Library / Income-tax Act, 2025: The Professional's Master Guide

10. Capital Gains (Sections 67 to 91, 196 to 198)

10.1 Short-term or long-term

Asset

Long-term if held for more than

Listed shares, listed securities, equity mutual fund units, units of business trusts

12 months

All other assets (land, building, unlisted shares, gold, debt funds bought before April 2023)

24 months

Undertaking transferred by slump sale

36 months

Specified mutual funds (investing more than 65% in debt and money market instruments) bought on or after 1 April 2023, and market-linked debentures

Always short-term (section 76)

10.2 Computation (section 72)

Full value of consideration

A

Less: expenses on transfer (brokerage, legal fees)

B

Less: cost of acquisition

C

Less: cost of improvement

D

Capital gain (A less B, C and D)

Result

Cost of assets received by gift, will, inheritance, amalgamation or demerger is the cost to the previous owner, and the previous owner's holding period is included (section 73). For equity shares bought before 1 February 2018, cost is the higher of actual cost and the FMV on 31 January 2018 (capped at sale value).

10.3 Tax rates

Type

Section

Old

Rate

STCG on listed equity, equity MF, business trust units (STT paid)

196

111A

20%

LTCG on listed equity, equity MF, business trust units (STT paid)

198

112A

12.5% on gains above Rs. 1,25,000 a year

LTCG on other assets

197

112

12.5% without indexation

LTCG on land or building acquired before 23 July 2024 (resident individual or HUF)

197

112

Lower of 12.5% without indexation or 20% with indexation

Other STCG

Normal

Slab or normal rates

Illustration 55: Share portfolio

Neha bought 1,000 listed shares at Rs. 400 on 10 January 2025 and sells 600 at Rs. 900 on 5 August 2026. She also has a gain of Rs. 80,000 on equity fund units held for six months.

LTCG on shares: 600 x (900 less 400)

3,00,000

Less: exemption under section 198

(1,25,000)

Taxable LTCG

1,75,000

Tax at 12.5% on 1,75,000

21,875

STCG on fund units: 20% on 80,000

16,000

Total tax before cess

37,875

The rebate under section 156 is not available against tax on these gains, and deductions under sections 123 to 154 cannot be set off against them. A resident individual may, however, adjust any unused basic exemption limit against them.

Illustration 56: Unlisted shares

Rakesh sells unlisted shares of a private company in December 2026 for Rs. 40 lakh, bought in 2019 for Rs. 15 lakh. Held more than 24 months, so LTCG = Rs. 25 lakh, taxed at 12.5% = Rs. 3,12,500 plus surcharge and cess. If the sale price is below the FMV computed under the Rules, the FMV is taken as sale value (section 79, old 50CA), and the buyer may be taxed on the shortfall under section 92.

10.4 Stamp duty value rule (section 78, old 50C)

On transfer of land or building, if the stamp duty value is more than 110% of the actual consideration, the stamp duty value is taken as the sale price. The taxpayer can ask for a reference to the Valuation Officer (section 91) if he disputes it.

10.5 Exemptions for reinvestment

Exemption

New

Old

Key conditions

Sale of residential house, buy another house

82

54

Buy within 1 year before or 2 years after, or construct within 3 years. Maximum exemption Rs. 10 crore

Sale of agricultural land

83

54B

Buy agricultural land within 2 years

Investment in specified bonds

85

54EC

LTCG on land or building. Invest within 6 months. Maximum Rs. 50 lakh. 5-year lock-in

Sale of any other long-term asset, buy a house

86

54F

Invest net sale consideration. Should not own more than one other house

Illustration 57: Sale of flat with reinvestment

Mr. Shah, a resident individual, bought a flat in 2010 for Rs. 30 lakh and sells it on 15 October 2026 for Rs. 1.20 crore. Stamp duty value is Rs. 1.25 crore. Brokerage Rs. 1 lakh.

Section 78 check: 1.25 crore is 104% of 1.20 crore, within 110%, so the actual price is accepted.

Sale consideration

1,20,00,000

Less: brokerage

(1,00,000)

Less: cost of acquisition (without indexation)

(30,00,000)

Long-term capital gain

89,00,000

Less: new house bought in March 2027 (section 82)

(70,00,000)

Balance LTCG

19,00,000

Less: specified bonds bought in February 2027 (section 85)

(19,00,000)

Taxable LTCG

Nil

Without reinvestment, tax at 12.5% would be Rs. 11,12,500 plus surcharge and cess. As the flat was bought before 23 July 2024, he may also compare with 20% after indexation.

Practice note

If the new house is not bought before the return due date, deposit the unused amount in the Capital Gains Accounts Scheme before filing the return, or the exemption is lost.

10.6 Share buyback from Tax Year 2026-27

The Finance Act 2026 changed the treatment of buyback. Consideration received on buyback is now taxed as capital gains in the shareholder's hands (not as dividend, which was the position from 1 October 2024 to 31 March 2026). Promoters face an additional tax, taking the effective rate to about 30% for non-corporate promoters and 22% for corporate promoters.

Illustration 58: Buyback

Kavita, a non-promoter, tenders 100 shares bought at Rs. 1,200 more than a year ago in a buyback at Rs. 1,500 in November 2026. Gain = Rs. 30,000, LTCG under section 198, within her Rs. 1,25,000 exemption. Tax: nil.

10.7 Transactions not regarded as transfer (section 70, old 47)

Section 70 lists transactions that do not give rise to capital gains. The important ones are: distribution on partition of an HUF; gifts, wills and irrevocable trusts; transfers between a holding company and its wholly owned Indian subsidiary; transfers in a scheme of amalgamation or demerger; conversion of bonds or debentures into shares; and conversion of a firm, private company or unlisted company into an LLP or company subject to conditions. These are covered in detail in the Mergers and Acquisitions part.

10.8 What is a capital asset?

A capital asset is property of any kind held by the taxpayer, whether or not connected with business. The definition excludes:

  • Stock-in-trade, consumable stores and raw materials held for business.
  • Personal effects (movable property for personal use), except jewellery, archaeological collections, drawings, paintings, sculptures and works of art.
  • Rural agricultural land in India: land outside a municipality or cantonment board with a population of 10,000 or more, and beyond the prescribed distance from such limits (2 km for population up to 1 lakh, 6 km for up to 10 lakh, 8 km above that).
  • Specified gold deposit bonds and certain gold monetisation instruments.

Illustration 59: Agricultural land

Hitesh sells agricultural land located 5 km from the limits of a municipality with a population of 3 lakh. For a population between 1 lakh and 10 lakh, land within 6 km is urban. His land is therefore urban agricultural land, a capital asset, and the gain is taxable. Land 7 km away would have been rural and outside the definition.

10.9 What is a transfer?

Transfer has a wide meaning. It includes sale, exchange, relinquishment of the asset, extinguishment of any right in it, compulsory acquisition, conversion of an asset into stock-in-trade, handing over possession under part performance of a contract, and transactions (such as acquiring shares in a company or a co-operative society) that give the enjoyment of immovable property. Section 70 then lists transactions that are not treated as transfers.

10.10 Special cases of chargeability

Situation

Year of taxation and value

Insurance money received for destruction of a capital asset

Year of receipt; money or FMV of asset received is the consideration

Conversion of capital asset into stock-in-trade

Gain = FMV on conversion less cost; taxed in the year the stock is sold. Profit over FMV is business income

Capital asset brought into a firm as capital contribution

Amount recorded in the firm's books is the sale value

Compulsory acquisition

Year of receipt of compensation; enhanced compensation taxed in the year of receipt, with cost nil

Joint development agreement (landowner, individual or HUF)

Year in which the completion certificate is issued; consideration = stamp value of share in the project plus cash

Unit-linked insurance policies above premium limits

Taxed as capital gains on maturity or surrender

Market-linked debentures, specified debt funds

Always short-term, taxed at slab or normal rates

Sovereign gold bonds

Redemption on maturity by the original subscriber is exempt. From Tax Year 2026-27 buyers in the secondary market do not get this benefit

Buyback of shares

Capital gains in the hands of shareholders from Tax Year 2026-27

Illustration 60: Joint development

Mr. Pillai enters into a joint development agreement in 2024 and gives land to a builder in exchange for 3 flats and Rs. 50 lakh cash. The completion certificate is issued in December 2026. Stamp duty value of the 3 flats on that date is Rs. 3 crore. Consideration = Rs. 3.5 crore, taxed in Tax Year 2026-27 as long-term capital gain after deducting the cost of land. The builder deducts TDS on the cash component.

Judicial view: Joint development and transfer

CIT v. Balbir Singh Maini (Supreme Court, 2017): where a joint development agreement could not be carried out because the required permissions were not obtained, there was no transfer and no capital gain. Possession under part performance counts as a transfer only if the agreement is registered, as required after the 2001 amendment to section 53A of the Transfer of Property Act.

10.11 Cost of acquisition in special cases

Asset

Cost

Bonus shares

Nil (for bonus received before 1 April 2001, FMV on that date can be taken)

Rights shares subscribed

Amount paid

Rights entitlement renounced

Nil; sale proceeds are short-term capital gain

Shares after split or consolidation

Original cost spread over the new number of shares

Asset received by gift, will or inheritance

Cost to the previous owner, plus his improvements; holding period of previous owner included

Self generated goodwill, trademark, route permit, loom hours

Nil

Asset acquired before 1 April 2001

Option to take FMV on 1 April 2001 (for land and building, not above stamp value on that date)

Listed equity acquired before 1 February 2018

Higher of actual cost and lower of (FMV on 31 January 2018, sale value)

Illustration 61: Grandfathering of listed shares

Sonal bought listed shares in 2016 at Rs. 100 each. The highest quoted price on 31 January 2018 was Rs. 250. She sells in November 2026 at Rs. 400.

Cost = higher of Rs. 100 and lower of (Rs. 250, Rs. 400) = Rs. 250. LTCG = Rs. 150 per share, taxable under section 198 above the Rs. 1,25,000 annual exemption.

If she had sold at Rs. 200, cost = higher of 100 and lower of (250, 200) = Rs. 200, so gain is nil, not a loss.

Judicial view: Cost that cannot be determined

CIT v. B.C. Srinivasa Setty (Supreme Court, 1981): where an asset has no conceivable cost (self generated goodwill), the computation provisions fail and so does the charge. The legislature responded by providing that the cost of such assets is nil, so that the entire consideration is now taxed.

10.12 Indexation option for land and building

For land or building acquired before 23 July 2024 and transferred by a resident individual or HUF, the tax is the lower of (a) 12.5% of the gain without indexation, and (b) 20% of the gain computed with indexation using the Cost Inflation Index (CII). Loss computed with indexation cannot be carried forward if the non-indexed computation shows a gain.

Illustration 62: Indexation comparison

Continuing Mr. Shah's case: net sale value Rs. 1,19,00,000 (after brokerage), cost Rs. 30,00,000 in 2010-11 (CII 167). Assume the notified CII for 2026-27 is 390 (use the actual notified figure in practice).

Indexed cost = 30,00,000 x 390 / 167 = Rs. 70,05,988. LTCG with indexation = Rs. 48,94,012. Tax at 20% = Rs. 9,78,802.

Without indexation: LTCG Rs. 89,00,000 x 12.5% = Rs. 11,12,500.

The indexation option gives lower tax, so Mr. Shah pays Rs. 9,78,802 (plus surcharge and cess) if he does not reinvest. Reinvestment exemptions are computed on the gain used for the chosen option.

10.13 Section 82 (old 54) in full

  • Available to an individual or HUF on transfer of a long-term residential house (building or land appurtenant) whose income was chargeable as house property.
  • New residential house in India must be purchased within 1 year before or 2 years after the transfer, or constructed within 3 years after the transfer.
  • Exemption = amount of capital gain invested, up to the cost of the new house, and capped at Rs. 10 crore.
  • Once in a lifetime, if the LTCG does not exceed Rs. 2 crore, the taxpayer may buy or construct two houses and claim exemption for both.
  • If the new house is sold within 3 years, the exemption is withdrawn by reducing its cost by the exempted amount.
  • Amount not invested by the return due date must be deposited in the Capital Gains Accounts Scheme; if not used within the time limit, it is taxed in the year the period expires.

Judicial view: Agreement to sell and time limits

Sanjeev Lal v. CIT (Supreme Court, 2014): where an agreement to sell was executed and advance received, and the sale deed was delayed due to litigation, the date of the agreement was relevant for computing the time limit for the new house, because rights in the property had been transferred under the agreement.

10.14 Section 86 (old 54F): proportionate exemption

Where a long-term asset other than a residential house (shares, gold, land) is sold and a residential house is bought or constructed within the same time limits, the exemption is proportionate: LTCG x amount invested / net sale consideration. If the whole net consideration is invested, the entire gain is exempt. The taxpayer must not own more than one residential house (other than the new one) on the date of transfer, and must not buy another within 2 years or construct another within 3 years.

Illustration 63: Section 86

Rekha sells unlisted shares for a net consideration of Rs. 50 lakh; LTCG is Rs. 30 lakh. She buys a flat for Rs. 40 lakh. Exempt = 30 lakh x 40 / 50 = Rs. 24 lakh. Taxable LTCG = Rs. 6 lakh at 12.5%.

10.15 Section 85 (old 54EC) bonds

LTCG from land or building (not other assets) is exempt to the extent invested within 6 months in notified bonds (issued by NHAI, REC, PFC, IRFC and similar), up to Rs. 50 lakh across the year of transfer and the next year. The bonds have a 5-year lock-in. Interest on them is taxable. If the bonds are transferred or pledged for a loan within 5 years, the exempted gain is taxed in that year.

10.16 Adjusting the basic exemption limit against special rate gains

A resident individual or HUF whose other income is below the basic exemption limit can use the unused limit against STCG under section 196 and LTCG under sections 197 and 198. Non-residents cannot.

Illustration 64: Unused exemption

Asha, a resident with only Rs. 2,00,000 of interest income (new regime), has STCG of Rs. 5,00,000 on listed shares. Unused exemption = Rs. 4,00,000 less Rs. 2,00,000 = Rs. 2,00,000. Taxable STCG = Rs. 3,00,000 at 20% = Rs. 60,000 plus cess. The section 156 rebate cannot be used against this tax.

10.17 Depreciable assets (section 74)

For assets on which depreciation has been allowed, the gain is always short-term, however long the asset was held, because the computation is done on the block. A business that sells an entire block (for example, its only building) for more than the WDV pays tax on the excess at normal rates, even if the building was owned for decades. The courts have held that this deeming fiction is limited to the computation of gains; for example, in CIT v. Ace Builders (P) Ltd. (Bombay High Court, 2005) a reinvestment exemption meant for long-term assets was allowed on a depreciable building held for many years. Examine the facts and current judicial position before relying on this.

10.18 Capital gains on common investment products

Product

Holding for long-term

LTCG rate

STCG rate

Listed equity shares, equity mutual funds (65% or more in Indian equity)

12 months

12.5% above Rs. 1.25 lakh

20%

Debt mutual funds bought on or after 1 April 2023

Always short-term

Not applicable

Slab rate

Hybrid funds with 35% to 65% equity (not specified funds)

24 months

12.5%

Slab rate

Gold, silver, gold ETFs and funds

12 months if listed (ETF), otherwise 24 months

12.5%

Slab rate

Listed bonds and debentures

12 months

12.5%

Slab rate

Unlisted bonds and debentures

Always short-term

Not applicable

Slab rate

REIT and InvIT units (listed)

12 months

12.5% above Rs. 1.25 lakh (section 198)

20%

Foreign shares and funds

24 months

12.5%

Slab rate

Land and building

24 months

12.5% (or 20% with indexation for pre-23 July 2024 assets, residents)

Slab rate

Unlisted shares

24 months

12.5%

Slab rate

10.19 Inherited property: a complete example

Illustration 65: Sale of inherited house

Vandana inherited a house on her father's death in 2015. Her father had bought it in 1995 for Rs. 8 lakh. Its FMV on 1 April 2001 was Rs. 20 lakh (stamp value on that date Rs. 18 lakh). She sells it on 10 September 2026 for Rs. 1.1 crore.

Cost: she can take the FMV on 1 April 2001, but for land and building it cannot exceed the stamp value on that date, so cost = Rs. 18 lakh.

Holding period: includes her father's holding from 1995, so it is long-term.

Without indexation: LTCG = 1.1 crore less 18 lakh = Rs. 92 lakh, tax at 12.5% = Rs. 11.5 lakh.

With indexation (as it was acquired before 23 July 2024): indexed cost = 18 lakh x CII of 2026-27 / 100 (CII of 2001-02). Assuming CII of 390, indexed cost = Rs. 70.2 lakh; LTCG = Rs. 39.8 lakh; tax at 20% = Rs. 7.96 lakh. Indexation gives lower tax.

She can reduce this further by buying a house under section 82 or investing in section 85 bonds.

10.20 Booking rights in an under construction flat

Where a buyer sells the right in a flat booked with a builder before possession, the right is a capital asset. The holding period is counted from the date of allotment. Gain on such a sale is capital gain, and if the flat is residential, section 82 may be available for reinvestment of the gain, because the right is treated as a house property right in many rulings; examine the facts.

10.21 Loss harvesting and gain harvesting

Because the section 198 exemption of Rs. 1,25,000 is available every year, investors often sell listed equity with long-term gains up to that amount and buy it back, resetting their cost. Similarly, they may realise losses to set off against gains. These are lawful uses of the provisions, though transactions that are only paper transactions (buying and selling on the same day in a pre-arranged way) may be questioned.

Illustration 66: Harvesting gains

Rajan holds equity funds with an unrealised long-term gain of Rs. 3,00,000. In March 2027 he redeems units with a gain of Rs. 1,25,000 and reinvests the proceeds. Tax on the gain: nil (within the exemption). His cost is reset higher, reducing future tax by Rs. 1,25,000 x 12.5% = Rs. 15,625 plus cess, when he eventually sells.

Chapter summary

• Holding period: 12 months for listed securities, 24 months for others, 36 months for slump sale.

• Rates: STCG listed equity 20%; LTCG 12.5% (equity above Rs. 1.25 lakh); indexation option for older land and building.

• Section 78 applies stamp value if it exceeds 110% of the price.

• Reinvestment exemptions: sections 82, 83, 85 and 86 with strict time limits.

• Buyback is taxed as capital gains from Tax Year 2026-27.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.