Comprehensive Guide to Capital Gains Tax

In India, capital gains refer to profits earned from the sale of assets. The Union Budget of 1956–1957 established capital gains tax as a permanent fixture in the country’s taxation system. 

 

The tax is levied on both short-term and long-term capital gains, with several rates and exemptions. This depends on the type of assets and the period they were held. India’s capital gains tax system aims to encourage long-term investments while providing revenue for the government. 

Based on the timeline of holding an asset, capital gains against investment can be categorised into two types:

1. Short-term Capital Assets (STCA)

Any asset held for less than 36 months is known as a short-term capital asset. For instance, if you sell a property after 27 months of its purchase, the gain will be calculated as short-term capital gains.

 

However, the time limit for unlisted shares and immovable properties from FY 2017-18 is 24 months. There are some assets with a holding period of 12 months or less termed as short-term ones. But this rule is valid if the transfer date is after July 10, 2014. 

 

A few examples of these assets include: 

• Shares of a company listed on a recognised Indian stock exchange

• Securities (e.g., debentures, government securities, or bonds) listed on a recognized Indian stock exchange

• Units of UTI, regardless of quotation

• Units of equity-oriented mutual funds, regardless of quotation

• Zero-coupon bonds, regardless of quotation

2. Long-term Capital Assets (LTCA)

An asset held for more than 36 months is known as a long-term capital asset. Assets like buildings, house properties, and land will be considered LTCA if held for more than 24 months (from FY 2017-18). 

 

Certain short-term assets held for over 12 months, like zero-coupon bonds or debentures listed on the Indian stock exchange, are classified as LTCA.  

The gains earned after you sell your debt and equity funds are calculated differently. Any fund which invests in equities (65% of the total portfolio or more) is known as an equity fund.

Funds	On or Before April 1, 2023		Effective from April 1, 2023
	STCG	LTCG	STCG	LTCG
Debt Funds	As per the individual’s income tax slab rates	At 20% with indexation or 10% without indexation (whichever is lesser)	As per the income tax slab rate of the individual	As per the taxpayer’s slab rate
Equity Funds	15%	10% on over ₹1 Lakh (indexation not included)	15%	10% on over ₹1 Lakh (without indexation)

Here are some parameters included under deductible expenses:

1. Sale of House Property

The following expenses are deductible from the total selling price:

• Expenses of the stamp papers

• Commission or brokerage, which is paid for securing a buyer

• Travelling expenditures with respect to the transfer - these could be incurred post the transfer gets affected

2. Sale of Shares

You are allowed to subtract the following expenses:

• Commission of the broker for the shares which have been sold

• Securities Transaction Tax (STT) is not permitted as a deductive expenditure

3. Sale of Jewellery

Expenses incurred for broker services facilitating the sale of jewellery can be deducted from the proceeds of the sale. Expenses which are deducted from the selling price of the assets for computing the capital gains are not permitted as a deduction under any other income head. This can only be claimed once.

The acquisition and improvement cost are indexed by applying the Cost Inflation Index (CII). It is computed to adjust for inflation across the holding period of the asset. This lessens your capital gains and raises your costs. 

 

The indexed acquisition cost is computed as follows: