Capital Gains Tax in India — Rates, Holding Periods and What Changed

What Is a Capital Gain?

A capital gain is the profit arising on the transfer of a capital asset — land, buildings, shares, mutual fund units, bonds, gold, jewellery or any other property held by a taxpayer other than stock in trade, personal effects and specified agricultural land.

Two questions determine the tax. First, is the gain short-term or long-term, which depends on how long the asset was held before transfer. Second, what rate applies to that category for that class of asset. Get either wrong and the liability can be out by a multiple, which is why classification is not a formality.

The charge arises in the year of transfer, and transfer is defined widely — it includes sale, exchange, relinquishment, extinguishment of rights and compulsory acquisition, not merely a conventional sale. This matters more often than people expect: a family arrangement, a conversion, or the surrender of a right can each constitute a transfer even though no money changes hands in the ordinary way.

What Are the Holding Periods and Rates?

Budget 2024 reduced three holding periods to two and moved almost every long-term gain to a single rate. The table below is the current position for transfers on or after 23 July 2024.

Two qualifications matter. Surcharge and cess apply on top of the rates shown, with surcharge on long-term capital gains capped at fifteen per cent. And a resident individual or Hindu undivided family selling land or a building acquired before 23 July 2024 may compute the tax at twenty per cent with indexation as an alternative, paying whichever amount is lower — a grandfathering that does not extend to companies, firms or non-residents.

How Did Capital Gains Tax in India Develop?

Capital gains have been taxed, untaxed and re-taxed in India, and the current design carries the marks of each phase.

The Income-tax Act, 1922 did not tax capital gains at all. They were regarded as accretions to capital rather than income, consistent with the British jurisprudence of the period. A charge was introduced in 1947, withdrawn in 1949, and reintroduced in 1956 — a sequence that reflects genuine uncertainty about whether a gain on an asset held for years is income in any meaningful sense.

The Income-tax Act, 1961 settled the question and built the architecture that survived for six decades: a charge in the year of transfer, a distinction between short-term and long-term based on holding period, and a computation allowing cost of acquisition, cost of improvement and expenditure on transfer. Rates through the pre-liberalisation decades were high, and the regime was correspondingly full of concessions.

Indexation arrived in 1992, immediately after liberalisation. It addressed a real unfairness: at the inflation rates India experienced through the 1970s and 1980s, a nominal gain on a long-held asset could be entirely illusory in real terms, yet fully taxable. The Cost Inflation Index allowed the acquisition cost to be scaled up, and it became a defining feature of Indian capital gains taxation. Reinvestment exemptions for residential property and specified bonds developed alongside, encouraging recycling of capital into housing and infrastructure.

Equity was then carved out. The Securities Transaction Tax was introduced in 2004, and in exchange long-term gains on listed equity became exempt while short-term gains were taxed at a concessional rate. For fourteen years, long-term equity investment in India was effectively tax-free. That exemption was withdrawn in 2018, when a ten per cent rate on gains above one lakh rupees was introduced with a grandfathering of gains accrued up to 31 January 2018 — which is why the cost of shares held since before that date is still stepped up to their value on that day.

The debt fund concession went next. From 1 April 2023, gains on specified mutual funds investing predominantly in debt were treated as short-term regardless of holding period, removing the indexation advantage that had made debt funds more efficient than fixed deposits for long-horizon investors.

Budget 2024 then rationalised the whole structure with effect from 23 July 2024. Three holding periods became two. Indexation was removed as the general rule, and the long-term rate on most assets was reduced to 12.5 per cent to compensate. The equity exemption threshold rose from one lakh to 1.25 lakh rupees, the equity long-term rate rose from ten to 12.5 per cent, and the short-term rate on equity rose from fifteen to twenty per cent. Recognising that removing indexation on long-held property could increase tax in real terms, the grandfathering option for resident individuals and Hindu undivided families was retained for land and buildings acquired before that date.

The Income-tax Act, 2025, in force from 1 April 2026, completed a recodification rather than a reform. Capital gains were reorganised into Sections 67 to 91, the previous year and assessment year concepts were replaced by a single Tax Year, and buyback proceeds were brought back into capital gains treatment. Rates and thresholds were left alone.

How Should a Capital Gains Transaction Be Handled — Step by Step?

1. Fix the Date of Transfer and Holding Period

   The holding period runs from the date of acquisition to the date of transfer, and for inherited or gifted assets it includes the previous owner’s period. For under-construction property, whether the period runs from allotment or from possession is a question that has been litigated repeatedly and turns on the facts of the agreement.

2. Establish the Cost Properly

   For inherited or gifted assets, the cost is that of the previous owner. For assets held since before 1 April 2001, fair market value on that date may be substituted. For listed equity held before 1 February 2018, the grandfathered value applies. Getting this right is the whole of the capital gain computation and the most common place where liability is overstated.

3. Check for Deemed Consideration

   On immovable property, where the stamp duty value exceeds the stated consideration beyond a tolerance band, the stamp duty value is substituted as the sale price. A parallel rule applies to unlisted shares transferred below fair market value. Both can create a tax liability on money never received.

4. Plan the Reinvestment Before the Sale

   Exemptions on reinvestment operate on strict timelines running from the date of transfer, and where the deadline extends beyond the return filing date, the unutilised amount must be deposited under the Capital Gains Account Scheme before the return is due. Missing that deposit forfeits the exemption entirely.

5. Compute the Advance Tax Position

   Capital gains are frequently unpredictable, and the law recognises this: where the gain arises after an instalment date, the shortfall attributable to it is not penalised provided the tax is paid in the remaining instalments or by the year end. That relief is often overlooked, and taxpayers pay interest they did not owe.

6. Handle the Withholding

   On a property purchase from a resident above the threshold, the buyer deducts one per cent. Where the seller is a non-resident, withholding applies to the whole consideration, and a lower deduction certificate is usually essential to avoid a very large deduction followed by a long refund wait.

7. Reconcile With the Annual Information Statement

   Property registrations, high-value securities transactions and mutual fund redemptions are reported to the department independently. Pull the statement from incometax.gov.in and reconcile it against broker and registrar records. Unexplained differences between what you report and what the department already holds are the most common cause of a notice.

8. File the Correct Return With Complete Schedule CG

   ITR-2 where there is no business income, ITR-3 where there is. Listed equity gains claimed under the concessional regime require scrip-wise reporting. File by the due date, because a late return forfeits the right to carry forward any capital loss.

How Do Capital Gains Arise Across Different Situations?

Frequently Asked Questions on Capital Gains Tax