Capital Gains Tax (CGT) in India is a critical aspect of financial planning for anyone selling capital assets like property, shares, mutual funds, or gold. Governed by the Income Tax Act, 1961, CGT is levied on the profit earned from such sales, and its treatment depends on whether the gain is classified as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG). This comprehensive blog, updated as of August 2025, dives into the nuances of STCG and LTCG in the Indian context, covering definitions, holding periods, tax rates, exemptions, recent Budget 2024 changes, and practical strategies to optimize your tax liability. Whether you’re an investor, homeowner, or trader, this guide will help you navigate the complexities of CGT.
Understanding Capital Gains: The Basics
A capital gains tax arises when you sell a capital asset for more than its cost of acquisition. Capital assets include immovable property (land, buildings), movable property (jewelry, artworks), and financial assets (stocks, bonds, mutual funds). Exceptions include personal effects (except jewelry), rural agricultural land, and business inventory.
The classification of gains as short-term or long-term depends on the holding period of the asset, which significantly impacts the tax rate and available exemptions. The distinction is crucial because LTCG often enjoys lower tax rates and additional benefits, while STCG is taxed more heavily.
Holding Periods: Short-Term vs. Long-Term
The holding period determines whether a gain is STCG or LTCG. Following the Union Budget 2024, effective from July 23, 2024, the rules have been simplified:
- Listed Financial Assets (e.g., equity shares listed on BSE/NSE, equity-oriented mutual funds, zero-coupon bonds):
- Short-Term: Held for 12 months or less.
- Long-Term: Held for more than 12 months.
- All Other Assets (e.g., real estate, unlisted shares, debt mutual funds, physical gold, jewelry):
- Short-Term: Held for 24 months or less.
- Long-Term: Held for more than 24 months.
This standardization reduced complexity, as unlisted shares previously required a 36-month holding period for LTCG. For example:
- Selling listed equity shares after 10 months results in STCG.
- Selling a house after 30 months qualifies as LTCG.
Always verify the asset type and holding period, as misclassification can lead to incorrect tax filings.
Calculating Capital Gains Tax
To compute capital gains, use the formula:
Capital Gain = Full Value of Consideration (Sale Price) – (Cost of Acquisition + Cost of Improvement + Cost of Transfer)
- Full Value of Consideration: The sale price, net of incidental expenses like brokerage.
- Cost of Acquisition: The purchase price. For assets acquired before April 1, 2001, you can use the fair market value as of that date.
- Cost of Improvement: Expenses enhancing the asset’s value (e.g., renovations for property).
- Cost of Transfer: Costs like stamp duty or legal fees incurred during the sale.
Indexation Benefit
For LTCG, the Cost Inflation Index (CII) adjusts the cost of acquisition for inflation, reducing taxable gains. However, Budget 2024 removed indexation for most assets sold after July 23, 2024, except for resident individuals selling property acquired before this date, who can choose between:
- New Regime: 12.5% tax without indexation.
- Old Regime: 20% tax with indexation.
Example:
- You bought a property in 2015 for ₹60 lakh and sell it in 2025 for ₹1.2 crore.
- With Indexation (CII 2015-16: 254, CII 2024-25: 363, assuming): Indexed cost = ₹60 lakh * 363/254 ≈ ₹85.8 lakh. LTCG = ₹1.2 crore – ₹85.8 lakh = ₹34.2 lakh, taxed at 20% = ₹6.84 lakh (plus cess).
- Without Indexation: LTCG = ₹1.2 crore – ₹60 lakh = ₹60 lakh, taxed at 12.5% = ₹7.5 lakh (plus cess).
The CII is published annually by the Income Tax Department. Check the latest values on their official portal.
Capital Gains Tax Rates: Short-Term vs. Long-Term
Tax rates differ significantly between STCG and LTCG, influencing investment decisions.
Short-Term Capital Gains (STCG)
- Listed Equity Shares and Equity-Oriented Mutual Funds (under Section 111A):
- Taxed at 20% (increased from 15% in Budget 2024).
- Example: Selling shares held for 6 months with a gain of ₹2 lakh incurs ₹40,000 tax (plus cess).
- Other Assets (e.g., real estate, debt mutual funds, unlisted shares):
- Added to your total income and taxed at your income tax slab rate (0% to 30%, plus surcharge and cess).
- Example: A ₹5 lakh STCG from selling a plot held for 18 months, for someone in the 30% slab, incurs ₹1.5 lakh tax (plus cess).
Long-Term Capital Gains (LTCG)
- Uniform Rate for Most Assets: 12.5% without indexation (post-July 23, 2024), up from 10% for equity and 20% for others.
- Equity Shares and Equity-Oriented Mutual Funds:
- LTCG up to ₹1.25 lakh per financial year is exempt (increased from ₹1 lakh in Budget 2024).
- Gains above ₹1.25 lakh are taxed at 12.5%.
- Example: LTCG of ₹2 lakh from shares held for 15 months: ₹1.25 lakh exempt, ₹75,000 taxed at 12.5% = ₹9,375 (plus cess).
- Non-Residents (NRIs): Similar rates, but TDS applies (e.g., 20% on STCG, 12.5% on LTCG for equity). Double Taxation Avoidance Agreements (DTAA) may reduce liability.
A 4% Health and Education Cess and applicable surcharge (up to 15% for income above ₹5 crore) are added to all rates.
Exemptions and Deductions
Exemptions can significantly reduce capital gains tax liability, especially for LTCG:
- Section 54 (Residential Property): Exempt LTCG from selling a house if reinvested in another residential property within 2 years (or 3 years for construction). Limit: ₹10 crore for sales after April 1, 2023.
- Section 54F (Non-Residential Assets): Exempt LTCG from assets like shares or gold if the entire sale proceeds are invested in a residential house. Partial investment reduces the exemption proportionally.
- Section 54EC (Bonds): Invest up to ₹50 lakh of LTCG in specified bonds (e.g., REC, NHAI) within 6 months for exemption. Applies to any long-term asset.
- Section 54GB (Startups): Reinvest LTCG from unlisted shares in eligible startups for exemption.
- Capital Gains Account Scheme (CGAS): Park funds in CGAS if you can’t reinvest before ITR filing, for use under Sections 54/54F.
For STCG, no specific exemptions exist, but you can set off losses:
- Short-Term Capital Loss (STCL): Offset against STCG or LTCG.
- Long-Term Capital Loss (LTCL): Offset only against LTCG.
- Losses can be carried forward for 8 years.
Budget 2024 Changes: Key Impacts
The Finance Bill 2024, effective for Assessment Year 2025-26, introduced pivotal changes:
- Uniform LTCG Rate: 12.5% for all assets, removing indexation for most (except property choice for residents).
- STCG on Equity: Increased to 20% from 15%.
- Equity LTCG Exemption: Raised to ₹1.25 lakh from ₹1 lakh.
- Debt Mutual Funds: Gains treated as STCG if held less than 24 months, taxed at slab rates.
- Property Sales: No indexation for sales after July 23, 2024, but residents can opt for 20% with indexation for pre-date assets.
These changes simplify compliance but may increase tax for long-held assets like property due to indexation removal. For equity investors, the higher exemption limit is a relief, but the STCG rate hike discourages frequent trading.
Practical Strategies to Navigate STCG vs. LTCG
- Hold Assets Longer: Aim for LTCG to benefit from lower rates (12.5%) and exemptions like ₹1.25 lakh for equity or Section 54 for property.
- Reinvest Gains: Use Sections 54, 54F, or 54EC to defer taxes. For example, reinvesting property gains in a new house can save significant tax.
- Harvest Losses: Sell underperforming assets to offset gains, reducing taxable income.
- Plan Sales Timing: Spread sales across financial years to stay within the ₹1.25 lakh LTCG exemption for equity.
- Accurate Record-Keeping: Maintain records of purchase, improvements, and sale expenses to compute gains correctly.
- Leverage CGAS: Use this scheme if reinvestment deadlines approach before ITR filing.
- Consult Experts: Engage a Chartered Accountant for complex portfolios or NRI taxation, considering DTAA benefits.
- File Correctly: Use ITR-2/3/4/5 with Schedule CG. Report exempt gains (e.g., under Section 54) for transparency.
Case Studies
Case 1: Equity Investor
- Scenario: Priya sells listed shares held for 10 months, earning ₹3 lakh STCG, and other shares held for 15 months, earning ₹2 lakh LTCG.
- Tax:
- STCG: ₹3 lakh * 20% = ₹60,000 (plus cess).
- LTCG: ₹1.25 lakh exempt, ₹75,000 * 12.5% = ₹9,375 (plus cess).
- Strategy: Hold shares longer to shift more gains to LTCG for lower rates and exemptions.
Case 2: Property Seller
- Scenario: Raj sells a house bought in 2018 for ₹80 lakh, sold in 2025 for ₹1.5 crore (held 7 years, LTCG).
- Tax Options:
- Without Indexation: Gain = ₹1.5 crore – ₹80 lakh = ₹70 lakh, tax at 12.5% = ₹8.75 lakh (plus cess).
- With Indexation (CII 2018-19: 280, CII 2024-25: 363): Indexed cost = ₹80 lakh * 363/280 ≈ ₹1.04 crore. Gain = ₹1.5 crore – ₹1.04 crore = ₹46 lakh, tax at 20% = ₹9.2 lakh (plus cess). Choose the new regime (lower tax).
- Strategy: Reinvest ₹70 lakh in a new house under Section 54 to claim exemption.
Conclusion
Navigating Short-Term vs. Long-Term Capital Gains Tax in India involves understanding holding periods, tax rates, and exemptions to make informed financial decisions. The Budget 2024 changes streamline rates but challenge investors with indexation removal for non-equity assets. By strategically timing sales, reinvesting gains, and leveraging exemptions, you can minimize your Capital Gains Tax burden while staying compliant. Always verify calculations with a tax professional and file accurate ITRs using the Income Tax portal to ensure compliance with Capital Gains Tax regulations.