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Capital Gains Tax | Income Tax Act 2025
Three extra days of patience saved Rs 10,000 in tax on a Rs 50,000 gain. That is the difference between short-term and long-term capital gains in the most direct terms possible. The Income Tax Act 2025 (Act 30 of 2025), which comes into force on 1 April 2026, retains the core STCG-LTCG distinction while renumbering nearly every section. Short-term gains on equity now attract 20%. Long-term gains attract 12.5%, with the first Rs 1,25,000 of equity LTCG fully exempt each year. This article explains every holding period threshold, every rate, and every planning angle that follows from these rules.
Table of Contents
- Quick Snapshot: The Whole Topic in Two Minutes The Rs 50,000 gain example, four key numbers, and the one decision that changes everything
- Part I: What Is a Capital Asset and When Does a Gain Arise Definition under Section 2(14), what is excluded, chargeability under Section 67
- Part II: Holding Periods: The Three Buckets 12 months vs 24 months, which assets fall where, Section 2(101) explained
- Part III: How to Count the Holding Period Correctly Inherited assets, bonus shares, amalgamation, EGRs, liquidation, the special rules
- Part IV: Tax Rates on STCG and LTCG for FY 2025-26 Sections 196, 197, 198 of ITA 2025, the Rs 1.25L exemption, the property grandfathering formula
- Part V: Indexation: What Survives and What Does Not The 23 July 2024 cut-off, Section 197(3) formula, asset-wise indexation status
- Part VI: Why STT Changes Everything The STT condition in Section 198, what happens without STT, IFSC exception
- Part VII: Old Sections (ITA 1961) vs New Sections (ITA 2025) Complete mapping table for practitioners and students
- Part VIII: Three Legal Ways to Cut Your Capital Gains Tax Loss harvesting, the annual exemption reset, and the patience strategy
- Frequently Asked Questions
20%
STCG rate on STT-paid equity shares and equity-oriented mutual funds. Section 196, ITA 2025.
12.5%
Flat LTCG rate on all long-term capital assets. First Rs 1.25L of equity LTCG is exempt. Section 197 and 198.
12 mo.
Minimum holding for listed equity, equity MFs, business trust units, and zero-coupon bonds to qualify as LTCG.
24 mo.
Minimum holding for property, unlisted shares, gold, and all other assets to qualify as LTCG.
Quick SnapshotUnderstand the Whole Topic in Two Minutes
You bought 100 shares of a listed company on 1 April 2024 at Rs 1,000 each. Total investment: Rs 1 lakh. By April 2025, the price is Rs 1,500 per share. Your gain is Rs 50,000. Now comes the question that changes everything: when exactly do you sell?
Sell on 30 March 2025. That is 364 days since purchase. The gain is short-term. Tax rate: 20%. Tax payable: Rs 10,000.
Sell on 2 April 2025. That is 366 days since purchase. The gain is now long-term. Tax rate: 12.5%, but only on the portion above Rs 1,25,000. Your entire gain of Rs 50,000 is below Rs 1,25,000, so tax payable: Rs 0.
Same shares. Same profit. Three extra days. Tax difference: Rs 10,000. That is the STCG vs LTCG distinction in its most direct form.
The rule is simple: the longer you hold an asset, the lower the tax rate on the gain when you sell it. The law rewards patience. The thresholds are 12 months for listed equity and 24 months for everything else. Cross that threshold and you move from STCG territory into LTCG territory, with meaningfully lower rates.
The one sentence you need to remember: Short-term gains get taxed at your full rate or 20% depending on the asset; long-term gains get taxed at a flat 12.5%, and the first Rs 1.25 lakh of long-term gain on equity is completely free every single year.
Part IWhat Is a Capital Asset and When Does a Gain Arise
The Definition of Capital Asset
Under Section 2(14) of the Income Tax Act 2025, a capital asset means any property of any kind held by an assessee, whether or not connected with a business or profession. This is a wide definition. It covers land, buildings, equity shares, mutual fund units, gold, jewellery, patents, goodwill, and even art and antiques.
However, the law specifically excludes certain items from the definition. Stock-in-trade held for a business is not a capital asset, when you sell it, the profit is business income, not capital gains. Personal movable property such as furniture, vehicles, and clothing used for personal purposes is excluded. Agricultural land situated in rural areas (not in or near specified urban areas) is also excluded. Gains from selling such excluded items do not attract capital gains tax.
When Does a Capital Gain Arise
A capital gain arises when a capital asset is transferred. Transfer is broadly defined under Section 2(118) of the ITA 2025 to include sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition under law, and even conversion of a capital asset into stock-in-trade. The profit from such a transfer, after deducting the cost of acquisition and improvement, is the capital gain. Sec 67(1), ITA 2025
The chargeability section is Section 67 of the ITA 2025 (corresponding to Section 45 of the old ITA 1961). It states that any profits or gains arising from the transfer of a capital asset in a tax year shall be chargeable to income tax under the head Capital Gains and shall be the income of the year in which the transfer took place.
Part IIHolding Periods: The Three Buckets
The General Rule: 24 Months
Section 2(101)(a) of the Income Tax Act 2025 defines a short-term capital asset as one held by an assessee for not more than twenty-four months immediately preceding the date of its transfer. Everything held for more than 24 months is, by default, a long-term capital asset under Section 2(67) of the Act. This is the base rule.
The Exception: 12 Months for Listed Securities
Section 2(101)(b) then carves out an exception. For the following specific asset types, the words “twenty-four months” in the definition are replaced with “twelve months.” This means they become long-term after just 12 months of holding, not 24. Sec 2(101)(b), ITA 2025
| Asset Type | Short-Term If Held Up To | Long-Term If Held More Than | Legal Basis |
|---|---|---|---|
| Listed equity shares on a recognised stock exchange in India | 12 months | 12 months | Sec 2(101)(b)(i) |
| Units of the Unit Trust of India | 12 months | 12 months | Sec 2(101)(b)(ii) |
| Units of an equity-oriented fund | 12 months | 12 months | Sec 2(101)(b)(iii) |
| Zero-coupon bonds | 12 months | 12 months | Sec 2(101)(b)(iv) |
| Units of a business trust (on exchange) | 12 months | 12 months | Sec 2(101)(b)(i) read with Sec 198 |
| Immovable property – land, building, or both | 24 months | 24 months | Sec 2(101)(a) general rule |
| Unlisted equity shares of a company | 24 months | 24 months | Sec 2(101)(a) general rule |
| Gold, jewellery, and other movable property | 24 months | 24 months | Sec 2(101)(a) general rule |
| Debt mutual funds acquired before 1 April 2023 | 24 months | 24 months | Sec 2(101)(a) general rule |
| Debt mutual funds (Specified MFs) acquired on or after 1 April 2023 | Always STCG regardless of holding period. Taxed at slab rates. Section 76, ITA 2025. | Sec 76, ITA 2025 | |
Debt Mutual Funds bought after 31 March 2023, no LTCG benefit ever: Section 76 of the ITA 2025 (which codifies the Finance Act 2023 amendment) treats gains on Specified Mutual Funds as short-term capital gains regardless of how long you hold them. A Specified Mutual Fund is one that invests more than 65% of its proceeds in debt and money market instruments. Even if you hold such a fund for 5 years, the gain is STCG taxed at your applicable slab rate. This is a commonly missed point. Planning a debt fund investment for LTCG treatment is only available for units bought before 1 April 2023.
Part IIIHow to Count the Holding Period Correctly
The Basic Rule of Counting
The holding period runs from the date of acquisition up to the day immediately before the date of transfer. So if you buy shares on 1 April 2024 and sell them on 1 April 2025, you have held them for exactly 365 days, which is more than 12 months. The gain is long-term. If you sell on 31 March 2025 instead, that is 364 days, which is less than 12 months, short-term.
Special Situations Where Counting Gets Complicated
Section 2(101)(c) of the ITA 2025 lays down specific rules for situations where the straightforward counting does not apply. These matter enormously in practice.
| Situation | How to Count the Holding Period | Legal Reference |
|---|---|---|
| Asset received as a gift, under a will, by inheritance, succession, or devolution | Include the period for which the previous owner held it. The previous owner’s holding period is added to yours. | Sec 2(101)(c)(B)(I), ITA 2025 |
| Shares received on amalgamation | Include the period for which the assessee held shares in the amalgamating company before the merger. | Sec 2(101)(c)(B)(II) |
| Rights shares or bonus shares | Counted from the date of allotment of such rights or bonus shares, not from the date of the original shares. | Sec 2(101)(c)(C)(II) |
| Shares on demerger | Include the period for which the original shares in the demerged company were held. | Sec 2(101)(c)(B)(III) |
| Share in company under liquidation | Exclude the period from the date the company went into liquidation onwards. | Sec 2(101)(c)(A) |
| Electronic Gold Receipt (EGR) issued on depositing gold | Include the period for which the original gold was held before conversion to EGR. | Sec 2(101)(c)(B)(XI) |
| Gold released against an EGR | Include the period for which the EGR was held before conversion back to gold. | Sec 2(101)(c)(B)(XII) |
Example: Inherited Property
Your father purchased a house in January 2010. He passed away in January 2021, and you inherited it as the legal heir. You decide to sell the house in March 2025.
Your personal holding period is only 4 years and 2 months. But under Section 2(101)(c)(B)(I) read with Section 73(1) (Table Sl. No. 1) of the ITA 2025, the period for which your father held the property is included in your holding period. The total holding is from January 2010 to March 2025, over 15 years.
Result: This is a long-term capital gain. Tax rate: 12.5% (or the better of 12.5% or 20% with indexation, since the property was acquired before 23 July 2024). Without this rule, you might mistakenly treat it as STCG. That mistake could cost you thousands in unnecessary tax.
Example: Bonus Shares
You bought 100 shares of a company on 1 March 2024. On 1 September 2024, the company issued 1 bonus share for every share held. You now hold 200 shares. You sell all 200 shares on 15 September 2025.
For the original 100 shares: holding period runs from 1 March 2024 to 15 September 2025, over 18 months. These are long-term.
For the 100 bonus shares: holding period runs from 1 September 2024 (date of allotment of bonus shares) to 15 September 2025, just over 12 months. These are also long-term (barely). Sell two weeks earlier in August 2025 and those bonus shares would be short-term, taxed at 20% instead of 12.5%.
Part IVTax Rates on STCG and LTCG for FY 2025-26
Short-Term Capital Gains Tax Rates
Two different rate regimes apply to STCG, depending on the asset type.
For equity shares, equity-oriented mutual funds, and business trust units where the transaction is subject to Securities Transaction Tax (STT): the tax rate is a flat 20% on the short-term capital gain. This is set out in Section 196(1) of the ITA 2025. Sec 196(1), ITA 2025
For all other assets – property, gold, debt mutual funds acquired before April 2023, unlisted shares, and so on, short-term gains are added to your total income and taxed at your applicable slab rate. If you are in the 30% slab, the effective tax rate on such STCG is 30%.
| Asset | STCG Rate | Condition | Section (ITA 2025) |
|---|---|---|---|
| Listed equity shares (STT paid) | 20% | STT must have been paid on the transaction | Sec 196(1) |
| Equity-oriented mutual fund units (STT paid) | 20% | STT must have been paid on transfer | Sec 196(1) |
| Business trust units (STT paid) | 20% | STT must have been paid | Sec 196(1) |
| Immovable property | Slab rate | Added to total income, taxed at applicable bracket | General provision |
| Unlisted equity shares | Slab rate | Added to total income | General provision |
| Gold, jewellery, other movables | Slab rate | Added to total income | General provision |
| Debt MFs (Specified MFs, acquired after 31 March 2023) | Slab rate (always) | Always STCG; no LTCG benefit regardless of holding | Sec 76 |
Long-Term Capital Gains Tax Rates
The flat LTCG rate is 12.5% across all asset classes. However, two important variations apply. Sec 197(1), ITA 2025
First, for equity shares, equity-oriented mutual funds, and business trust units where STT was paid: the first Rs 1,25,000 of LTCG in a financial year is completely exempt. Tax at 12.5% applies only on the excess above Rs 1,25,000. This relief is under Section 198(2)(a) of the ITA 2025. Sec 198(2), ITA 2025
Second, for immovable property acquired before 23 July 2024 and sold by an individual or HUF: a special formula under Section 197(3) ensures you pay whichever is lower, 12.5% without indexation, or 20% with indexation. This protects taxpayers who bought property in the era when indexation was fully available. Sec 197(3), ITA 2025
| Asset | LTCG Rate | Exemption / Special Rule | Section (ITA 2025) |
|---|---|---|---|
| Listed equity shares (STT paid on acquisition and transfer) | 12.5% | First Rs 1,25,000 exempt per year. Grandfathering for pre-Feb 2018 purchases. | Sec 198 |
| Equity-oriented mutual fund units (STT paid) | 12.5% | First Rs 1,25,000 exempt per year. | Sec 198 |
| Business trust units (STT paid) | 12.5% | First Rs 1,25,000 exempt per year. | Sec 198 |
| Property acquired before 23 July 2024 (individual/HUF only) | Lower of 12.5% (no index) or 20% (with indexation) | Taxpayer gets whichever results in lower tax. Section 197(3) formula. | Sec 197(3) |
| Property acquired on or after 23 July 2024 | 12.5% | No indexation. No exemption. | Sec 197(1) |
| Unlisted equity shares | 12.5% | No exemption. No indexation. | Sec 197(1) |
| Gold and jewellery | 12.5% | No indexation for transfers post July 2024. | Sec 197(1) |
Example: Using the Rs 1.25 Lakh Exemption
You hold listed equity shares for 14 months and make a long-term gain of Rs 2,00,000 in FY 2025-26.
Tax-free portion: Rs 1,25,000. Taxable LTCG: Rs 2,00,000 minus Rs 1,25,000 = Rs 75,000. Tax at 12.5% = Rs 9,375.
Had this been a short-term gain (sale within 12 months): Tax at 20% on the full Rs 2,00,000 = Rs 40,000. The combination of the lower LTCG rate plus the Rs 1.25 lakh exemption saves you Rs 30,625. That is the reward for holding for 12 months and one day instead of 11 months and 29 days.
The Rs 1.25 lakh exemption resets every financial year. You can intentionally book LTCG up to Rs 1.25 lakh every April, pay zero tax, and reinvest at the higher cost, thereby locking in a higher base cost for future gains. This is called tax gain harvesting and it is completely legal and specifically enabled by Section 198 of the ITA 2025.
Part VIndexation: What Survives and What Does Not
What Indexation Does
Indexation adjusts your original purchase cost upward for inflation before calculating the gain. The government notifies a Cost Inflation Index (CII) every year, reflecting 75% of the average rise in the Consumer Price Index (urban). Sec 72(8)(a), ITA 2025
The formula for indexed cost of acquisition is: (Cost of Acquisition) multiplied by (CII for the year of transfer divided by CII for the year of acquisition, or 2001-02, whichever is later). Sec 72(8)(b), ITA 2025 A higher indexed cost means a smaller taxable gain, which means less tax.
The 23 July 2024 Watershed
The Finance (No. 2) Act 2024, effective 23 July 2024, largely eliminated indexation for new transfers. For most assets transferred on or after that date, the 12.5% rate applies without any indexation. However, Section 197(3) of the ITA 2025 carves out a critical protection for property acquired before 23 July 2024.
For an individual or HUF selling land or building (or both) that was acquired before 23 July 2024, the tax payable is capped at the lower of the following two calculations:
Calculation A: 12.5% on the gain computed without indexation.
Calculation B: 20% on the gain computed using the indexed cost of acquisition.
Whichever gives a lower tax number is the amount you pay. The Act achieves this by saying the excess of Calculation A over Calculation B shall be ignored. In practice, you always get the more favourable outcome. Sec 197(3), ITA 2025
Example: Property Grandfathering in Action
You bought a flat in 2005 for Rs 20 lakh. You sell it in March 2026 for Rs 1.2 crore. CII for 2005-06 is 117. CII for 2025-26 is (assumed) 390. You are an individual assessee.
Calculation A (12.5%, no indexation): Gain = Rs 1 crore. Tax = 12.5% of Rs 1 crore = Rs 12.5 lakh.
Calculation B (20%, with indexation): Indexed cost = Rs 20 lakh × (390 ÷ 117) = Rs 66.67 lakh. Gain = Rs 1.2 crore minus Rs 66.67 lakh = Rs 53.33 lakh. Tax = 20% of Rs 53.33 lakh = Rs 10.67 lakh.
Section 197(3) says take the lower amount. You pay Rs 10.67 lakh, not Rs 12.5 lakh. The indexation formula wins here. In cases where property prices rose sharply and inflation-adjustment is large, Calculation B frequently gives a lower result. In areas where prices barely kept pace with inflation, Calculation A may win. The law gives you both options automatically.
| Asset Type | Indexation Available? | Rate | Notes |
|---|---|---|---|
| Property acquired before 23 July 2024 (individual or HUF) | Yes, via Sec 197(3) formula | Lower of 12.5% or 20% with index | Automatic. No election needed. |
| Property acquired on or after 23 July 2024 | No | 12.5% | Flat rate, no adjustment for inflation. |
| Listed equity / equity MFs | No | 12.5% | Grandfathering applies for pre-Feb 2018 purchases. Not indexation. |
| Gold and jewellery (transferred post July 2024) | No | 12.5% | Significant change for long-held gold. |
| Debt MFs (pre-April 2023 acquisition, pre-July 2024 transfer) | Yes (historical) | 20% with indexation | Old transfers only. Post-July 2024 transfers are STCG anyway. |
Part VIWhy STT Changes Everything
The STT Condition in Section 198
The preferential 20% STCG rate and the 12.5% LTCG rate with the Rs 1.25 lakh exemption for equity apply only when Securities Transaction Tax (STT) has been paid on the relevant transaction. Section 198(1)(c) specifies that for equity shares, STT must have been paid on both acquisition and transfer. For equity-oriented mutual fund units and business trust units, STT must have been paid on transfer. Sec 198(1)(c), ITA 2025
In practice, any transaction through a recognised stock exchange in India automatically attracts STT. So if you buy and sell shares on NSE or BSE, you will always have the STT condition satisfied. Problems arise when shares are transferred off-market through private deals or bulk transactions without going through the exchange. In such cases, the beneficial rates do not apply.
What Happens Without STT
If STT is not paid on an equity transfer, the gain is taxed differently. STCG becomes taxable at slab rates instead of 20%. LTCG becomes taxable at 12.5% but without the Rs 1.25 lakh annual exemption. For taxpayers in the 30% slab, this distinction is especially significant for short-term gains, the rate triples from 20% to 30%.
The IFSC Exception: Section 196(3) and Section 198(4) of the ITA 2025 both provide that the STT condition does not apply to transactions undertaken on a recognised stock exchange located in an International Financial Services Centre, such as NSE IFSC at GIFT City, where consideration is paid or received in foreign currency. This enables foreign investors to trade at GIFT City without STT compliance while still accessing the beneficial capital gains rates.
Part VIIOld Sections (ITA 1961) vs New Sections (ITA 2025)
The Income Tax Act 2025 came into force on 1 April 2026 per Section 1(3) of the Act. For FY 2025-26 transactions (i.e., transactions up to 31 March 2026), the old ITA 1961 governs the tax liability. From FY 2026-27 onwards, the ITA 2025 applies. The substance of capital gains law has largely not changed, only the section numbering has been reorganised. This table is essential for practitioners working across both regimes.
| Concept | ITA 1961 (Old Section) | ITA 2025 (New Section) |
|---|---|---|
| Definition: Short-term capital asset | Section 2(42A) | Section 2(101) |
| Definition: Long-term capital asset | Section 2(29A) | Section 2(67) |
| Chargeability of capital gains | Section 45 | Section 67 |
| Transactions not regarded as transfer | Section 47 | Section 70 |
| Mode of computation of capital gains | Section 48 | Section 72 |
| Cost with reference to certain modes of acquisition (inherited assets etc.) | Section 49 | Section 73 |
| Depreciable assets — STCG deemed | Section 50 | Section 74 |
| Slump sale | Section 50B | Section 77 |
| Full value for stamp duty cases (property) | Section 50C | Section 78 |
| Cost of acquisition meaning (including grandfathering) | Section 55(2) | Section 90 |
| STCG on equity — STT paid (20%) | Section 111A | Section 196 |
| LTCG general (12.5% flat) | Section 112 | Section 197 |
| LTCG on equity — STT paid (12.5%, Rs 1.25L exempt) | Section 112A | Section 198 |
| Capital gains exemption on sale of house property (reinvestment) | Section 54 | Section 82 |
| Capital gains exemption on agricultural land | Section 54B | Section 83 |
| Capital gains exemption on compulsory acquisition (industrial land) | Section 54D | Section 84 |
| Capital gains bonds exemption (54EC bonds) | Section 54EC | Section 86 |
| Capital gains exemption on reinvestment in residential house (non-property assets) | Section 54F | Section 87 |
Part VIIIThree Legal Ways to Cut Your Capital Gains Tax
Strategy 1: Harvest the Rs 1.25 Lakh Exemption Every Year
The Rs 1.25 lakh exemption on equity LTCG under Section 198 of the ITA 2025 refreshes every financial year. If you have long-held equity gains, you can sell units worth up to Rs 1.25 lakh in gains every April, pay no tax, and immediately repurchase the same units. Your new cost basis is higher, locking in tax-free appreciation. Over 10 years, this annual harvesting can save a significant amount.
Strategy 2: Set Losses Off Against Gains
Section 109 of the ITA 2025 (corresponding to Section 70 of ITA 1961) allows short-term capital losses to be set off against both STCG and LTCG. Long-term capital losses can only be set off against LTCG. If you have a large LTCG position and an unrealised loss elsewhere, deliberately booking that loss in the same year can reduce your taxable LTCG and defer or eliminate tax. Sec 109, ITA 2025
Loss Harvesting Example
You have LTCG of Rs 4,00,000 on equity shares (taxable portion: Rs 2,75,000 after Rs 1.25L exemption). Tax at 12.5% = Rs 34,375.
You also hold another equity position sitting on an unrealised long-term loss of Rs 2,00,000. You sell that position, booking the Rs 2,00,000 LTCL. The LTCL is set off against your LTCG of Rs 4,00,000, reducing it to Rs 2,00,000. Taxable LTCG after exemption: Rs 75,000. Tax at 12.5% = Rs 9,375.
You saved Rs 25,000 in tax. You can repurchase the position at the lower price, which also gives you a lower cost base for future gains. The loss is not wasted, it is harvested.
Strategy 3: The Patience Play, Cross the Holding Period Threshold
Before selling any capital asset, check how long you have held it. If you are within a few days or weeks of crossing the STCG-to-LTCG threshold, the tax saving from waiting is almost always worth it. On a gain of Rs 5 lakh in equity, crossing from 11.5 months to 12 months saves you: STCG tax (20% of Rs 5L = Rs 1L) minus LTCG tax (12.5% of Rs 3.75L above exemption = Rs 46,875) = Rs 53,125 saved. One month of patience. Rs 53,125 kept.
Short-Term Capital Gain: Key Facts
- Equity / equity MF (STT paid): taxed at flat 20%
- All other assets: taxed at applicable slab rate (up to 30%)
- No exemption of any kind
- Short-term losses can offset both STCG and LTCG
- Unlisted equity, property, gold: slab rate applies
- Debt MFs (post April 2023): always STCG at slab rate
Long-Term Capital Gain: Key Facts
- Flat rate of 12.5% across all asset classes
- Rs 1.25 lakh exemption on equity LTCG every year
- Property (pre-July 2024): better of 12.5% or 20% with indexation
- Long-term losses can only offset LTCG, not STCG
- Grandfathering for equity bought before 1 February 2018
- Can be carried forward 8 years if not fully set off
The Two Numbers That Govern Capital Gains Tax in India
Everything in capital gains taxation comes back to two numbers: 12 and 24. Hold a listed equity share for more than 12 months and your gain is long-term. Hold anything else for more than 24 months and your gain is long-term. Cross those thresholds and the tax rate drops from 20% or your slab rate down to a flat 12.5%. For equity, the first Rs 1.25 lakh of that long-term gain disappears entirely each year.
The Income Tax Act 2025 has reorganised the law entirely, with new section numbers replacing every familiar reference from the old ITA 1961. But the substance is recognisable. Section 196 is the new Section 111A. Section 198 is the new Section 112A. Section 72 is the new Section 48. The logic, the rates, and the holding period rules are consistent with the framework taxpayers and advisors have worked under for years.
What has changed significantly is the treatment of indexation. The 23 July 2024 cut-off date effectively ended indexation as a planning tool for new acquisitions. Only property bought before that date, and only for individuals and HUFs, retains the indexation option through the Section 197(3) formula. For everything else, the 12.5% flat rate without inflation adjustment is the new reality. Buyers of property, gold, and other long-term assets from July 2024 onwards need to factor this in when estimating future tax outgo on eventual sale.
The simplest thing you can do for your own tax efficiency is this: know the holding period threshold for each asset you own, check the date before you sell, and if you are days away from crossing into long-term territory, wait. The law is designed to reward patience. Make sure you collect that reward.
Practical Compliance Checklist
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1If you are selling listed equity shares or equity MF units: Confirm the holding period exceeds 12 months (date of purchase to day before sale). If LTCG for the year stays within Rs 1.25 lakh, no tax applies. Report under Schedule CG in ITR-2 or ITR-3. Use the broker’s capital gains statement to match the FIFO cost allocation.
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2If you are selling immovable property: Check the acquisition date. If acquired before 23 July 2024 and you are an individual or HUF, compute both calculations, 12.5% without indexation and 20% with indexation. Pay the lower of the two. If acquired on or after 23 July 2024, only 12.5% without indexation applies.
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3If you inherited the asset: Include the previous owner’s period of holding when determining STCG versus LTCG classification. Use the previous owner’s original purchase cost as your cost of acquisition under Section 73(1) (Table Sl. No. 1) of the ITA 2025. If cost is not ascertainable, use the fair market value on the date the asset became the previous owner’s property, per Section 90(11).
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4If you hold debt mutual funds: Check the purchase date. Units bought after 31 March 2023 are always taxed at slab rates as STCG under Section 76, regardless of holding duration. Units bought before 1 April 2023 and transferred before 23 July 2024 could qualify for LTCG with indexation under the old rules. Seek clarification from your fund house on the applicable regime for each specific unit purchased.
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5If you have both gains and losses in the same year: Set off short-term losses against both STCG and LTCG first. Set off long-term losses only against LTCG. Any unadjusted LTCL can be carried forward for up to 8 assessment years. File your ITR before the due date to preserve the carry-forward benefit, a belated return forfeits the right to carry forward capital losses.
Frequently Asked Questions
Immovable property, land, building, or both, must be held for more than 24 months from the date of acquisition to qualify as a long-term capital asset. This rule is set out in Section 2(101)(a) of the Income Tax Act 2025. If you sell before completing 24 months, the gain is short-term and taxed at your applicable slab rate. If you sell after 24 months, the gain is long-term and taxed at 12.5%, with the potential benefit of the Section 197(3) indexation formula for property acquired before 23 July 2024.
Under Section 112A of the old Income Tax Act 1961, the LTCG tax rate on equity shares and equity-oriented mutual funds was 10% on gains exceeding Rs 1,00,000 per year. The Finance (No. 2) Act 2024 changed this from the assessment year 2025-26 onwards, raising the rate to 12.5% and increasing the exemption threshold to Rs 1,25,000. The Income Tax Act 2025, under Section 198, codifies these revised rates. So the current rate under ITA 2025 is 12.5% with a Rs 1,25,000 annual exemption, compared to 10% with a Rs 1,00,000 exemption under the original Section 112A of ITA 1961.
No. Under Section 109 of the Income Tax Act 2025 (corresponding to Section 70(3) of the ITA 1961), a long-term capital loss can only be set off against long-term capital gains. It cannot be set off against short-term capital gains. However, a short-term capital loss can be set off against both short-term and long-term capital gains. If your LTCL exceeds LTCG in a given year, the balance LTCL can be carried forward for up to 8 assessment years and set off only against LTCG in those future years.
Section 90(7) of the Income Tax Act 2025 (corresponding to Section 55(2)(ac) of the ITA 1961) provides that for equity shares, equity-oriented MF units, and business trust units acquired before 1 February 2018, the cost of acquisition is deemed to be the higher of the actual purchase price or the lower of: (a) the fair market value (highest quoted price) as on 31 January 2018, and (b) the actual sale consideration. In practical terms, this means any appreciation in the share price up to 31 January 2018 is exempt from LTCG tax. You are only taxed on gains from that date onwards. The rule was introduced to grandfather gains that had already accrued before the reintroduction of LTCG tax on equity in Budget 2018.
Under Section 73(1) (Table Sl. No. 1) of the Income Tax Act 2025, when a capital asset becomes your property as a result of a gift, will, inheritance, succession, or devolution, your cost of acquisition is taken as the cost for which the previous owner acquired it. If the previous owner also received it by gift or inheritance, you trace back through the chain to the last person who actually paid for it, that is the cost. The holding period works the same way: under Section 2(101)(c)(B)(I), you include the period for which the previous owner held the asset when determining whether your gain is short-term or long-term. So if your parent bought shares in 2010 and gifted them to you in 2023, and you sold them in 2025, the total holding period is from 2010 to 2025, long-term in every sense.
Section 196(2) of the Income Tax Act 2025 provides a specific relief. If you are a resident individual or HUF, and your total income minus the STCG is below the basic exemption limit, the STCG is first reduced by that shortfall, and the 20% rate applies only to the balance. For example, if your basic exemption is Rs 3 lakh and your other income is Rs 2 lakh, your shortfall is Rs 1 lakh. The first Rs 1 lakh of STCG is shielded by the basic exemption. Tax at 20% applies only to STCG exceeding Rs 1 lakh. The same relief is available for LTCG under Section 197(2) and Section 198(3) of the ITA 2025.
Legal Disclaimer: This article is for educational and informational purposes only. All provisions cited refer to the Income Tax Act 2025 (Act 30 of 2025, as amended by Finance Act 2026) and, where indicated, the Income Tax Act 1961. Tax laws are subject to change by Finance Acts and CBDT notifications. The examples used are illustrative and are based on the provisions as understood at the time of writing. Nothing in this article constitutes legal or tax advice. Consult a qualified tax professional for advice specific to your situation.
