Indian Tax Law on WebNotes

Capital gains tax in India

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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.

Commodity Transaction Tax (CTT)

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The Commodity Transaction Tax (CTT) is a transaction-level tax levied on the sale or purchase of certain non-agricultural commodity derivatives on recognised commodity derivative exchanges in India. CTT was introduced by Chapter VII of the Finance Act, 2013 with effect from 1 July 2013 and is structurally analogous to the Securities Transaction Tax (STT) that applies to equity and equity-derivative transactions. CTT is collected by the stock broker or the commodity derivative exchange at the time of the transaction and remitted to the Central Government on behalf of the parties.

Futures and options taxation in India

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Futures and options taxation in India is governed by the Income Tax Act, 1961 , with the core classification provided by Section 43(5)(d), which treats eligible derivative transactions on recognised stock exchanges as non-speculative business income rather than as speculative income or as capital gains. The classification is the structural foundation of the F&O tax framework and has consequential implications across the entire computation: profits and losses are computed as business income, are aggregated with other business income, are reported in ITR-3 , are subject to the Section 44AB tax audit thresholds, are eligible for the Section 44AD presumptive taxation option (subject to turnover limits), and produce business losses that can be set off against other heads of income (other than salary) and carried forward for 8 years.

Grandfathering rule for LTCG on listed equity

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The grandfathering rule for long-term capital gains (LTCG) is the transitional tax provision in the Indian Income Tax Act, 1961, that protects equity investors from being taxed on gains that accrued before 1 February 2018, the date on which Section 112A reintroduced LTCG on listed equity after a 14-year exemption. Under the rule, the cost of acquisition for computing LTCG on listed equity shares and equity-oriented mutual fund units acquired on or before 31 January 2018 is deemed to be the higher of the actual purchase price and the fair market value (FMV) on 31 January 2018, subject to a cap that the deemed cost cannot exceed the actual sale price. The mechanism has the effect of treating all pre-1-February-2018 appreciation as outside the taxable base, while gains that accrue after that date are taxed under Section 112A.

Income tax in India

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Income tax in India is the direct tax levied on the income of individuals, Hindu Undivided Families (HUFs), companies, firms, associations of persons, and other taxpaying entities under the Income Tax Act, 1961. The Act is administered by the Income Tax Department under the Central Board of Direct Taxes (CBDT) within the Department of Revenue of the Ministry of Finance. Income tax is the principal direct-tax revenue source for the Government of India, contributing approximately Rs 15 lakh crore in gross collections in financial year 2024-25 (corporate and personal income tax combined), representing the largest single component of central-government direct-tax revenue.

Section 111A of the Income Tax Act

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Section 111A of the Income Tax Act, 1961, is the operative tax provision that governs short-term capital gains (STCG) arising from transfers of listed equity shares, units of equity-oriented mutual funds , and units of business trusts (REITs and InvITs), subject to the condition that Securities Transaction Tax (STT) has been paid on both acquisition (with prescribed exceptions) and sale. The section was inserted by the Finance Act, 2004 alongside Section 10(38) (the now-repealed LTCG exemption), and operates as the structural counterpart to Section 112A for short-term holdings. As of the post-23 July 2024 regime introduced by the Finance (No. 2) Act, 2024, STCG under Section 111A is taxed at 20 per cent, with no exemption threshold and no indexation, applicable to gains on listed equity and equity-oriented MF held for up to 12 months.

Section 112A of the Income Tax Act

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Section 112A of the Income Tax Act, 1961, is the operative tax provision that governs long-term capital gains (LTCG) on transfers of listed equity shares, units of equity-oriented mutual funds , and units of business trusts (REITs and InvITs), subject to the condition that Securities Transaction Tax (STT) has been paid on both acquisition and sale (with prescribed exceptions). The section was inserted by the Finance Act, 2018, effective from 1 April 2018, replacing the long-standing Section 10(38) exemption that had operated since the introduction of STT in 2004. As of the post-23 July 2024 regime introduced by the Finance (No. 2) Act, 2024, LTCG under Section 112A is taxed at 12.5 per cent on gains above an annual exemption threshold of Rs 1.25 lakh, with no indexation benefit. The section operates alongside Section 111A (short-term capital gains on the same asset class at 20 per cent) and the broader capital gains tax in India framework.

Section 44AB of the Income Tax Act

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Section 44AB of the Income Tax Act, 1961 is the principal tax audit provision under Indian direct tax law. The section requires every person carrying on business or profession to get their accounts audited by a Chartered Accountant if the gross receipts, total turnover, or gross professional fees exceed prescribed thresholds. The provision is administratively foundational to the income-tax framework, as the tax audit report submitted under Section 44AB provides the Income Tax Department with an independent verification of the taxpayer’s business income computation, expense claims, depreciation, statutory deductions, and other taxable items.