Capital gains tax is an important consideration when selling assets such as real estate, equity shares, or mutual funds. Understanding its applicability and the differences in taxation based on asset class and holding period helps ensure proper compliance with tax laws.
This guide provides a factual overview of capital gains tax rules as applicable to listed securities, mutual funds, and immovable property, including changes effective from July 23, 2024.
What is Capital Gains Tax?
Capital gains tax (CGT) is levied on the profit earned from the sale of capital assets. The tax applies only upon sale or transfer of the asset. The applicable tax rate depends on the type of asset and the duration for which it was held.
Short-term vs. Long-term Capital Gains
The classification of gains into short-term or long-term depends on the asset type and the holding period:
Short-term Capital Gains (STCG) Assets are considered short-term if held for:
- Up to 12 months: Listed equity shares, equity mutual funds, UTI units, listed securities, zero-coupon bonds
- Up to 24 months: Immovable property (from July 23, 2024 onwards)
- Up to 36 months: For real estate sold before July 23, 2024
Long-term Capital Gains (LTCG) Assets are considered long-term if held beyond the short-term duration mentioned above. For instance:
- More than 12 months for listed shares and equity mutual funds
- More than 24 months for real estate and other specified assets (if sold on or after July 23, 2024)
Tax Rates (Effective from July 23, 2024)
| Asset Type | Holding Period | Tax Rate (STCG) | Tax Rate (LTCG) |
| Listed equity shares / equity MFs | ≤ 12 months | 20% | 12.5% (on gains exceeding ₹1.25 lakh) |
| Unlisted shares | ≤ 24 months | Slab rate | 20% with indexation (holding > 24 months) |
| Debt mutual funds | ≤ 36 months | Slab rate | 12.5% (flat rate, no indexation) |
| Real estate (immovable property) | ≤ 24 months | Slab rate | 12.5% (default) or 20% with indexation (optional)* |
*Note: Taxpayers holding real estate acquired before July 23, 2024, may choose between 12.5% flat or 20% with indexation.
Source: Ministry of Finance Notification dated July 2024.
STT Applicability Securities Transaction Tax (STT) is applicable on the sale of listed equity shares and equity mutual funds transacted through recognised stock exchanges. The concessional tax rate (12.5% LTCG) applies only where STT has been paid.
Capital Gains Tax on Mutual Funds and Stocks
- Equity Mutual Funds & Listed Shares:
- Short-term (≤12 months): 20% flat rate
- Long-term (>12 months): 12.5% on gains exceeding ₹1.25 lakh
- Debt Mutual Funds:
- Short-term: Taxed as per income tax slab
- Long-term: 12.5% flat rate (from July 23, 2024); no indexation available
Capital Gains Tax on Real Estate Transactions
- Short-term Capital Gains (STCG):
- Property held for ≤24 months (for sales post-July 23, 2024)
- Taxed as per the individual’s income tax slab
- No indexation available
- Long-term Capital Gains (LTCG):
- Property held for >24 months
- Taxed at 12.5% flat or 20% with indexation (optional, based on date of acquisition)
- Indexation adjusts purchase cost for inflation, reducing taxable gains
Capital Gains Exemptions for Real Estate (Subject to Conditions)
- Section 54: Exemption on sale of a residential property if proceeds are reinvested in another residential property within specified timelines.
- Section 54EC: Exemption if LTCG is invested in government-specified bonds (e.g., NHAI/REC) within 6 months of sale; bonds must be held for 5 years.
- Section 54F: Available when capital gains from assets other than residential property are invested in a new residential property.
Refer to Income Tax Act, 1961 for full eligibility criteria.
Considerations for Non-Resident Indians (NRIs)
As per recent amendments, NRIs are subject to:
- 12.5% LTCG on sale of property or shares (no indexation benefit)
- TDS of 12.5% on such transactions
- Relief may apply based on Double Taxation Avoidance Agreements (DTAAs)
Key Considerations for Capital Gains Management
- Asset Holding Period: Assets held beyond the long-term threshold qualify for concessional rates.
- Indexation: Applies only to assets sold before July 23, 2024, or optionally for real estate held before this date.
- Exemption Planning: Utilize eligible provisions under Sections 54, 54EC, or 54F where applicable.
Conclusion
Capital gains taxation varies based on the nature of the asset and the period it was held. Understanding applicable provisions and recent legislative changes ensures proper compliance and aids in tax-efficient financial planning.
Disclaimer
This document is for informational purposes only and does not constitute financial/tax advice or an offer to purchase any financial product. Investments in securities markets are subject to market risks. Read all related documents carefully before investing. Past performance is not indicative of future results. Illustrations in this article are for educational purposes only and do not constitute investment advice.
Sources:
https://incometaxindia.gov.in/Documents/Left%20Menu/income-from-capital-gains.htm
https://incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs+on+Capital+Gains