1. Introduction
Capital gains represent the profit earned when an asset is sold at a price higher than its purchase cost. Tax on such profits is governed by the Income Tax Act, 1961, under the head “Capital Gains.” This concept has wide relevance, as it applies to the sale of assets like property, shares, mutual funds, gold, and jewellery. Capital gains are classified into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), depending on the holding period of the asset. This classification determines the computation method, applicable tax rates, and exemptions. The Finance Act, 2024, introduced significant amendments that simplified and rationalized these rules, making it crucial for taxpayers to stay updated.
2. What is a Capital Asset?
As per Section 2(14) of the Income Tax Act, a capital asset means any property held by a taxpayer, whether movable or immovable, tangible or intangible. Examples include land, buildings, shares, mutual funds, bonds, gold, jewellery, and intangible assets like goodwill. Certain exclusions apply: stock-in-trade, agricultural land in rural areas, and specified government bonds or deposit schemes. Profits from their sale are not taxed under the head “Capital Gains.”
3. Classification of Capital Gains: STCG vs LTCG
The distinction between STCG and LTCG depends on how long the asset is held before being sold. The Finance Act, 2024, standardised the holding period criteria into two simple buckets. For equity shares and equity-oriented mutual funds, a holding period of up to 12 months results in STCG, while more than 12 months qualifies as LTCG. For immovable property like land and buildings, the threshold is 24 months (same as earlier). For physical gold, jewellery, and unlisted shares, holding beyond 24 months makes the gains long-term.
⚠️ Important: Specified Mutual Funds (such as debt funds, gold ETFs, and international funds not meeting equity thresholds) are governed by Section 50AA and continue to be taxed as STCG at slab rates regardless of the holding period.
Holding Period Summary:
Equity shares & equity-oriented mutual funds: >12 months = LTCG; ≤12 months = STCG
Land & buildings: >24 months = LTCG; ≤24 months = STCG
Gold, jewellery, unlisted shares: >24 months = LTCG; ≤24 months = STCG
Specified Mutual Funds (Sec. 50AA): Always STCG at slab rates
4. Computation of Capital Gains
Capital Gain = Sale Price – (Purchase Price + Cost of Improvement + Transfer Expenses).
For STCG, this formula applies directly. For LTCG, indexation was available earlier. However, for transfers on or after 23rd July 2024, indexation benefits are withdrawn. Now, most assets are taxed at a flat 12.5% without indexation. For land or building acquired before 23rd July 2024, resident individuals and HUFs can choose between 20% with indexation or 12.5% without indexation, whichever is more beneficial.
5. Tax Rates Applicable to STCG and LTCG
For transfers on or after 23rd July 2024:
STCG on listed equity shares/equity MFs (Sec. 111A): 20%
LTCG on listed equity shares/equity MFs (Sec. 112A): 12.5% on gains above ₹1.25 lakh per FY
Other LTCG (land, buildings, physical gold, unlisted shares): 12.5% without indexation
Grandfathering: Land/building acquired before 23rd July 2024 → option of 20% with indexation or 12.5% without indexation (for resident individuals/HUFs)
Specified Mutual Funds (Sec. 50AA): Taxed as STCG at slab rates regardless of holding period
6. Exemptions on Capital Gains
While STCG generally does not enjoy exemptions, multiple exemptions apply for LTCG:
Section 54: Exemption on sale of residential property if reinvested in another residential property (₹10 crore cap applies)
Section 54F: Exemption on sale of other long-term assets if net consideration invested in residential property (₹10 crore cap applies)
Section 54EC: Exemption if gains from land/building invested in specified bonds (NHAI, REC, PFC, IRFC) within 6 months; max ₹50 lakh; 5-year lock-in
7. Conclusion
Capital gains taxation directly impacts investment strategies and post-tax returns. The distinction between STCG and LTCG determines applicable tax rates and exemptions. With the changes introduced by the Finance Act, 2024 (effective 23rd July 2024), taxpayers must carefully evaluate holding periods, applicable tax rates, and exemption options before executing any sale transaction. A clear understanding of these rules ensures efficient tax planning, compliance, and wealth preservation.
