Capital Gains Tax in India: STCG vs LTCG

What Is a Capital Asset? Understanding the Scope of Capital Gains Tax

Before you can understand capital gains tax, you need to understand what qualifies as a 'capital asset' under the Income Tax Act. Section 2(14) of the Act defines a capital asset broadly as any property held by an assessee, whether or not connected with their business or profession. This sweeping definition encompasses a wide range of assets that Indian investors commonly hold.

Equity shares and preference shares listed on recognised stock exchanges like the NSE and BSE are capital assets. So are equity-oriented and debt mutual fund units, bonds and debentures, Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), gold in physical or paper form (such as Sovereign Gold Bonds or Gold ETFs), immovable property like land and buildings, and even intellectual property like patents and copyrights.

However, the law carves out certain exclusions. Stock-in-trade - that is, goods held primarily for the purpose of sale in the ordinary course of business - is not a capital asset. So if you are a trader whose primary income is the frequent buying and selling of goods, those goods are not capital assets. In the context of securities, the Income Tax Act and SEBI regulations draw a distinction between 'investor' activity (capital gains) and 'trader' activity (business income). This line is not always crisp and has been the subject of considerable litigation over the years.

For most retail investors in the Indian market, the capital assets they deal with most frequently are:

1. Listed equity shares on the NSE or BSE 2. Units of equity mutual funds, including ELSS (Equity Linked Savings Schemes) 3. Units of debt mutual funds, hybrid funds, and fund-of-funds 4. Listed bonds, government securities, and NCDs (Non-Convertible Debentures) 5. Unlisted shares of private companies 6. Immovable property - residential and commercial 7. Gold in physical form, Sovereign Gold Bonds, and Gold ETFs

Each of these asset classes has its own set of holding-period thresholds and tax rates, which we will cover in detail in the sections that follow.

It is also important to understand what is NOT taxed as capital gains. If you are running an intraday trading operation on the NSE where you buy and sell shares within the same trading session without taking delivery, the Income Tax Department classifies that as speculative business income, not capital gains. Futures and Options (F&O) transactions are treated as non-speculative business income. The distinction matters enormously because these categories are taxed at slab rates and have different loss set-off rules compared to capital gains.

The concept of 'transfer' is also central to the levy of capital gains tax. Section 2(47) defines transfer to include sale, exchange, relinquishment, compulsory acquisition, and even certain types of gifts and family partition. Some transfers are specifically exempt from capital gains tax under Section 47 - for instance, transfers in amalgamations, certain gifts to relatives, and transfers under a will.

Short-Term vs Long-Term: The Holding Period Rules

The single most important factor in determining your capital gains tax liability is how long you held the asset before selling it. India's income tax law uses this holding period to classify gains into two broad buckets: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The threshold, however, is not a uniform twelve months - it varies significantly depending on the type of asset.

For listed equity shares and equity-oriented mutual funds, the threshold is twelve months. If you sell listed equity shares that you have held for twelve months or less, the gain is STCG. If you have held them for more than twelve months, the gain is LTCG. This twelve-month rule also applies to ETFs that are equity-oriented, units of business trusts like REITs and InvITs, and zero-coupon bonds.

For unlisted shares and immovable property (land, buildings, house property), the threshold is twenty-four months. Hold for two years or less, and the gain is short-term; hold for more than two years, and it becomes long-term. Notably, the Finance Act of 2017 reduced the holding period for immovable property from three years to two years to provide some relief to real estate investors.

For debt mutual funds, bonds, debentures, and most other assets not specifically classified elsewhere, the threshold was historically thirty-six months (three years). However, the Finance Act 2023 made a landmark change: gains from debt mutual funds purchased on or after 1 April 2023 are now always taxed at the investor's applicable income tax slab rate, regardless of holding period, removing the LTCG classification and the indexation benefit for this category of funds. This was a significant shift and substantially changed the tax calculus for conservative investors who had relied on debt mutual funds for tax-efficient fixed income.

Gold ETFs and Gold Fund-of-Funds fall into the debt mutual fund category post the 2023 amendment and are similarly taxed at slab rates regardless of how long you hold them.

Physical gold and jewellery, on the other hand, still follow a thirty-six month threshold: hold for three years or less for STCG; more than three years for LTCG with indexation benefit.

Sovereign Gold Bonds (SGBs) issued by the RBI have a special provision: if you hold them until maturity (eight years), the capital gains arising at redemption are completely exempt from tax. If you sell them on the secondary market before maturity, the thirty-six month rule applies for classifying the gains.

Listed bonds and debentures use the twelve-month threshold (aligned with listed securities), while unlisted bonds and debentures use twenty-four months.

To summarise the holding periods clearly: - Listed equity shares, equity ETFs, equity mutual funds, REITs, InvITs: 12 months - Unlisted shares, immovable property: 24 months - Physical gold, unlisted bonds, debt instruments (other than those covered by Finance Act 2023): 36 months - Debt mutual funds purchased on or after 1 April 2023: always slab rate (no LTCG/STCG distinction for tax rates)

The date from which you start counting the holding period is the date of acquisition. For listed shares, this is the date of purchase as reflected on your Demat account or contract note. For mutual funds, it is the date of allotment of units. For property, it is the date of registration of the sale deed or in some cases the date of allotment by a developer. Keeping accurate records of acquisition dates is essential for correct tax computation.

Tax Rates: STCG and LTCG at a Glance

Once you have determined whether your gain is short-term or long-term, the next question is: at what rate is it taxed? This is where the Indian tax structure introduces some important distinctions based on whether Securities Transaction Tax (STT) was paid at the time of sale.

For listed equity shares and equity-oriented mutual funds where STT has been paid, STCG is taxed at a flat rate of 15% under Section 111A of the Income Tax Act (refer the latest Finance Act for the current applicable rate). No basic exemption limit is available to offset against this gain - it is taxed from the first rupee. However, a non-resident or a resident individual below the basic exemption limit in terms of other income may be able to benefit from the exemption limit to that extent; the rules here are nuanced and a tax professional should be consulted.

For listed equity shares and equity-oriented mutual funds where STT has been paid, LTCG exceeding INR 1 lakh in a financial year is taxed at 10% without the benefit of indexation under Section 112A (refer the latest Finance Act for the current applicable rate and threshold). Gains up to INR 1 lakh are exempt. This exemption is per financial year. The 10% LTCG tax on equity was reintroduced by the Finance Act 2018 after a period of complete exemption, and it has been a significant point of discussion ever since for equity investors.

For assets where STT is not paid - unlisted shares, property, physical gold, debt instruments that are still classifiable as short or long term - the picture is different.

STCG on assets without STT applicability is added to the investor's total income and taxed at the applicable slab rate. So if you are in the 30% tax bracket and sell unlisted shares at a profit after holding for eighteen months (which is short-term for unlisted shares), that gain is added to your income and taxed at 30% plus applicable surcharge and cess.

LTCG on property, physical gold, unlisted shares, and other qualifying assets is taxed at 20% with the benefit of indexation under Section 112. Indexation allows you to inflate the cost of acquisition using the Cost Inflation Index (CII) published by the CBDT, thereby reducing the taxable gain. We will explain indexation in detail in a dedicated section.

For listed bonds and debentures (other than zero-coupon bonds where special rules apply), the 20% with indexation framework under Section 112 applies for LTCG.

Non-resident Indians (NRIs) have a somewhat different tax treatment, with withholding tax (TDS) obligations falling on the buyer or the fund house, and they should refer to the relevant Double Taxation Avoidance Agreements (DTAAs) their country of residence has with India to understand their final liability.

Surcharge and Health and Education Cess apply on top of the base tax rates. The effective tax rate is therefore higher than the headline figures. The surcharge rate depends on the total income, and it is important to compute the total tax liability including surcharge and cess when doing tax planning.

Always refer to the latest Finance Act for the most current rates, as these are revised regularly through the Union Budget.

How to Calculate Your Capital Gain: The Full-Cost Method

Calculating your capital gain correctly is as important as knowing the applicable tax rate. The basic formula is deceptively simple: Capital Gain = Full Value of Consideration minus (Cost of Acquisition + Cost of Improvement + Cost of Transfer). But each of these components has specific rules under the Income Tax Act.

The Full Value of Consideration is the price at which you sold the asset. For listed securities, this is the sale price as per your contract note from your broker on the NSE or BSE. For property, it is the sale price as per the sale deed, subject to the Stamp Duty Value provisions under Section 50C.

Section 50C is a critical anti-avoidance provision for property transactions. If the sale consideration declared by the seller is less than the stamp duty value (the value assigned by the state government's stamp duty authorities), the stamp duty value is deemed to be the full value of consideration for tax purposes. This prevents under-reporting of property sale prices. There is a tolerance limit - if the actual sale price is within a certain percentage of the stamp duty value, the actual sale price may be accepted. Refer the latest Finance Act for the current tolerance threshold.

The Cost of Acquisition is what you originally paid for the asset. For shares, this includes the purchase price plus brokerage paid at the time of purchase. STT paid at the time of purchase is, however, not included in the cost of acquisition because STT is separately allowed as a deduction when computing business income, but not as part of capital gains computation.

The Cost of Improvement covers any capital expenditure incurred to enhance the value of the asset after acquisition. For property, this might include expenses on renovation or construction of an additional floor. For financial assets like shares, improvements are rarely applicable.

The Cost of Transfer includes expenses directly associated with the act of selling the asset - brokerage paid on the sale transaction, stamp duty on transfer, registration charges, and legal fees for property sales. These are all deductible from the full value of consideration.

For assets inherited through a will or received as a gift, the cost of acquisition is the cost at which the previous owner acquired the asset, not the fair market value at the time of receipt. However, for assets acquired before 31 January 2018 (relevant to the reintroduction of LTCG tax on equity), a grandfathering provision allows the cost of acquisition to be taken as the higher of the actual cost or the fair market value as on 31 January 2018, subject to a cap at the actual sale price. This grandfathering clause is important for investors who have held equity shares or equity mutual funds for a very long time.

For shares received under an Employee Stock Option Plan (ESOP), the cost of acquisition for capital gains purposes is the Fair Market Value (FMV) on the date of exercise, on which the perquisite tax would have been paid as salary income. This prevents double taxation on the same gain.

Fractional shares and bonus shares also have specific cost rules. Bonus shares issued by a company have a cost of acquisition of zero for the shareholder who receives them. Rights shares have a cost equal to the price paid for them. The holding period for bonus shares starts from the date of allotment of the bonus shares, not from the original purchase date.

Mutual fund units purchased through Systematic Investment Plans (SIPs) require careful tracking because each SIP instalment is a separate purchase with its own acquisition date and cost. When units are redeemed, the FIFO (First-In, First-Out) method is generally applied - the units purchased first are deemed to have been sold first, which affects the holding period and therefore the classification of gains.

Indexation: How It Reduces Your Long-Term Capital Gains Tax

One of the most valuable reliefs available to long-term investors in India is the concept of indexation, which is available for certain categories of assets under Section 48 of the Income Tax Act. Indexation allows you to inflate the original cost of acquisition to account for inflation over the holding period, thereby reducing the taxable capital gain.

The tool used for indexation is the Cost Inflation Index (CII), which is notified by the CBDT every year. The base year is currently taken as Financial Year 2001-02, where the CII is set at 100. Each subsequent year's CII reflects the cumulative inflation in the economy, so assets held for longer periods benefit more from indexation.

The indexed cost of acquisition is calculated as follows: Indexed Cost = (Actual Cost of Acquisition × CII of the Year of Sale) ÷ CII of the Year of Acquisition.

If the asset was acquired before Financial Year 2001-02 (the base year), you have the option to use the Fair Market Value as on 1 April 2001 as your cost of acquisition for indexation purposes, which can significantly reduce your taxable gain on very old assets.

Let us understand why indexation matters so much. Suppose you purchased a plot of land for INR 20 lakhs several years ago and sell it today for INR 60 lakhs. Without indexation, your LTCG would be INR 40 lakhs, taxed at 20%, giving a tax liability of INR 8 lakhs. With indexation, your cost of INR 20 lakhs gets inflated using the CII, which might bring the indexed cost up to, say, INR 40 lakhs (depending on the actual CII figures for the relevant years). Your LTCG then reduces to INR 20 lakhs, and the tax at 20% is only INR 4 lakhs - a saving of INR 4 lakhs purely through indexation.

Indexation is available for long-term capital gains on immovable property, physical gold, unlisted shares, and debt instruments that remain classifiable as long-term under the current rules. It is notably not available for equity shares and equity mutual funds, which are taxed at 10% (above the INR 1 lakh threshold) under Section 112A without indexation.

For debt mutual funds purchased before 1 April 2023, the legacy rules applied - LTCG after three years was taxed at 20% with indexation. Units held in debt funds before this cut-off date continue to be eligible for the old treatment until they are redeemed, according to clarifications issued by the CBDT. However, this is an area with evolving interpretations and investors should check for the latest clarifications.

It is important to note that indexation reduces the cost of acquisition only. The cost of improvement can also be indexed separately. The cost of transfer, however, is not indexed - it is deducted at its actual value.

For NRI investors, the indexation benefit for property sales in India can be a powerful tool, but they also face TDS deductions at the time of sale. The interaction of indexation benefits with DTAA provisions adds further complexity to NRI tax planning.

An important recent development: the Finance Act 2024 proposed significant changes to the indexation benefit for immovable property, generating considerable debate. Investors should refer to the latest Finance Act and any associated CBDT circulars to understand the current position on indexation for property, as this area has seen active legislative attention.

Exemptions from Capital Gains Tax: Sections 54, 54EC, and More

Indian tax law offers several important exemptions from capital gains tax, particularly for long-term gains. These exemptions are designed to encourage reinvestment of proceeds into productive assets and to provide relief to individuals reinvesting in residential property. Understanding these exemptions can significantly reduce your tax outgo if planned correctly.

Section 54 - Reinvestment in Residential Property: This is the most commonly used capital gains exemption for individuals. If you sell a residential property and make an LTCG, you can claim exemption by reinvesting the capital gains (not the entire sale proceeds) in purchasing or constructing another residential property in India. The new property must be purchased within one year before or two years after the date of sale, or constructed within three years of the sale. The exemption is limited to the amount of capital gains reinvested. The Finance Act 2023 capped the maximum exemption under Section 54 at INR 10 crore, meaning gains above that threshold on very high-value property transactions remain taxable.

Section 54F - Reinvestment from Other Long-Term Assets: This section applies to LTCG arising from the sale of any long-term capital asset other than a residential property. If you sell, say, listed shares or gold at an LTCG, and you do not own more than one residential property at the time of sale, you can claim exemption by investing the entire net consideration (not just the gains) in a new residential property within the same time limits as Section 54. The exemption is proportionate to the amount invested.

Section 54EC - Investment in Capital Gains Bonds: This exemption is available for LTCG arising from the sale of immovable property or other specified long-term assets. You can invest the capital gains (up to INR 50 lakhs per financial year) in specified bonds issued by entities such as the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC) within six months of the sale. These bonds have a mandatory lock-in period of five years. The interest on these bonds is taxable, but the principal investment gives you exemption from capital gains tax.

Section 54B - Agricultural Land: Individuals and Hindu Undivided Families (HUFs) can claim exemption on capital gains from the sale of agricultural land if the gains are reinvested in the purchase of another agricultural land within two years.

Capital Gains Account Scheme (CGAS): If you have sold a property and intend to reinvest under Section 54 or 54F but cannot do so before the due date for filing your income tax return, you can deposit the capital gains amount in a Capital Gains Account Scheme with an authorised bank. This deposit is treated as constructive reinvestment for the purpose of claiming the exemption, and the actual reinvestment must happen within the prescribed time limits.

Sovereign Gold Bond Redemption: As mentioned earlier, if SGBs are held to maturity (eight years), the capital gains arising on redemption are completely exempt from tax, making them one of the most tax-efficient gold investment instruments in India.

Grandfathering for Pre-2018 Equity Gains: The reintroduction of LTCG tax on equity in 2018 came with a grandfathering clause. Gains on equity shares or equity mutual funds that had accrued up to 31 January 2018 are effectively exempt. The cost of acquisition for grandfathering is taken as the higher of the actual cost or the fair market value on 31 January 2018, subject to the actual sale price not being lower.

All exemptions come with conditions, deadlines, and lock-in requirements. The consequences of failing to meet these conditions (for example, selling the new property before the required holding period) can result in the exemption being withdrawn and the original capital gain becoming taxable in the year of withdrawal. Meticulous compliance and documentation are therefore essential when relying on these exemptions.

Set-Off and Carry-Forward of Capital Losses

Investing does not always result in gains, and the Indian tax law provides a structured mechanism to set off capital losses against capital gains, which can meaningfully reduce your tax liability. Understanding these rules is important for smart tax planning.

The basic principle is that capital losses can only be set off against capital gains - they cannot be set off against salary income, business income, or other heads of income. This is a key distinction from business losses, which enjoy broader set-off rights.

Within the capital gains head, the rules distinguish between short-term and long-term:

Short-Term Capital Losses (STCL) can be set off against both Short-Term Capital Gains and Long-Term Capital Gains in the same financial year. This makes STCL the more flexible type of capital loss.

Long-Term Capital Losses (LTCL) can only be set off against Long-Term Capital Gains in the same financial year. They cannot be set off against STCG. This is the more restrictive rule.

The above rules apply to losses from financial assets (shares, mutual funds, etc.). For speculative losses (arising from intraday trading), the restriction is even tighter: speculative losses can only be set off against speculative gains, not against capital gains or non-speculative business income.

If the losses cannot be fully absorbed by gains in the same year (because you had more losses than gains), the unabsorbed capital losses can be carried forward for up to eight assessment years. This carry-forward is subject to the condition that you have filed your income tax return by the due date for the year in which the loss was incurred. This is one of the most important reasons why timely ITR filing is essential for investors with capital losses.

In subsequent years, the same set-off rules apply: carried-forward STCL can be set off against STCG or LTCG; carried-forward LTCL can only be set off against LTCG.

Tax-Loss Harvesting is a strategy where investors deliberately realise capital losses on underperforming investments before the end of the financial year to offset capital gains they have made on other investments, thereby reducing their net taxable capital gains. On the NSE or BSE, this might involve selling shares or mutual fund units that are trading below your purchase price. If you still want to maintain exposure to that security, you can repurchase after a suitable interval (being mindful of the wash-sale dynamics, though India does not have a formal wash-sale rule like the US - but transaction costs and market risk during the gap should be considered).

Some investors use the INR 1 lakh LTCG exemption on equity actively through a strategy called 'grandfathering and rebooking', where they book long-term gains up to INR 1 lakh each financial year and immediately repurchase at the new higher price, resetting their cost of acquisition. This effectively harvests the tax-free LTCG allowance each year. Over a long investment horizon, this can defer or eliminate a significant portion of the LTCG tax liability.

Important: Capital losses on exempt income cannot be carried forward. For instance, if SGBs are redeemed at maturity and the gains are exempt, a loss on SGBs redeemed before maturity would need to be evaluated in the context of the specific provisions applicable.

All set-off and carry-forward transactions must be disclosed accurately in your ITR. Schedule CG in the ITR forms (ITR-2 or ITR-3 for those with capital gains) requires a detailed break-up of all capital gains and losses, asset-category wise.

Securities Transaction Tax and Its Relationship with Capital Gains

Securities Transaction Tax (STT) is a tax levied in India on the purchase and sale of securities traded on recognised stock exchanges. Introduced in 2004, STT was designed partly to prevent tax evasion on equity transactions and to ensure that gains from equity investments entered the tax net. Understanding how STT interacts with capital gains tax is important for equity investors.

STT is charged as a percentage of the transaction value (the rate varies by type of transaction - equity delivery, equity intraday, derivatives - and is specified by the Finance Act). When you buy or sell equity shares through a broker on the NSE or BSE in the delivery segment, STT is deducted by the exchange at the point of transaction. You can see the STT amount on your contract note from your broker.

The most important interaction between STT and capital gains tax is this: the concessional tax rates under Section 111A (15% STCG) and Section 112A (10% LTCG above INR 1 lakh) are available only for transactions where STT has been paid. This condition was introduced to ensure that investors who transact through regulated, transparent market infrastructure get the benefit of the lower capital gains tax rates, while off-market transactions in equity do not enjoy the same concession.

For equity sold in an off-market deal (for instance, transfer of unlisted shares) where STT is not applicable, the STCG would be taxed at slab rates and the LTCG would be taxed at 20% with indexation under Section 112, rather than the concessional rates.

STT paid at the time of purchasing equity shares is not deductible as a cost of acquisition for computing capital gains. However, STT paid at the time of sale is also not separately deductible (unlike brokerage, which is treated as part of the cost of transfer). The logic is that the concessional tax rate (10% or 15% rather than the full slab rate of up to 30%) itself represents the offset for the STT cost.

For F&O traders, STT is deductible as a business expense since F&O income is treated as business income rather than capital gains. This is one of the reasons why F&O taxation is treated differently from equity delivery trading.

Intraday equity traders (those who buy and sell shares in the same session without taking delivery) are also subject to STT, but their gains are classified as speculative business income rather than capital gains, so the Section 111A and 112A concessional rates do not apply to them either. Their income is taxed at slab rates.

Investors sometimes confuse STT with capital gains tax, thinking that paying STT means they have 'paid their tax' on equity transactions. This is incorrect. STT is a transaction tax, not an income tax. Capital gains tax is payable separately when you file your ITR, based on the gains you have made over the year. STT is, however, factored into the design of the capital gains tax rate - the concessional equity rates exist partly because STT provides a baseline revenue stream for the government on equity transactions.

Capital Gains Tax on Mutual Funds: Equity, Debt, and Hybrid

Mutual funds are one of the most popular investment vehicles for Indian retail investors, and the capital gains tax treatment of mutual funds deserves a dedicated explanation. The rules vary significantly depending on the type of fund, and the Finance Act 2023 made landmark changes that every mutual fund investor should understand.

Equity-Oriented Mutual Funds: SEBI defines an equity-oriented mutual fund as one that invests at least 65% of its assets in equity and equity-related instruments of Indian companies. For such funds, the capital gains tax rules mirror those for direct equity investments. STCG (holding period of twelve months or less) is taxed at 15% under Section 111A. LTCG (holding period exceeding twelve months) above INR 1 lakh is taxed at 10% under Section 112A. Both rates are concessional because the fund pays STT on its transactions. The ELSS category of equity mutual funds, which has a mandatory three-year lock-in, qualifies as equity-oriented and its gains are treated accordingly.

Debt Mutual Funds: The Finance Act 2023 fundamentally changed the taxation of debt mutual funds. For units purchased on or after 1 April 2023, gains from debt mutual funds (those that invest less than 65% in equity) are now always taxed at the investor's applicable income tax slab rate, with no distinction between short-term and long-term. The indexation benefit, which was a major attraction of debt funds over fixed deposits for investors in higher tax brackets, has been removed for new investments. This has significantly reduced the tax advantage of debt funds over bank fixed deposits for high-income investors.

For units of debt mutual funds purchased before 1 April 2023, the legacy rules continue to apply at the time of redemption: STCG (within three years) at slab rate; LTCG (after three years) at 20% with indexation. As the years pass and investors redeem these older units, the entire debt mutual fund universe will gradually transition to the new slab-rate regime.

Hybrid Mutual Funds: The classification of a hybrid fund depends on its equity allocation. Aggressive hybrid funds (also called balanced funds) typically maintain more than 65% in equity and are therefore treated as equity-oriented for tax purposes. Conservative hybrid funds with lower equity allocation would fall under the debt mutual fund category and face slab-rate taxation on new investments made after 1 April 2023.

Arbitrage Funds are a special category. Despite investing largely in arbitrage opportunities and looking like a low-risk product, SEBI requires them to maintain at least 65% of assets in equities (including derivatives used for hedging). This qualifies them as equity-oriented for tax purposes, giving them the same 15%/10% tax treatment as equity funds. This makes arbitrage funds a popular short-term parking option for investors in higher tax brackets, as the 15% STCG rate on holding periods up to twelve months is lower than the 30% slab rate that would apply to a fixed deposit interest income.

Fund of Funds (FoFs), including Gold Fund-of-Funds and International FoFs, have historically been classified as non-equity-oriented and thus faced the debt mutual fund tax treatment. Post the Finance Act 2023, new investments in FoFs face slab-rate taxation.

Switching between mutual fund schemes - even within the same fund house - is treated as a redemption and a fresh purchase for tax purposes. This means that a switch from a growth plan to a dividend plan, or from one scheme to another, triggers capital gains tax on the appreciated units, even if no cash left your account. Investors using systematic transfer plans (STPs) should be particularly mindful of this, as each transfer is a taxable event.

Dividend income from mutual funds (from dividend/IDCW plans) is also taxable in the hands of the investor at slab rates after the abolition of Dividend Distribution Tax (DDT) in the Finance Act 2020. This is a separate tax event from capital gains and should not be confused with gains arising on redemption.

NRI Capital Gains Taxation: Special Considerations

Non-Resident Indians (NRIs) who invest in the Indian capital markets through Portfolio Investment Scheme (PIS) accounts or otherwise are subject to capital gains tax in India, but with some specific provisions and procedural requirements that differ from those applicable to resident Indians.

For NRIs, the capital gains tax rates on listed equity shares and equity-oriented mutual funds are the same as for residents - 15% for STCG under Section 111A and 10% for LTCG under Section 112A. However, the mechanism of tax collection is different. Under Section 195 of the Income Tax Act, the buyer or the fund house is required to deduct TDS (Tax Deducted at Source) at the applicable rate before making payment to the NRI investor. The TDS rate is typically the applicable capital gains tax rate plus surcharge and cess.

For property sales by NRIs, the buyer is required to deduct TDS under Section 195 at a higher rate (often 20% to 30% plus surcharge and cess) on the full sale consideration, not just on the gains. This can result in significant TDS deductions even when the actual taxable gain is much lower. NRIs can apply to the Assessing Officer for a lower TDS deduction certificate under Section 197 if they can demonstrate through computation that the actual tax liability is less than the TDS amount.

The basic exemption limit is available to NRIs (other than those in the non-resident not ordinarily resident category, where different rules may apply), but it must be applied in a specific sequence - first against non-STT-eligible income, then against other income, with the concessional-rate capital gains potentially benefiting from the residual exemption.

Double Taxation Avoidance Agreements (DTAAs): India has comprehensive DTAAs with many countries. For NRIs resident in countries like the UAE, Mauritius, Singapore, the Netherlands, and others, the DTAA may provide a more favourable tax treatment on certain types of capital gains. The 'Mauritius route' and 'Singapore route' for capital gains, which were extensively used by Foreign Portfolio Investors (FPIs) in the past, have been significantly curtailed through treaty amendments and the General Anti-Avoidance Rules (GAAR). NRIs should take specific professional advice on the DTAA provisions applicable to them.

NRIs are also required to file income tax returns in India if their Indian income exceeds the basic exemption limit, or if they want to claim a refund of excess TDS deducted. The applicable ITR form for NRIs with capital gains is typically ITR-2 or ITR-3.

Foreign Exchange Management Act (FEMA) regulations govern repatriation of capital gains by NRIs. Proceeds from equity investments made through PIS accounts in NRE (Non-Resident External) accounts are freely repatriable. However, investments made from NRO (Non-Resident Ordinary) accounts are subject to repatriation limits and conditions as specified by the RBI from time to time. SEBI and RBI regulations together govern what NRIs can invest in and the procedural requirements for investment and repatriation.

Tax Planning Strategies for Capital Gains

While this guide cannot recommend specific investments, it can outline the general principles of legitimate, legal tax planning (also called tax avoidance as distinct from tax evasion) that investors can consider when managing their capital gains liability. All planning strategies should be implemented in compliance with the Income Tax Act and with guidance from a qualified tax professional.

Utilise the INR 1 Lakh LTCG Exemption on Equity: Every financial year, up to INR 1 lakh of long-term capital gains from listed equity and equity mutual funds is exempt from tax. Investors with a large portfolio of appreciated equity can systematically book gains up to this threshold each year, reset the cost of acquisition, and continue holding the investment. Over many years, this strategy can meaningfully reduce the accumulated LTCG tax liability.

Time Your Redemptions Strategically: Since the difference between short-term and long-term is often one day, timing a redemption to fall after the completion of the relevant holding period (twelve months for equity, twenty-four months for property/unlisted shares) can shift the applicable tax rate significantly - from slab rate to 15% for equity STCG, or from 15% STCG to 10% LTCG for equity.

Balance Gains with Losses: If you have made gains on some investments and are sitting on unrealised losses on others, consider whether it makes sense to realise those losses before the end of the financial year to set them off against the gains. Remember that STCL can offset both STCG and LTCG, making it particularly valuable. This is the essence of tax-loss harvesting.

Carry Forward Losses Properly: Ensure you file your ITR on time to preserve your right to carry forward capital losses. A loss can only be carried forward if the return for the year in which it was incurred is filed by the due date. Missing this deadline means permanently losing the ability to use that loss for future set-offs.

Consider the Capital Gains Account Scheme: If you have sold a property or other asset and made an LTCG, but are not yet ready to reinvest under Section 54 or 54F, deposit the gains in a Capital Gains Account Scheme before filing your ITR. This preserves your exemption claim while giving you time to make the qualifying reinvestment.

Understand the SGB Tax Advantage: For long-term investors seeking gold exposure, Sovereign Gold Bonds held to maturity offer complete capital gains tax exemption on the appreciation. This is a significant advantage over gold ETFs or physical gold, where LTCG is taxed at 20% with indexation (or at slab rates for gold ETFs post-2023 amendments, depending on the category). The SGB also offers a fixed interest coupon (taxable as income), making it doubly advantageous compared to non-income-generating gold.

Familiarise Yourself with ITR Filing Requirements: Capital gains, no matter how small, must be reported in your income tax return. Salaried individuals who normally file ITR-1 (Sahaj) cannot report capital gains in that form - they must use ITR-2. Taxpayers with business income from trading (intraday or F&O) must use ITR-3. Using the wrong ITR form can result in your return being treated as defective.

Maintain Detailed Records: For every capital transaction, preserve the following: date of acquisition, purchase price, brokerage paid, date of sale, sale price, brokerage paid on sale, and any indexed cost calculations for long-term assets. Demat account statements, contract notes from your broker, and mutual fund account statements are the primary source documents. SEBI-registered brokers are required to provide these, and they are typically available in your trading account's back-office portal.

GAAR Awareness: The General Anti-Avoidance Rules, introduced with effect from 1 April 2017, empower the tax authorities to recharacterise arrangements that have no commercial substance and are primarily designed to obtain a tax benefit. Legitimate tax planning is protected, but aggressive or artificial arrangements designed purely to avoid capital gains tax can be challenged under GAAR.

Example

Key benefits

How it works

1. 1
   Identify the Capital Asset

   Determine the type of capital asset sold - listed equity, mutual fund, property, gold, bonds, etc. This determines the applicable holding period threshold and tax rate framework.

2. 2
   Calculate the Holding Period

   Count the number of days from the date of acquisition to the date of sale. Compare this against the applicable threshold (12, 24, or 36 months) to classify the gain as STCG or LTCG.

3. 3
   Compute the Capital Gain

   Subtract the cost of acquisition (and cost of improvement and cost of transfer) from the full value of consideration. For LTCG on eligible assets, inflate the cost using the CII to arrive at the indexed cost before computing the gain.

4. 4
   Apply Exemptions

   Check whether any exemptions apply - such as the INR 1 lakh equity LTCG exemption, Section 54/54F for property reinvestment, Section 54EC for bond investment, or the SGB maturity exemption - and reduce the taxable gain accordingly.

5. 5
   Set Off Losses

   If you have capital losses from other transactions in the same year, set them off against the gains in accordance with the set-off rules (STCL against STCG and LTCG; LTCL only against LTCG).

6. 6
   Apply the Applicable Tax Rate

   Apply the relevant rate - 15% for equity STCG, 10% for equity LTCG above threshold, 20% with indexation for other LTCG, or slab rate for STCG on non-STT assets and debt mutual funds - and compute the gross tax.

7. 7
   Add Surcharge and Cess; Report in ITR

   Add applicable surcharge (based on total income) and Health and Education Cess on the tax computed. Report all capital gains and losses accurately in the Capital Gains schedule of ITR-2 or ITR-3 and file by the due date.

Formula

Capital Gain = Full Value of Consideration − (Indexed Cost of Acquisition + Cost of Improvement + Cost of Transfer)
Tax Payable = Taxable Capital Gain × Applicable Rate (+ Surcharge + Cess)

Key takeaways

Frequently asked questions

Related terms