Capital gains tax in India

Capital gains tax in India is the levy imposed on the profit arising from the transfer of a capital asset, governed principally by Chapter IV-E (Sections 45 to 55A) of the Income Tax Act, 1961. The tax applies to a broad spectrum of asset classes including listed equity shares, mutual fund units, debt instruments, unlisted shares, immovable property, bullion, and other capital assets, with rates and holding-period thresholds varying by asset class and by the period of holding. The regime has been substantially restructured by the Finance (No. 2) Act, 2024, which standardised the long-term capital gains (LTCG) rate at 12.5 per cent across asset classes, raised the LTCG exemption for listed equity and equity-oriented mutual funds from Rs 1 lakh to Rs 1.25 lakh, abolished indexation for most asset classes, and rationalised the holding-period thresholds.

The Indian capital gains framework distinguishes between short-term capital gains (STCG) and long-term capital gains (LTCG), with the threshold depending on the asset class. Listed equity shares and units of equity-oriented mutual funds are long-term if held for more than 12 months; unlisted securities, immovable property, and most other assets become long-term after 24 months; bonds and debentures generally after 36 months. The principal operative provisions are Section 112A (LTCG on listed equity and equity MF, subject to Securities Transaction Tax (STT)), Section 111A (STCG on the same), Section 112 (LTCG on most other assets), Section 50AA (the post-1-April-2023 “specified mutual fund” regime that abolished indexation for debt MF and certain other categories), and Section 50C and 50CA (deemed full-value-of-consideration rules for real estate and unlisted securities).

The Indian capital gains regime has undergone several major structural changes since the original 1961 Act. The 2004 introduction of Section 10(38) (long-term equity exemption with STT) created the modern equity-tax framework. The Finance Act, 2018, reintroduced LTCG on listed equity at 10 per cent above Rs 1 lakh, with a grandfathering rule anchored to the 31 January 2018 fair-market-value as the cost of acquisition for pre-2018 gains. The Finance Act, 2020, abolished the Dividend Distribution Tax under Section 115R, returning dividends to the slab-rate regime. The Finance Act, 2023, introduced Section 50AA, which created the “specified mutual fund” category for debt mutual funds and similar non-equity-oriented vehicles and removed indexation for those investments. The Finance (No. 2) Act, 2024, was the most consequential single reform since 2004, harmonising the LTCG rate across asset classes and removing indexation for most non-equity capital assets.

Statutory framework

The capital gains regime is governed by Chapter IV-E of the Income Tax Act, 1961. The principal operative provisions are:

Adjacent sections of significance include Section 10(38) (pre-2018 long-term equity exemption, since repealed), Section 56(2)(x) (gift taxation), and Section 50B (slump sale).

Capital asset and capital gain

Definition of capital asset

A “capital asset” is defined in Section 2(14) as property of any kind held by an assessee, with certain exclusions. The principal exclusions are stock-in-trade (held as part of a business), agricultural land in rural areas, certain specified Gold Bonds and special bearer bonds, and personal effects (with the exception of jewellery, archaeological collections, drawings, paintings, sculptures, and any work of art).

The principal capital asset classes that produce capital gains include:

• Listed equity shares and listed preference shares
• Units of mutual funds , ETFs , and FoFs
• Unlisted equity shares and unlisted preference shares
• Debentures and bonds (whether listed or unlisted)
• Immovable property (residential, commercial, plot)
• Bullion (gold, silver) and jewellery
• Foreign assets including foreign equity, debt, and immovable property
• Other capital assets (paintings, drawings, sculptures, archaeological collections)

Definition of capital gain

A “capital gain” arises on the transfer of a capital asset. “Transfer” is defined broadly in Section 2(47) to include sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition by the government, conversion of capital asset into stock-in-trade, gift, and certain other transactions. Section 47 carves out specified transactions that are not regarded as transfers (gift to specified relatives, transfer in scheme of amalgamation or demerger, certain conversion or reconstitution events, etc.).

Holding period and the STCG-LTCG distinction

Under the post-23-July-2024 regime, the holding-period thresholds are:

The simplification of holding-period thresholds was a stated objective of the Finance (No. 2) Act, 2024. Prior to 23 July 2024, the framework recognised three principal holding-period thresholds (12 months for listed equity, 24 months for immovable property and unlisted equity, 36 months for most other assets), with additional sub-rules for specific instruments. Post-23 July 2024, the framework reduced to two principal thresholds (12 months for listed and 24 months for everything else, with bonds being a residual category).

Computation

General rule under Section 48

Capital gain is computed under Section 48 as:

Capital gain = Full value of consideration minus (Cost of acquisition plus Cost of improvement plus Expenditure on transfer)

For long-term capital assets held before 23 July 2024, indexation under the second proviso to Section 48 was previously available for most assets other than listed equity. The Finance (No. 2) Act, 2024, removed indexation for non-equity assets prospectively, with a specific exception for resident individuals and HUFs holding land or building acquired before 23 July 2024 (who may elect to compute LTCG at the lower of (a) 12.5 per cent without indexation, or (b) 20 per cent with indexation, under a transition election).

Full value of consideration

For listed securities, the full value of consideration is the actual sale price received. For unlisted shares and immovable property, Section 50C and Section 50CA introduce deemed full-value-of-consideration rules: if the actual sale price is lower than the prescribed reference value (stamp duty value for immovable property, fair market value for unlisted shares), the deemed value is substituted unless the variation is within the tolerance band.

Cost of acquisition

The cost of acquisition is generally the actual cost paid by the assessee. Specific situations:

• Inheritance and gift: Under Section 49(1), the cost of acquisition is the cost incurred by the previous owner, with the holding period including the previous owner’s period of holding.
• Bonus shares: Cost is nil; the period of holding starts from the date of allotment.
• Rights shares: Cost is the subscription price paid; holding period from the date of allotment.
• ESOPs: Cost is the fair market value on the date of allotment (which is also the perquisite-tax base under Section 17).
• Grandfathering for listed equity: For listed equity and equity-oriented MF acquired before 31 January 2018, the cost of acquisition is the higher of the actual cost and the fair market value on 31 January 2018, but the gain on which 31-Jan-2018 FMV is substituted cannot exceed the actual gain. The detailed mechanics are at the grandfathering rule for LTCG reference.

Indexed cost of acquisition

For assets where indexation continues to apply (essentially only the optional land-and-building transition election for assets acquired before 23 July 2024), the indexed cost of acquisition is:

Indexed cost = Cost of acquisition multiplied by (CII of year of sale divided by CII of year of acquisition)

The Cost Inflation Index (CII) is notified annually by the Central Board of Direct Taxes (CBDT). For assets acquired before 1 April 2001, the assessee may substitute the fair market value as on 1 April 2001 as the cost of acquisition.

Asset-class taxation in detail

Listed equity and equity-oriented mutual fund

Listed equity shares and units of equity-oriented mutual funds (more than 65 per cent of investible assets in domestic equity) are governed by:

The Securities Transaction Tax (STT) must have been paid on both the acquisition (for shares acquired on or after 1 October 2004) and the sale. The grandfathering rule of 1 February 2018 applies for equity acquired before 31 January 2018; the STCG framework for equity MF under Section 111A and the LTCG framework under Section 112A are treated in detail at the dedicated references.

Specified mutual fund (Section 50AA)

The Finance Act, 2023, inserted Section 50AA, which created a special regime for “specified mutual funds”, defined as mutual funds where not more than 35 per cent of the investible assets are in domestic equity. The principal effect of Section 50AA for units acquired after 1 April 2023 is:

• Gains are always short-term, regardless of holding period.
• Taxed at the assessee’s slab rate (no special concessional LTCG rate, no indexation).
• The 12.5 per cent LTCG rate under Section 112 does not apply.

The category covers debt mutual funds, FoF Overseas, FoF Domestic where the underlying is not equity-oriented, gold mutual funds, and similar non-equity-oriented vehicles. The 2024 Finance Act adjustments preserved the 50AA regime for the original target categories. The detailed mechanics are at debt MF indexation removal 2023 and SEBI debt MF tax 2023 .

Other mutual fund (35% to 65% equity)

Mutual funds with equity exposure between 35 and 65 per cent (the “non-equity-oriented but not specified” residual category) are taxed as:

This residual category typically includes certain hybrid mutual funds.

Unlisted equity and bonds

Immovable property

For immovable property, the holding-period threshold is 24 months. Post-23 July 2024 LTCG is 12.5 per cent without indexation. The transition election for resident individuals and HUFs holding land or building acquired before 23 July 2024 permits computation at the lower of:

• 12.5 per cent without indexation, or
• 20 per cent with indexation (the pre-23-July-2024 regime preserved as a one-off election).

The election is asset-by-asset and is made in the return of income. Section 50C continues to apply: if the sale consideration is below the stamp-duty value, the stamp-duty value is substituted (subject to the 10 per cent tolerance band).

Gold and bullion

Physical gold, gold ETFs, gold mutual funds, and Sovereign Gold Bonds (SGBs) follow different treatment:

• Physical gold and gold MF: 24-month threshold, 12.5 per cent LTCG without indexation.
• Gold ETF: Same as gold MF.
• Sovereign Gold Bonds: LTCG on redemption at maturity is fully exempt under Section 47(viic). Capital gains on secondary-market sale (before maturity) are taxed as other capital assets at 12.5 per cent (LTCG, after 24 months) or slab (STCG, up to 24 months).

Foreign assets

Foreign equity shares, foreign bonds, and foreign immovable property follow the same framework as unlisted Indian equity (24-month threshold, 12.5 per cent LTCG). Currency-conversion considerations under Rule 115 apply for the conversion of foreign currency cost and sale value. The conversion is at the State Bank of India telegraphic transfer (TT) buying rate on the relevant dates.

Securities Transaction Tax and stamp duty

Securities Transaction Tax (STT)

STT is a separate levy on securities-market transactions, payable to the exchange and collected at the source. For listed equity and equity-oriented MF:

• Equity delivery purchase: 0.1 per cent of transaction value.
• Equity delivery sale: 0.1 per cent of transaction value.
• Equity intraday sale: 0.025 per cent.
• Equity-MF redemption (open-ended): 0.001 per cent.

Payment of STT is the gateway to the concessional Section 112A and Section 111A treatment for equity transactions. The 2018 reintroduction of LTCG on equity preserved this principle: only equity transactions on which STT has been paid on both acquisition and sale qualify for the Section 112A rate (with limited exceptions for IPO-allotted shares).

Stamp duty

Stamp duty on mutual fund units at 0.005 per cent on the value of units issued applies from 1 July 2020 under the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2020. Stamp duty is a transaction-level charge, separate from STT and from capital gains tax. Stamp duty for stockbrokers is treated separately.

Major reform timeline

The capital gains regime has been reshaped several times since the original 1961 Act. The most consequential reforms in the past two decades:

2004: Section 10(38) introduction

Under the 2004 Finance Act, long-term capital gains on listed equity were made exempt under Section 10(38), provided STT had been paid. The exemption stood for 14 years and produced the structural framework of the modern equity market.

2018: LTCG reintroduction and grandfathering

The Finance Act, 2018, reintroduced LTCG on listed equity at 10 per cent above Rs 1 lakh per year, effective 1 April 2018. The reintroduction was accompanied by the grandfathering rule of 31 January 2018 : for equity acquired before that date, the cost of acquisition was the higher of the actual cost and the fair market value as on 31 January 2018. Detailed mechanics are at equity MF grandfathering of January 2018 and how to compute LTCG with grandfathering .

2020: Dividend Distribution Tax abolition

The Finance Act, 2020, abolished the Dividend Distribution Tax under Section 115R for distributions from 1 April 2020. Dividends from mutual funds (now called Income Distribution cum Capital Withdrawal, IDCW) are taxed in the hands of the investor at slab rate. This was a substantial change for high-tax-bracket investors who had previously benefited from the flat DDT regime.

2023: Section 50AA insertion

The Finance Act, 2023, inserted Section 50AA, creating the “specified mutual fund” regime for debt MF and similar non-equity-oriented vehicles. For units acquired after 1 April 2023, gains are always short-term and taxed at slab rate, with no indexation. The detailed treatment is at Section 50AA debt MF tax 2023 and debt MF indexation removal 2023 .

2024: Finance (No. 2) Act overhaul

The Finance (No. 2) Act, 2024, effective 23 July 2024, was the most consequential single capital-gains reform since 2004. Principal changes:

• LTCG rate harmonised at 12.5 per cent across asset classes (up from 10 per cent for equity, 20 per cent with indexation for other assets).
• LTCG exemption for listed equity raised from Rs 1 lakh to Rs 1.25 lakh per year.
• STCG rate on listed equity raised from 15 per cent to 20 per cent.
• Indexation removed for non-equity assets (with limited transition election for resident individuals on land and building acquired before 23 July 2024).
• Holding-period thresholds simplified to 12 months (listed) and 24 months (other), with bonds being a residual.
• Unlisted bonds and debentures lost their LTCG benefit and are taxed at slab rate.

The reform was justified by the government on the basis of simplification and equity (parity across asset classes), but produced material winners and losers depending on asset mix and prior holding history.

Exemptions and deductions

Several provisions offer exemption or rollover from capital gains tax on reinvestment:

Section 54: Residential house

A taxpayer who sells a residential house and uses the gain to purchase or construct another residential house in India within the prescribed window (1 year before or 2 years after sale, or construction within 3 years) is exempt from LTCG on the original sale. The 2023 amendments capped the exempt amount at Rs 10 crore.

Section 54B: Agricultural land

Capital gains on the transfer of agricultural land used by the assessee or a parent are exempt if the gain is reinvested in other agricultural land within 2 years.

Section 54EC: NHAI and REC bonds

Capital gains on the transfer of long-term capital assets (immovable property only, post-2018 restriction) are exempt up to Rs 50 lakh per financial year if invested in NHAI or REC bonds within 6 months of the sale. The bonds have a 5-year lock-in period.

Section 54F: Other long-term capital asset

A taxpayer who sells any long-term capital asset other than a residential house and uses the net consideration to purchase or construct a residential house is exempt from LTCG, subject to conditions. Section 54F for mutual fund redemption is the standard route for sheltering equity-MF LTCG. The exempt amount is capped at Rs 10 crore (post-2023 amendment).

Other provisions

Sections 54D, 54G, 54GA, 54GB provide for specific rollover exemptions in defined situations including industrial undertakings and start-up investments.

Set-off and carry-forward

Capital losses follow specific set-off rules:

• Short-term capital loss: Can be set off against any capital gain (STCG or LTCG) in the same year. Unutilised loss can be carried forward for 8 years and set off against any future capital gain.
• Long-term capital loss: Can be set off only against LTCG in the same year (not against STCG). Unutilised loss can be carried forward for 8 years and set off against future LTCG only.
• Speculation business loss: Separate regime under Section 73; not relevant to capital gains.

Loss set-off requires that the loss-incurring transaction is genuine; structured transactions designed primarily to create a tax loss may be re-characterised under the General Anti-Avoidance Rule (GAAR) since 2017.

TDS and reporting

TDS on capital gains

For resident investors, no TDS is generally deducted on capital gains; the taxpayer self-reports the gain in the return of income and pays advance tax under the quarterly schedule.

For non-resident investors:

• TDS under Section 195: 20 per cent on LTCG, 30 per cent on STCG (slab rate for income classified as STCG under the specified MF regime). The detailed framework is at NRI MF TDS Section 195 .
• DTAA relief: Available where applicable based on the investor’s country of residence and the treaty terms.
• TRC and Form 10F: Required documentation for DTAA benefits.

Reporting in the return

Capital gains are reported in ITR-2 (for individuals without business income) or ITR-3 (for individuals with business income). The principal supporting documents are:

• The capital gains statement issued by the broker for equity transactions (treated at how to download capital gains statement Zerodha for the Zerodha workflow and at Zerodha ITR capital gains statement for the broader interface).
• The capital gains statement from CAMS and KFin for mutual fund redemptions, treated at CAMS-KFin capital gains statement , mutual fund ITR capital gains statement , and KFin mutual fund statement .
• The Annual Information Statement (AIS) issued by the Income Tax Department, which consolidates all reported transactions across brokers, RTAs, mutual funds, and registrars. The AIS is the principal reconciliation source; significant variance between the AIS and the return triggers scrutiny.

Common errors and enforcement

Frequent capital-gains computation errors include:

• Wrong cost of acquisition for grandfathered equity: Using the actual cost rather than the higher of cost and 31-January-2018 FMV.
• Incorrect holding-period computation: Particularly for inherited or gifted assets, where the previous owner’s holding period applies.
• Missing dividend reinvestment cost basis: Dividends reinvested historically created additional units; the cost basis of those additional units is the IDCW amount, not zero.
• STT-paid versus non-STT-paid equity confusion: Pre-2004 or off-market acquisitions of listed equity may not qualify for Section 112A even if sold on the exchange.
• Section 50AA mis-application: Conflating the post-1-April-2023 specified-MF regime with the pre-2023 regime for legacy units.
• Indexation misuse: Continuing to claim indexation for non-equity assets post-23 July 2024 outside the limited transition election.
• NRI reporting: Failing to reconcile TDS deducted at source against the eventual return computation, leading to refund delays.

The Income Tax Department routinely cross-checks capital-gains entries in the return against:

• The AIS dataset (via TDS Form 26AS and AIS reconciliation).
• The exchange-broker reporting under Section 285BA.
• The mutual fund reporting via SFT (Statement of Financial Transactions).
• The depository reporting on demat transactions.

Material discrepancies typically trigger a notice under Section 143(2) (scrutiny) or Section 148 (reassessment) within the prescribed time limit.

International comparison

The Indian capital gains framework is more granular and asset-class-specific than most peer markets. The United States operates a binary long-term vs short-term distinction (12-month threshold, taxed at preferential long-term capital-gains rates of 0, 15, or 20 per cent depending on income). The United Kingdom operates a single annual exempt amount with the gains above taxed at 10 or 20 per cent (depending on the taxpayer’s overall income, with a 24 per cent higher rate on residential property post-October 2024). Germany operates a flat 25 per cent withholding tax on most capital gains, with reduced rates for specific asset types.

The Indian 2024 reform is, in international perspective, a partial move toward the United States model: rate harmonisation across asset classes is a step away from the historical Indian preference for asset-class-specific rules. The retention of the 12-month threshold for listed equity (rather than the United States 12-month threshold for all assets) preserves Indian distinctness.

Recent developments

Post-2024 reform implementation

Implementation of the Finance (No. 2) Act, 2024, has produced several interpretive questions resolved through CBDT circulars and direct-tax tribunal rulings through 2024 to 2026. The principal areas of contention have been:

• The treatment of in-transit capital gains where the transaction straddles the 23 July 2024 effective date.
• The transition election for resident individuals on land and building.
• The interaction between Section 50AA and the new equity-MF threshold for specified mutual fund classification.

AIS expansion

The Annual Information Statement, treated at the annual information statement reference, has expanded substantially through 2024 and 2025 to include foreign capital-asset transactions, cryptocurrency transactions, and detailed mutual fund SIP records. The reporting comprehensiveness is now near-complete for transactions through SEBI-regulated intermediaries.

Cryptocurrency and virtual digital assets

The Finance Act, 2022, introduced Section 115BBH, which taxes gains on Virtual Digital Assets (VDAs) at a flat 30 per cent, with no set-off against any other income or loss. The 2024 amendments preserved this regime. VDAs include cryptocurrencies and non-fungible tokens. The 1 per cent TDS under Section 194S applies on every VDA transfer.

Real Estate Investment Trust units

REIT and InvIT units are treated as a hybrid asset class, with capital gains on transfer of units taxed at the equity-MF rate (12.5 per cent LTCG above Rs 1.25 lakh, 20 per cent STCG) when held on stock exchanges with STT paid. Distributions from REITs and InvITs follow a different framework based on the underlying pass-through structure.

Tax administration digitalisation

The Income Tax Department’s digitalisation programme has substantially reduced the friction of capital-gains reporting. Pre-filled returns now include AIS-sourced capital-gains entries, with the taxpayer required only to validate or correct. The 2025 to 2026 enhancements have extended this to include mutual fund redemption gains computed using CAMS and KFin source data.

See also

• Section 112A (LTCG on listed equity and equity MF)
• Section 111A (STCG on listed equity and equity MF)
• LTCG equity mutual fund Section 112A
• STCG equity mutual fund Section 111A
• Grandfathering rule for LTCG
• Equity MF grandfathering of January 2018
• How to compute LTCG with grandfathering
• SEBI debt MF tax 2023
• Debt MF indexation removal 2023
• Debt MF indexation removal FY24
• Arbitrage fund taxation
• F and O taxation in India
• Mutual fund stamp duty
• Stamp duty stockbroker
• STT mutual fund equity
• Section 54F mutual fund redemption
• NRI MF TDS Section 195
• Annual Information Statement (AIS)
• ITR-2
• How to download capital gains statement Zerodha
• Zerodha ITR capital gains statement
• CAMS-KFin capital gains statement
• Mutual fund ITR capital gains statement
• KFin mutual fund statement
• Mutual fund
• Mutual fund industry in India
• Mutual fund taxation post-July-2024 (in industry article)
• Passive investing wave in India

References

1. Income Tax Act, 1961, Chapter IV-E (Sections 45 to 55A), as amended.
2. Finance (No. 2) Act, 2024, Sections 51 to 56 (capital gains tax regime).
3. Finance Act, 2023, Section 50AA insertion.
4. Finance Act, 2020, Section 115R abolition and DDT reform.
5. Finance Act, 2018, reintroduction of LTCG on listed equity and grandfathering provisions.
6. Finance Act, 2022, Section 115BBH (virtual digital assets).
7. CBDT Cost Inflation Index notifications (annual).
8. CBDT Circulars on Section 50C and Section 50CA implementation.
9. Securities Transaction Tax under Finance (No. 2) Act, 2004.
10. Income Tax Department, Annual Information Statement Framework, Central Board of Direct Taxes.
11. Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2020.
12. SEBI Master Circular on Mutual Funds, SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.