption under Section 24(b) up to INR 2 lakhs.

So, understand how capital gains are calculated and how they are taxed so that you can plan your taxes accordingly.


FAQ’s

In the case of house property, costs incurred on brokerage, stamp duty, commission, in the case of inheritance, the cost incurred in inheriting the property, cost of travelling, if any, would be included in the expense associated with the sale of assets. In the case of the sale of shares, the cost of brokerage would be allowed.


Yes, short term capital loss can be set off against either a short term capital gain or long term capital gain. Long term capital loss, however, can be set off only against long term capital gain.


Yes, for any capital gains earned in India, NRIs are also taxed on the income that they earn.