Capital Gains Tax India — LTCG, STCG, Rates & Exemptions

Capital Gains Tax in India — FY 2024-25 Framework

The Finance Act 2024 made significant changes to capital gains tax rates in India, effective July 23, 2024. Understanding these changes is critical for tax planning on property, equity, mutual funds, unlisted shares, and other capital assets. This guide covers all the key rates, holding periods, exemptions, and planning strategies.

Capital Gains Tax Rates — FY 2024-25 At a Glance

Property Capital Gains — The Indexation Question

The Finance Act 2024 generated significant controversy by removing indexation for property sales from July 23, 2024 onwards. However, for properties acquired before July 23, 2024, taxpayers can choose the lower of:

• 12.5% on gains without indexation, OR
• 20% on gains with CII (Cost Inflation Index) indexation

The choice is made at the time of filing the return. For most long-held properties (15–20 years), indexation at 20% often results in lower tax than 12.5% without indexation due to significant inflation adjustment.

Example Calculation

Key Exemptions from LTCG

Section 54 — Residential Property Reinvestment

If you sell a residential house and invest the LTCG in one new residential property (purchased 1 year before / 2 years after sale, or constructed within 3 years), the LTCG is exempt. Key conditions:

• Maximum exemption = cost of new house
• If new house is sold within 3 years, original exemption is withdrawn
• One new house only (cannot split between two properties)
• You can own one other residential house at the time of sale

Section 54F — Non-Residential Asset Sale

Selling shares, gold, commercial property? If you are not already owning more than one residential house, invest the entire net consideration (not just gains) in one new residential house within the prescribed period, the entire LTCG is exempt. If only a part of the net consideration is reinvested, proportionate exemption is given.

Section 54EC — Infrastructure Bonds

Invest up to ₹50 lakh in NHAI or REC bonds within 6 months of sale. Bonds have a 5-year lock-in. Exemption up to ₹50 lakh of LTCG. No exemption if bonds are sold or pledged within 5 years.

Section 54GB — Investment in Startups

LTCG from sale of residential property can be exempted if invested within 6 months in equity shares of an eligible startup (DPIIT-recognised) and the startup uses the funds to purchase assets (machinery, not land) within 1 year of investment. Sunset clause has been extended periodically — check current FY applicability.

Capital Gains from Startup Shares — Special Rules

• Shares received in ESOPs: Exercise price is cost of acquisition. FMV at exercise date is perquisite income (not capital gains). Capital gains arise only on subsequent sale of shares — from exercise date at exercise price as cost.
• Shares received on bonus: Cost of original shares apportioned to bonus shares. Holding period starts from original allotment date.
• Shares received via rights issue: Rights issue price is cost; date of allotment in rights is start of holding period.
• Conversion of CCPS / CCD to equity: Deemed acquisition at cost of convertible instrument; holding period starts from allotment of convertible instrument (not conversion date) per Finance Act 2024 clarification.

Capital Gains Tax Planning Strategies

1. Harvest LTCG up to ₹1.25 lakh annually — tax-free on listed equity; sell and re-buy to "step up" cost basis
2. Choose indexation vs. no-indexation for property sold before July 23, 2024 acquisition — always compute both
3. Section 54 reinvestment planning — plan new property purchase timeline around sale date
4. Set off capital losses — LTCL set off against LTCG; STCL against both STCG and LTCG (within the same head)
5. Spread gains across family members (if gifted assets) — gifts to spouse are clubbed, but gains on gifts to children (major) are not
6. Section 54EC bonds before December 31 of assessment year — pay advance tax to avoid interest under Section 234B/C

Frequently Asked Questions

Capital Gains from Partnership Dissolution and LLP

When a partnership firm or LLP is dissolved, partners receive their share of the assets — this is treated as a transfer under Section 45(4) and is taxable as capital gains in the hands of the firm/LLP. The specific provisions post the Finance Act 2021 amendments (introducing Section 9B and Section 45(4)) are complex: Section 9B taxes the distributing entity on the fair market value of capital assets distributed; Section 45(4) determines the partner's capital gains on their share in the firm. Valuations at the time of dissolution are critical.

Capital Gains on Agricultural Land

Agricultural land in India has a special exemption: rural agricultural land (not within 2 km of a municipal limit with population 10,000–99,999, or within 8 km for towns above 1 lakh population) is not a "capital asset" under Section 2(14) — so capital gains tax does not apply. Urban agricultural land, however, is fully taxable. The boundary between "rural" and "urban" agricultural land (the notified limits) frequently changes — verify the current notification for the specific plot's location. Conversion of agricultural land to residential/commercial use triggers capital gains and stamp duty at the development stage.

Indexation Base Year

For assets acquired before April 1, 2001, the cost of acquisition for indexed cost purposes is the higher of: actual acquisition cost, or FMV as on April 1, 2001 (the base year). This is relevant for properties and assets held for decades — getting a valuation certificate of FMV as on April 1, 2001 (from an approved valuer) can significantly increase the indexed cost and reduce taxable capital gains. Once the FMV as on April 1, 2001 is determined, it is multiplied by the CII for the year of sale and divided by 100 (the base year CII).

Reporting Capital Gains in ITR

Capital gains must be reported in the correct ITR form and schedule:

• ITR-2: For individuals/HUFs with capital gains (no business income)
• ITR-3: For individuals/HUFs with business income and capital gains
• ITR-4 (Sugam): Cannot report capital gains — if you have capital gains, must use ITR-2 or ITR-3
• Schedule CG in ITR-2/3: Separate sections for short-term and long-term; 111A (equity STCG), 112A (LTCG on equity), 112 (other LTCG), 50C (property sales at below stamp duty value)

Section 50C trap: If you sell property at a price below the stamp duty value (circle rate), the income tax department deems the sale consideration to be the stamp duty value for capital gains computation. The buyer also faces Section 56(2)(x) tax if the purchase price is more than 10% below the stamp duty value.

Related Services

• Income Tax Appeal
• Income Tax Scrutiny Notice
• Startup Valuation
• IBBI Registered Valuer
• FEMA Compliance