Comprehensive Guide on Capital Gains Tax in India

Introduction to Capital Gains Tax

Capital Gains Tax is levied on the profit earned from the sale of a capital asset during a financial year. The taxability of such gains falls under the head “Capital Gains” in the Income Tax Act, 1961. Capital gains are further classified as:

Long-Term Capital Gains (LTCG) – Arising from the transfer of long-term capital assets.
Short-Term Capital Gains (STCG) – Arising from the transfer of short-term capital assets.

Capital gains are subject to different tax rates, computation methods, and indexation benefits, depending on whether they are short-term or long-term.

What is a Capital Asset?

A capital asset refers to any kind of property owned by an individual, whether or not it is used for business or profession. It includes:

Real estate (land, buildings, houses, flats, etc.)
Shares, bonds, and securities
Jewelry, paintings, sculptures, and works of art
Mutual funds and financial instruments
Gold and precious metals

Exclusions from Capital Assets

Certain items are not considered capital assets and are not taxable under Capital Gains Tax:

Stock-in-trade, consumable stores, and raw materials (used for business purposes).
Personal effects (movable property for personal use, except for jewelry, paintings, and collectibles).
Agricultural land in rural areas (as per specified conditions).
Government-issued bonds such as 6.5% Gold Bonds, Special Bearer Bonds, and Gold Monetization Scheme certificates.

Types of Capital Gains: Long-Term vs. Short-Term

Capital assets are classified as long-term or short-term, based on their holding period before the sale.

Classification Criteria (Before & After July 23, 2024)

Asset Type	Before July 23, 2024 (Short-Term if Held for ≤)	After July 23, 2024 (Short-Term if Held for ≤)
Immovable property (land/building/both)	24 months	24 months
Unlisted shares	24 months	24 months
Listed shares, mutual funds, government securities, UTI, zero-coupon bonds	12 months	12 months
Other capital assets	36 months	24 months

Short-Term Capital Gain (STCG): Profit from sale of short-term capital assets.
Long-Term Capital Gain (LTCG): Profit from sale of long-term capital assets.

Exception: Gains from depreciable assets are always considered short-term capital gains.

Computation of Capital Gains

A. How to Calculate Long-Term Capital Gains (LTCG)?

For assets sold before July 23, 2024:

Particulars	Amount (₹)
Full sale consideration	XXXXX
Less: Transfer-related expenses (brokerage, commission, legal fees, etc.)	(XXXXX)
Net Sale Consideration	XXXXX
Less: Indexed Cost of Acquisition	(XXXXX)
Less: Indexed Cost of Improvement (if any)	(XXXXX)
Long-Term Capital Gain	XXXXX

Indexed Cost of Acquisition Formula:

Cost of Acquisition×Cost Inflation Index (CII) of year of saleCII of year of purchaseCost of Acquisition×CII of year of purchaseCost Inflation Index (CII) of year of sale

Indexed Cost of Improvement Formula:

Cost of Improvement×CII of year of saleCII of year of improvementCost of Improvement×CII of year of improvementCII of year of sale

For transfers on or after July 23, 2024, indexation on improvement costs is no longer allowed.

B. How to Calculate Short-Term Capital Gains (STCG)?

Particulars	Amount (₹)
Full sale consideration	XXXXX
Less: Transfer-related expenses (brokerage, commission, etc.)	(XXXXX)
Net Sale Consideration	XXXXX
Less: Cost of Acquisition	(XXXXX)
Less: Cost of Improvement (if any)	(XXXXX)
Short-Term Capital Gain	XXXXX

Indexation benefit is NOT available for STCG.

Tax on Capital Gains

Short-Term Capital Gains (STCG): Taxed at applicable slab rates or 15% (on equity shares & mutual funds).
Long-Term Capital Gains (LTCG):
- 10% (without indexation) on equity shares & mutual funds (exceeding ₹1 lakh).
- 20% (with indexation) for other capital assets.

Capital Gains Tax for NRIs (Non-Resident Indians)

NRI Capital Gains Tax and Property Sale Implications

Tax on Capital Gains for NRIs applies at special rates:
- LTCG on property: 20% (with indexation).
- STCG on property: As per income tax slab rates.
- NRI Capital Gains on shares: 10% (LTCG), 15% (STCG).
TDS (Tax Deducted at Source) for NRI Property Sale Tax:
- 20% on LTCG (with indexation).
- 30% on STCG (if taxable under the highest slab).
Repatriation of funds from property sale (NRI): Subject to RBI and FEMA rules.

Capital Gains Exemptions & Reinvestment Benefits

A taxpayer can reinvest capital gains to claim exemptions under various sections:

Section	Eligible Assessee	Investment Type
54	Individual/HUF	Residential house (max 2 properties if LTCG ≤ ₹2 crore)
54B	Individual/HUF	Agricultural land
54EC	Any person	Bonds (NHAI, REC) (max ₹50 lakh)
54F	Individual/HUF	Residential house (if selling any asset except a house)

Section 54EC Bonds:

Investment must be made within 6 months of sale.
The amount cannot exceed ₹50 lakh.
Lock-in period: 5 years.

Stamp Duty Value & Its Role in Capital Gains Calculation

Under Section 50C, if the actual sale price of a property is less than the stamp duty value, the stamp duty value is deemed as the sale price for calculating capital gains.

Exception: If the stamp duty value does not exceed 105% of the actual sale price, then the actual sale price is used.

Capital Gains Account Scheme (CGAS)

If a taxpayer fails to reinvest capital gains before filing an income tax return, they can deposit the amount in a Capital Gains Account (CGA) before the due date of ITR filing.

Interest on Capital Gains Account is taxable under Income from Other Sources.
Withdrawal requires Form C/D for Account A and Form B for Account B.
For account closure, Form G (with AO’s approval) is needed.

Capital Gains Tax Filing & Forms

Capital Gains Tax Form: Reported in Schedule CG of ITR-2/ITR-3.
How to Calculate Capital Gains Tax: Using the Capital Gains Calculator based on acquisition cost, sale price, indexation, and exemptions.
Capital Gains Audit: If total income exceeds prescribed limits, an audit under Section 44AB may be required.

Taxability of Interest Earned on Capital Gains Account Deposit

The interest received on deposits made under the Capital Gains Account Scheme (CGAS) is taxable.
The Capital Gains Account Scheme helps taxpayers defer capital gains tax when they haven’t reinvested the capital gains in a new asset before the due date of filing their income tax return.
If the taxpayer has not utilized the capital gains:
- To acquire a new asset before the due date of filing the return,
- The capital gains amount can be deposited in a special account in a nationalized bank.
The interest earned on this deposit is taxable under the head “Income from Other Sources”.
Tax is levied on this interest in the year it accrues, and it is credited to the capital gains account of the assessee.

Taxability of Profit from Sale of Land or Building

Gains from the sale of land or buildings are taxed under the head “Capital Gains”.
If the stamp duty value (as assessed by the government) is higher than the actual sale consideration, then the stamp duty value will be considered as the full value of consideration for taxation purposes, provided:
1. The asset transferred is land or a building.
2. The sale consideration is less than the value determined by the stamp duty authority.
3. The stamp duty value exceeds 105% of the sale consideration received. (Applicable from A.Y. 2019-20).
The stamp duty value as of the date of property registration is considered for tax purposes.

Exception:
If the agreement date (when price is fixed) and registration date are different, then the stamp duty value as of the agreement date will be considered—provided:

The consideration (full or partial) was received via banking channels (cheque/draft/electronic transfer).
The payment was received before the agreement date.
This exception applies from A.Y. 2017-18.

Forms for Withdrawal from Capital Gain Account

As per Rule 9 of CGAS, 1988, the withdrawal process is:

For Account-A:

Initial withdrawal: Form C is required along with the passbook.
Subsequent withdrawals: Form D (in duplicate) is required, along with details of the previous withdrawal and its utilization.

For Account-B:

The amount must be transferred to Account-A before withdrawal.
The depositor must apply in Form B to transfer funds from Account-B to Account-A.

Closing a Capital Gains Account (CGAS) When Only Interest is Left

Procedure for Closure (As per Rule 13 of CGAS, 1988):
- The depositor (excluding eligible companies under Section 54GB) must submit:
  - Form G, duly endorsed by the Assessing Officer (AO).
  - Passbook (Account-A) or deposit receipt (Account-B).
- The bank will credit the remaining amount (interest) to the depositor’s bank account.
For Companies Eligible Under Section 54GB:
- A joint application (signed by the eligible assessee) in Form G must be submitted to the deposit office with AO’s prior approval.
For Deceased Depositors:

If a nominee is registered, the nominee should submit:
- Form H (endorsed by AO).
- Passbook (Account-A) or deposit receipt (Account-B).
If no nominee is registered, the legal heir must submit:
- Form H (endorsed by AO).
- Legal documents like succession certificate, probate of will, or letter of administration.
- If multiple legal heirs exist, one heir can apply with an authorization letter from the others.
After approval, the bank will transfer the remaining funds (including interest) to the bank account of the nominee or legal heir.

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