What Is Capital Gains Tax? Types, Rates & Exemptions Explained

Capital gains tax is levied on profit arising from the sale of capital assets, computation and rates as defined by law.

On 1st June 2025, Mr Amit decided to sell a set of listed equity shares for ₹5,00,000. These shares had been originally purchased by him on 15th April 2024 for ₹3,50,000. Since the shares were held for less than 12 months, the gain from this sale was treated as a short-term capital gain (STCG) under Indian tax laws.

The profit of ₹1,50,000 (₹5,00,000 minus ₹3,50,000) was calculated as a capital gain and taxed accordingly. Because it was considered a short-term gain, it was taxed at a flat rate of 20%, as applicable for such transactions. In this case, ₹30,000 was paid as tax by the broker at the time of settlement. Amit later smiled and said, “Chalo, kam se kam profit toh hua – tax toh dena hi padta hai.”

This blog breaks down everything you need to know about Capital Gains Tax, its types, current rates, and key exemptions, in a clear and simple way.

What is Capital Gains Tax in India?

Capital Gains Tax in India is a tax charged on the profit earned from the sale or transfer of a capital asset, such as property, shares, mutual funds, bonds, or gold. This tax is governed under the Income Tax Act, 1961, and is categorised into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the holding period of the asset before its sale.

As per official data from the Income Tax Department, more than ₹1.32 lakh crore in capital gains tax was collected in FY 2022–23, showing a sharp increase due to the booming stock and property markets.

On 10th January 2025, Ms Rekha sold her residential flat for ₹80,00,000. She had originally purchased the flat on 5th March 2022 for ₹60,00,000. Since she had held the property for more than 24 months, her sale qualified as a long-term capital gain (LTCG).

The gain of ₹20,00,000 was classified under LTCG and was taxed accordingly. After deductions and indexation (if applicable), the final tax was calculated based on the revised 12.5% rate, effective from the Union Budget 2025. This meant a tax of ₹2,50,000 was paid on the gain.

While discussing the sale with her neighbour, Rekha laughed and said, “Yeh toh theek hai, tax due pay kar diya. Naya ghar bhi mil gaya aur sab kuch legal bhi ho gaya!”

Types of Capital Gains:

In India, capital gains are taxed based on how long you keep an asset before selling it. These are called Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG).

Short Term Capital Gains (STCG): If you sell an asset within 12 months (like shares) or 24 months (like property), the profit is called short-term capital gain. This is taxed at a higher rate.

Example: Amit bought shares in April 2024 for ₹3,50,000 and sold them in June 2025 for ₹5,00,000. Since he held them for less than 12 months, his gain of ₹1,50,000 was taxed as STCG at 20%, which came to ₹30,000. He said, “Bas bhaiya, 20% to dena hi padta hai.”

Long-term Capital Gains (LTCG): If you sell an asset after holding it for more than 24 months, the profit is called a long-term capital gain. This is usually taxed at a lower rate.

Example: Rekha bought a flat for ₹60,00,000 in March 2022 and sold it in January 2025 for ₹80,00,000. Since she held it for over 24 months, her ₹20,00,000 profit was taxed as LTCG at 12.5%, so she paid ₹2,50,000 in tax. She smiled and said, “Ab toh 12.5% hi manageable hai.”

Key Changes in Union Budget 2025:

The Union Budget 2025 has brought some major updates in capital gains tax rules to create a more uniform tax structure and close loopholes in high-value investments. These changes affect ULIPs, listed/unlisted securities, and foreign investors.

Earlier, Long Term Capital Gains (LTCG) on equity shares and mutual funds were taxed at 10% (above ₹1,00,000). But from 23rd July 2024, this has been revised to 12.5% on listed and unlisted securities. Similarly, ULIPs (Unit Linked Insurance Plans) with annual premiums above ₹2.5 lakh are now being treated as capital assets. From 1st April 2026, any gain from these ULIPs will also be taxed at 12.5%.

No changes have been made to Short Term Capital Gains (STCG). These continue to be taxed at 20% for listed equity shares held for less than 12 months.

Foreign Institutional Investors (FIIs) will also be taxed at 12.5% on long-term capital gains from Assessment Year (AY) 2026–27 onwards.

Example: Mr Sunil invested in a ULIP by paying a premium of ₹6,00,000 in April 2025. He redeemed the ULIP on 1st May 2026 and received ₹10,00,000.

The gain of ₹4,00,000 was taxed as Long Term Capital Gain (LTCG) at 12.5%, since the annual premium exceeded ₹2.5 lakh and the policy was sold after the new rule came into effect. He sighed and said, “ULIP bhi capital gain bana diya budget ne.”

Union Budget 2025:

How Are Capital Gains Calculated?

Capital gains are calculated by subtracting the cost of buying and improving the asset from the total amount received after selling it. If the asset was inherited, the original owner’s cost is also considered.

Example: Ms Neha sold some bonds on 1st February 2025 for ₹4,00,000. She had originally bought them for ₹3,00,000 and had spent an extra ₹50,000 on improvements. So, her total cost became ₹3,50,000.

Her long-term capital gain was calculated as ₹50,000 (₹4,00,000 – ₹3,50,000). This gain was taxed as per the rules. She smiled and said, “Calculation ekdum saaf hua.”

If the asset had been inherited or gifted, then the original owner's cost (including improvements done by them) would have been used.

Also, capital gains exemptions under Section 54, 54F, 54EC, and 54B could have been applied if Neha had reinvested her gains into another property, bonds, or agricultural land as per the rules.

Note: Post-July 2024, indexation may not apply, depending on the asset type.

Capital Gains Tax Rates in India:

Capital gains tax rates depend on two things: what asset is sold, and how long it was kept before selling. When assets are sold soon, it is called Short Term Capital Gain (STCG) and taxed at higher rates. If assets are held longer, it becomes a Long Term Capital Gain (LTCG) and is taxed at lower rates.

After Budget 2025, most LTCG are taxed at a flat 12.5%, and STCG stays at 20% for listed shares and mutual funds.

Example: Mr Rajesh sold his equity mutual funds after 14 months for ₹2,00,000. He had bought them earlier for ₹1,00,000. His LTCG was ₹1,00,000. Since this gain was below the exemption limit of ₹1.25 lakh, no tax was paid.

He happily said, “Tab ₹1.25 lakh exemption raha, bas baaki pe 12.5% laga.”

Capital Gains Tax Rates After Budget 2025

Budget 2025 has brought some major shifts in capital gains tax rules, especially around holding periods, tax rates, and exemptions. Here's a quick breakdown by asset type:
 

The latest capital gains tax rates help you stay prepared and make smarter money moves. Just make sure to check if your asset falls under the new rules after July 2024.

Exemptions Under the Act

Certain capital gains can be made tax-free if they are reinvested under specific sections of the Income Tax Act.

Example: Ms Anita sold her residential house in March 2025 and earned a gain of ₹15,00,000. She used ₹12,00,000 to buy another house within 2 years. Because of this, under Section 54, her ₹12,00,000 gain was exempted. She smiled and said, “Section 54 ne toh badi madad ki.”

Main Exemption Sections
 

Conclusion: 
 

Capital gains tax in India is based on what asset sold and how long it is held. Short-term gains are taxed at 20%, while long-term gains are taxed at 12.5% as per Budget 2025. From April 2026, this flat rate will apply to ULIPs and foreign investors too. 

By using reinvestment options under Sections 54, 54F, 54EC, and 54B, tax can be saved. With careful planning and truthful reporting, tax stress can be reduced and savings can grow wisely.

FAQs:
 

Is capital gains tax charged on inherited property?
Yes, but only when the inherited asset is later sold.
 

Can capital gains be saved by reinvesting in property?
Yes, under Sections like 54 and 54F, if reinvested on time.
 

Are ULIPs now taxable under capital gains rules?
Yes, if the annual premium exceeds ₹2.5 lakh from April 2026.
 

Do capital gains attract tax under the new regime?
Yes, capital gains are always taxable even under the new tax regime.
 

Is the indexation benefit still available after Budget 2025?
No, indexation has been removed for most LTCG post 23 July 2024.

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