Capital Gains Tax in India: LTCG & STCG Explained

What is capital gains tax?

Capital gains tax is the tax on the profit you make when you sell a capital asset — shares, mutual fund units, a house, land, gold, or a business asset — for more than what it cost you to acquire (plus certain allowed expenses). The gain is computed under a separate head of income, "Capital Gains," and is taxed differently from your salary or business income.

The single most important classification is short-term vs long-term, decided purely by how long you held the asset before selling it. Get this wrong and the whole computation — rate, exemptions, set-off rules — follows the wrong path.

Short-term vs long-term: holding periods and rates by asset

The holding-period threshold and the applicable rate both depend on what you sold. Finance Act 2024 significantly simplified and revised these — reducing the number of distinct holding periods to essentially two (12 months and 24 months) and moving most LTCG to a flat 12.5% rate. Because these thresholds and rates are revised by Parliament almost every year, always confirm the figures in force for your assessment year on the income-tax portal before finalising a computation.

Verify before you file: holding-period thresholds, LTCG exemption limits (currently ₹1.25 lakh per financial year for listed equity/equity funds under Section 112A) and the applicable tax rates are set by the Finance Act in force for the relevant assessment year. Cross-check the current numbers on the income-tax e-filing portal or the latest Finance Act before relying on them for a client.

Indexation on property: what it does and when it applies

Indexation adjusts your property's purchase cost upward for inflation, using the Cost Inflation Index (CII) notified each year by the CBDT. A higher indexed cost means a lower taxable gain. Before Finance Act 2024, indexation was available on all long-term property sales at a 20% LTCG rate.

Finance Act 2024 changed this: for property (and certain other unlisted/non-equity assets) acquired on or after 23 July 2024, only the flat 12.5% LTCG rate applies — no indexation. For property acquired before that date, resident individuals and HUFs get a one-time transitional choice between:

• 12.5% LTCG without indexation, or
• 20% LTCG with indexation

— whichever produces the lower tax liability. This transitional rule, the CII table, and the cut-off date are all points a Finance Act can revise; confirm the applicable CII figures and rule text on the income-tax portal before computing.

Worked example: LTCG on a property sale (with indexation)

Assume a resident individual bought a flat in FY 2011-12 for ₹40,00,000 (CII for FY 2011-12 taken as 184, illustrative) and sells it in FY 2025-26 for ₹1,20,00,000 (CII for FY 2025-26 taken as 376, illustrative — always use the CBDT-notified figure for the actual year). The property was acquired before 23 July 2024, so the transitional choice applies. Assume no other deductible expenses for simplicity.

Here the indexed 20% option produces lower tax (₹7,65,217 vs ₹10,00,000), so the taxpayer would choose it — the whole point of the transitional rule is to let you pick whichever is cheaper. Add 4% health and education cess (and surcharge, if applicable) to arrive at the final liability. If the seller reinvests the gain into another residential house under Section 54, or into capital gains bonds under Section 54EC, the taxable gain — and the tax — can reduce further, subject to the prescribed limits and timelines.

This example uses illustrative CII figures only. Pull the actual CBDT-notified CII for the relevant financial years, and confirm the rate and indexation eligibility rules in force for the assessment year, before finalising any real computation.

Practical notes for a practising CA

• Confirm the acquisition date carefully for property — the 23 July 2024 cut-off decides whether your client even has the indexation choice.
• Debt mutual funds bought after 1 April 2023 lost the LTCG/indexation benefit entirely — the full gain is taxed at slab rate regardless of holding period; don't apply old STCG/LTCG logic to these.
• Track loss carry-forwards separately by nature — LTCL can only offset LTCG, never STCG, and both need the return filed on time under Section 139(1) to be carried forward.
• Reconcile against Form 26AS/AIS — broker and registrar-reported sale considerations (for equity and property, via SFT reporting) often surface transactions the client forgot to mention.
• Watch advance tax timing on large one-off gains (property sales, ESOP liquidity events) — pay in the instalment immediately following the gain to avoid Section 234C interest.
• Re-verify rates every filing season. Capital gains provisions are amended almost every Finance Act — a rate or threshold correct for AY 2025-26 may not hold for AY 2026-27.

Keeping capital gains organised through the year

Most capital gains computations go wrong not because the law is misunderstood, but because the underlying records — purchase deeds, contract notes, improvement bills, brokerage statements — are scattered across the year and reconstructed under deadline pressure. If you're already running your practice or your business books on TatvaBooks, keeping asset acquisition and disposal entries tagged as they happen makes the capital gains schedule at filing time a lookup, not a reconstruction exercise.

See our pricing or book a CA demo to see how TatvaBooks fits into a practice workflow.

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