Capital gains

Commerce (General / Accounting and Finance / Banking and Insurance) (B.Com) · Taxation · free study notes for exams, placements and interviews

In short

Capital gains is the head of income that taxes the profit on transfer of a capital asset — shares, mutual fund units, land, buildings, gold, jewellery, goodwill, crypto-adjacent assets and business undertakings. It is charged under Section 45 of the Income-tax Act, 1961, computed under Section 48, and taxed at special flat rates rather than slab rates in most cases. The Finance (No. 2) Act 2024 rewrote the whole chapter with effect from 23 July 2024 — holding periods cut to two buckets, indexation withdrawn, and rates reset to 12.5% long-term and 20% short-term on listed equity — so every older textbook answer must be updated. It is examined heavily in B.Com Direct Tax papers, CA/CS/CMA, and is a standard technical round for roles in wealth management, broking, mutual funds, tax advisory and bank relationship management. (Figures below are as at AY 2026-27; rates, limits and the CII are revised by each Finance Act, and the Income-tax Act, 2025 replaces the 1961 Act from 1 April 2026 with the capital gains provisions renumbered but substantively carried over.)

Explained

What is a capital asset and what is a transfer

Capital asset — Section 2(14): property of any kind held by an assessee, whether or not connected with business, plus securities held by FIIs. Includes rights in or in relation to an Indian company.
Excluded from the definition: stock-in-trade, consumable stores and raw material (taxed as business income); personal effects (movables for personal use) — but jewellery, archaeological collections, drawings, paintings, sculptures and any work of art are not excluded; rural agricultural land; the specified Gold Bonds issued by the Central Government (6½% 1977, 7% 1981, National Defence Gold Bonds 1980), Special Bearer Bonds 1991, Gold Deposit Bonds and Gold Monetisation Scheme deposit certificates. Sovereign Gold Bonds are capital assets — redemption by an individual is exempt under Section 47(viic).
Rural vs urban agricultural land: land is urban (hence a capital asset) if it lies within a municipality with population ≥ 10,000, or within 2 / 6 / 8 km aerial distance of such a municipality where population is above 10,000 / 1,00,000 / 10,00,000 respectively.
Transfer — Section 2(47): sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, conversion of a capital asset into stock-in-trade, maturity/redemption of a zero coupon bond, and allowing possession under Section 53A of the Transfer of Property Act (JDAs).
Not regarded as transfer — Section 47: gift, will or inheritance; total or partial partition of an HUF; transfer of a capital asset by a holding company to its wholly-owned Indian subsidiary and vice versa; transfer in a scheme of amalgamation or demerger to an Indian company; conversion of debentures into shares; conversion of a firm/sole proprietorship into a company on satisfying conditions.
Charge — Section 45(1): gain is taxable in the previous year in which the transfer takes place, irrespective of when the consideration is received.

Short-term versus long-term — holding period

For transfers on or after 23 July 2024 there are only two holding periods: 12 months and 24 months. The 36-month class was abolished.
12 months: listed equity shares, listed debentures and bonds, listed units of equity-oriented funds, units of UTI, zero coupon bonds — i.e. any security listed on a recognised stock exchange in India.
24 months: everything else — unlisted shares, immovable property, gold and jewellery, unlisted debentures (unlisted bonds/debentures are, however, always deemed short-term on transfer), goodwill, art, foreign shares.
Held for more than the period → long-term capital asset (LTCA); otherwise short-term (STCA).
Period of holding is counted from the date of acquisition to the date immediately preceding transfer. Where the cost of the previous owner is taken (gift, will, inheritance, partition, amalgamation), the previous owner's holding period is added — Explanation 1 to Section 2(42A).
Always short-term, regardless of holding: depreciable assets in a block (Section 50), units of a specified mutual fund and market linked debentures (Section 50AA), and unlisted bonds/debentures.

Computing the gain — Section 48

Full value of consideration (FVC) minus (i) expenditure wholly and exclusively in connection with the transfer — brokerage, stamp duty borne by seller, legal fees, advertisement — minus (ii) cost of acquisition minus (iii) cost of improvement.
Securities Transaction Tax is expressly not deductible (fifth proviso to Section 48). Interest on a loan taken to buy the asset may be capitalised into cost if not already claimed as a deduction.
Indexation has been withdrawn for transfers on or after 23 July 2024. Relief for land and building only: a resident individual or HUF transferring land or a building acquired before 23 July 2024 pays the lower of (a) 12.5% without indexation and (b) 20% with indexation. The indexed computation cannot be used to create or increase a loss.
Indexed cost (for the comparison above, and for pre-23.7.2024 transfers): cost × CII of year of transfer ÷ CII of year of acquisition. Base year 2001-02 = 100; CII is notified annually (2014-15 = 240, 2023-24 = 348, 2024-25 = 363).
Cost of acquisition — Section 55(2): actual cost; for assets acquired before 1 April 2001, the assessee may substitute the FMV as on 1.4.2001, and for land or building that FMV is capped at the stamp duty value as on 1.4.2001. For self-generated goodwill, tenancy rights, route permits, loom hours and the right to manufacture, cost is nil (cost of improvement also nil for goodwill).
Section 49(1): where the asset came by gift, will, inheritance, partition or amalgamation, cost = cost to the previous owner (improvement by both is added).
Non-residents — first proviso to Section 48: capital gains on shares or debentures of an Indian company bought in foreign currency are computed in the same foreign currency and reconverted, to neutralise exchange fluctuation; no indexation.

Special and deeming provisions

Section 50 — depreciable assets: gain or loss is computed on the block of assets and is always short-term. STCG arises when (a) the full value of consideration exceeds WDV at start + additions during the year, or (b) the block ceases to exist (all assets sold) leaving a balance — then a short-term capital loss.
Section 50C — land or building: if the stamp duty value (SDV) exceeds the actual consideration, SDV is deemed to be the FVC. Safe harbour: no substitution if SDV ≤ 110% of consideration. Where an agreement precedes registration and part consideration came by banking channel, the SDV on the agreement date may be used. The buyer is taxed on the same difference under Section 56(2)(x).
Section 50CA applies the same idea to unquoted shares using their prescribed FMV; Section 50D deems FMV as the consideration where consideration is not ascertainable.
Section 45(2) — conversion into stock-in-trade: capital gain is computed with FMV on the date of conversion as FVC, but is taxed in the year the stock is actually sold; the difference between sale price and that FMV is business income.
Section 45(3) / 9B and 45(4): introduction of a capital asset into a firm/AOP by a partner (FVC = amount recorded in the firm's books); on reconstitution, Section 9B taxes the firm on deemed transfer of capital assets or stock at FMV, and Section 45(4) taxes the firm on money or assets received by a partner in excess of his capital balance.
Section 45(5) — compulsory acquisition: the initial compensation is taxed in the year of first receipt; enhanced compensation is taxed in the year of receipt with cost taken as nil (litigation expenses deductible). Compensation for compulsory acquisition of urban agricultural land is exempt under Section 10(37), and awards under the RFCTLARR Act 2013 are exempt under Section 96 of that Act.
Section 45(5A) — joint development agreement: for an individual or HUF, gain is taxed in the year the completion certificate is issued, with FVC = stamp duty value of the share received plus cash; the benefit is lost if the owner sells the share before the certificate.
Section 46 and 46A: on liquidation, the shareholder is taxed on distribution less deemed dividend. For buy-backs on or after 1 October 2024, the whole consideration is a deemed dividend taxable at slab rates under Section 2(22)(f), and the cost of shares becomes a capital loss available for set-off.
Section 50B — slump sale: transfer of an undertaking for a lump sum. FVC = higher of the agreed consideration and the FMV computed under Rule 11UAE; cost = net worth of the undertaking (assets at book value, depreciable assets at WDV, revaluation ignored, minus liabilities). Long-term if the undertaking was held for more than 36 months; no indexation; a Form 3CEA report from an accountant is required.
Section 50AA: gains on market linked debentures and on units of a specified mutual fund are deemed short-term and taxed at slab rates. From AY 2026-27 a "specified mutual fund" means a fund investing more than 65% in debt and money market instruments.

Rates of tax (transfers on or after 23 July 2024)

Asset / section	Nature	Rate
Listed equity shares, equity-oriented fund units, business trust units (STT paid) — Sec 111A	STCG	20%
Same assets — Sec 112A	LTCG	12.5% on gains above ₹1,25,000 per year
All other assets — Sec 112	LTCG	12.5% without indexation (option of 20% with indexation for land/building acquired before 23.7.2024 by resident individual/HUF)
Immovable property, gold, unlisted shares, debt funds	STCG	Slab rate
Depreciable assets (Sec 50), specified MF and MLD (Sec 50AA)	Always STCG	Slab rate

Section 112A conditions: STT must have been paid on acquisition (for equity shares, subject to notified exceptions such as IPO and ESOP) and on transfer. Grandfathering: cost = higher of actual cost and the lower of (FMV on 31 January 2018, actual sale consideration).
Basic exemption limit may be adjusted against 111A/112/112A gains only by a resident whose other income falls short of the limit. No Chapter VI-A deduction (80C, 80D etc.) is allowed against these gains, and rebate under Section 87A is not available against Section 112A LTCG.
Surcharge on capital gains covered by 111A, 112 and 112A is capped at 15%; under the default new regime the maximum surcharge is 25%. Health and education cess is 4% on tax plus surcharge.

Exemptions — Sections 54 to 54GB

Sec	Who	Asset sold	Reinvest in	Limit / time
54	Individual/HUF	LT residential house	Residential house in India	Buy 1 yr before or 2 yrs after, or construct in 3 yrs; cap ₹10 crore; two houses allowed once in a lifetime if LTCG ≤ ₹2 crore
54B	Individual/HUF	Agricultural land used 2 yrs	Other agricultural land	Within 2 years
54D	Any	Compulsorily acquired industrial land/building	Industrial land/building	Within 3 years
54EC	Any	LTCG on land or building only	NHAI / REC / PFC / IRFC bonds	Within 6 months; max ₹50 lakh across financial years; lock-in 5 years
54F	Individual/HUF	Any LTCA other than a residential house	One residential house	Proportionate to net consideration; cap ₹10 crore; must not own more than one other house
54G / 54GA	Any	Assets shifted out of an urban area / to an SEZ	Plant, machinery, land, building at new place	Within 1 yr before, 3 yrs after
54GB	Individual/HUF	LT residential property	Equity of an eligible start-up/MSME company	Subscription before 139(1) due date; company buys new asset

Capital Gains Account Scheme, 1988: the unutilised amount must be deposited in a CGAS account with a notified bank before the due date of filing the return under Section 139(1); otherwise the exemption is lost. Unused balance is taxed in the year the time limit expires.
Withdrawal of exemption: if the new asset is transferred within 3 years, the exemption earlier allowed is reduced from its cost (Sections 54, 54B, 54D, 54F) and becomes short-term gain in that year; 54EC bonds transferred or pledged within 5 years make the exempted gain taxable.

Set-off, carry-forward and compliance

Short-term capital loss can be set off against both STCG and LTCG; long-term capital loss only against LTCG (Section 74).
Capital losses cannot be set off against any other head, and no other head's loss can be set off against capital gains (business loss may be set off against capital gains, but not the reverse).
Carry-forward is for 8 assessment years, and is allowed only if the return is filed within the due date under Section 139(1) (Section 139(3)).
Loss on an exempt asset (e.g. gains exempt under 10(37)) is not allowed; loss from a transfer where the gain would be taxable under 112A is allowed.
Advance tax: capital gains cannot be estimated in advance, so the instalment shortfall attributable to them is excused under the proviso to Section 234C if tax is paid in the remaining instalments.
TDS linkage: buyer deducts 1% under Section 194-IA on immovable property of ₹50 lakh or more; payments to a non-resident seller attract Section 195 at the applicable capital gains rate, often with a Section 197 lower-deduction certificate.
Reporting: Schedule CG in ITR-2 / ITR-3, with Section 112A gains reported scrip-wise where required; AIS/TIS captures broker and registrar data.

Key points

Section 45 – charging section; gain taxed in the year of transfer, not the year of receipt.
Section 2(14) – capital asset excludes stock-in-trade, personal effects and rural agricultural land; jewellery and art are always capital assets.
Holding period – 12 months for listed securities, 24 months for everything else, after 23 July 2024.
Previous owner's period – added when cost of the previous owner is taken under Section 49(1).
Section 48 – FVC − transfer expenses − cost of acquisition − cost of improvement; STT never deductible.
Indexation – withdrawn from 23.7.2024, except as a lower-of-two option for land/building acquired earlier by resident individuals/HUFs.
CII base year – 2001-02 = 100; FMV on 1.4.2001 may be substituted as cost for older assets (capped at SDV for land/building).
Section 111A – 20% STCG on STT-paid listed equity and equity-oriented funds.
Section 112A – 12.5% LTCG above ₹1,25,000, with 31 January 2018 grandfathering.
Section 112 – 12.5% LTCG on all other long-term assets, without indexation.
Section 50 – depreciable assets always give short-term gain or loss, computed block-wise.
Section 50C – stamp duty value substituted unless it is within 110% of actual consideration.
Section 54 vs 54F – 54 reinvests the capital gain from a house; 54F reinvests the net consideration from any other long-term asset, proportionately.
Section 54EC – ₹50 lakh cap, 6-month window, 5-year lock-in, land/building gains only.
CGAS 1988 – deposit unutilised gain before the 139(1) due date or lose the exemption.
Section 74 – LTCL only against LTCG; STCL against both; carry forward 8 years if the return is timely.
No 80C or 87A – Chapter VI-A deductions and the 87A rebate cannot reduce 112A LTCG; surcharge on 111A/112/112A is capped at 15%.
Buy-back from 1.10.2024 – entire proceeds are a deemed dividend; the cost becomes a capital loss.

Formulas and examples

Capital gain = FVC − (expenditure on transfer + cost of acquisition + cost of improvement)
FVC = full value of consideration in ₹; for land/building read with Section 50C.

Indexed cost of acquisition = Cost × (CII of the year of transfer ÷ CII of the year of acquisition or FY 2001-02)
CII = Cost Inflation Index notified by CBDT; base FY 2001-02 = 100.

Section 112A cost (grandfathered) = Higher of [actual cost, Lower of (FMV on 31.01.2018, sale consideration)]

Section 54F exemption = LTCG × (amount invested in the new house ÷ net consideration)
Net consideration = FVC − expenditure on transfer.

Section 50 STCG = Sale consideration − (Opening WDV of block + actual cost of additions) (limited to the block value)

Section 50B gain = Higher of (agreed consideration, FMV per Rule 11UAE) − Net worth of the undertaking

Example 1 — Listed shares with grandfathering (Section 112A). 1,000 shares bought in March 2015 at ₹100 (₹1,00,000); FMV on 31.01.2018 ₹250 (₹2,50,000); sold August 2025 at ₹400 (₹4,00,000); brokerage ₹2,000; STT paid.

Cost = higher of ₹1,00,000 and lower of (₹2,50,000, ₹4,00,000) = ₹2,50,000.
LTCG = 4,00,000 − 2,000 − 2,50,000 = ₹1,48,000.
Taxable = 1,48,000 − 1,25,000 = ₹23,000 × 12.5% = ₹2,875; + 4% cess = ₹2,990.

Example 2 — House property, 12.5% vs 20% with indexation. Resident individual bought a house in FY 2014-15 for ₹30,00,000; sold 15 November 2024 for ₹90,00,000; brokerage ₹1,00,000. CII: 2014-15 = 240, 2024-25 = 363.

Route A (new, no indexation): LTCG = 90,00,000 − 1,00,000 − 30,00,000 = ₹59,00,000 × 12.5% = ₹7,37,500.
Route B (old, with indexation): indexed cost = 30,00,000 × 363/240 = ₹45,37,500. LTCG = 90,00,000 − 1,00,000 − 45,37,500 = ₹43,62,500 × 20% = ₹8,72,500.
Tax payable = lower of the two = ₹7,37,500 + 4% cess = ₹7,67,000. (The gain carried to Schedule CG for set-off remains ₹59,00,000.)

Example 3 — Sections 54 and 54EC together. LTCG on sale of a residential house in May 2025 = ₹50,00,000. The assessee buys a new flat for ₹30,00,000 in January 2026 and invests ₹15,00,000 in REC bonds in October 2025 (within 6 months).

Exemption u/s 54 = ₹30,00,000; u/s 54EC = ₹15,00,000 (within the ₹50 lakh cap).
Taxable LTCG = 50,00,000 − 45,00,000 = ₹5,00,000 × 12.5% = ₹62,500 + cess = ₹65,000.
Had ₹10,00,000 of the flat payment been pending on the 139(1) due date, that amount must sit in a CGAS account to keep the exemption.

Example 4 — Section 54F is proportionate. Gold bought in FY 2015-16 for ₹20,00,000, sold November 2025 for ₹80,00,000; no transfer expenses; ₹60,00,000 invested in one residential house; assessee owns no other house.

LTCG = 80,00,000 − 20,00,000 = ₹60,00,000. Net consideration = ₹80,00,000.
Exemption = 60,00,000 × 60,00,000 / 80,00,000 = ₹45,00,000.
Taxable LTCG = ₹15,00,000 × 12.5% = ₹1,87,500 + 4% cess = ₹1,95,000.
Note: had ₹80,00,000 (the full net consideration) been invested, the entire gain would be exempt — this is the standard trap in 54F questions.

Example 5 — Set-off and rates (AY 2026-27). STCG u/s 111A ₹2,00,000; STCL on unlisted shares ₹50,000; LTCG u/s 112A ₹3,00,000; LTCL on a plot ₹1,00,000. Other income is above the basic exemption limit.

STCL is adjusted against the highest-taxed gain → 111A STCG = 2,00,000 − 50,000 = ₹1,50,000 × 20% = ₹30,000.
LTCL ₹1,00,000 set off against 112A LTCG ₹3,00,000 → ₹2,00,000; less ₹1,25,000 exemption = ₹75,000 × 12.5% = ₹9,375.
Tax on capital gains = ₹39,375 + 4% cess = ₹40,950.

Where it is used

Tax and audit firms (Big 4, Grant Thornton, BDO, regional CA firms): computing Schedule CG, 50C and 50CA valuations, slump sale and demerger structuring, Form 3CEA and Rule 11UAE workings.
Wealth management and broking (Zerodha, Groww, ICICI Securities, HDFC Securities, Motilal Oswal): capital gains statements, tax-loss harvesting before 31 March, explaining the ₹1,25,000 112A exemption and the 23 July 2024 change to clients.
Mutual funds and AMCs: classification of equity-oriented vs specified (debt) funds, Section 50AA treatment, redemption statements and AIS reconciliation.
Banks and NBFCs: 54EC bond desks (REC, PFC, IRFC, NHAI), Capital Gains Account Scheme accounts, 194-IA deduction on property funding.
Real estate and legal practice: JDA structuring under 45(5A), stamp duty value disputes, compulsory acquisition compensation under the RFCTLARR Act.
Corporate finance and M&A teams: choosing between slump sale, share sale and demerger largely on the capital gains and Section 47 consequences.

Interview questions

Q: What are the two holding periods now, and when did they change? A: 12 months for listed securities and 24 months for all other assets, for transfers on or after 23 July 2024; the 36-month category was abolished by the Finance (No. 2) Act 2024.
Q: Is indexation completely gone? A: Yes for new transfers, with one relief: a resident individual or HUF selling land or a building acquired before 23 July 2024 pays the lower of 12.5% without indexation and 20% with indexation.
Q: What is grandfathering under Section 112A? A: For listed equity held on 31 January 2018, cost is taken as the higher of actual cost and the lower of the 31.1.2018 FMV and the sale price, so pre-Budget-2018 appreciation is not taxed.
Q: Difference between Section 54 and Section 54F? A: Section 54 applies to a long-term residential house and exempts the reinvested capital gain; 54F applies to any other long-term asset, exempts proportionately to the net consideration, and requires that the assessee not own more than one other house.
Q: A flat sells for ₹80 lakh but the circle rate is ₹86 lakh. What is the full value of consideration? A: ₹80 lakh. The safe harbour threshold is 110% of ₹80 lakh = ₹88 lakh, and the stamp duty value of ₹86 lakh is within it, so no substitution is made. The buyer is similarly protected under 56(2)(x).
Q: Can a long-term capital loss be set off against salary or business income? A: No. LTCL can be set off only against LTCG, carried forward eight years, and only if the return was filed by the Section 139(1) due date.
Q: Why is gain on a depreciable asset always short-term? A: Section 50 computes it on the block of assets whose cost has already been written off through depreciation, so the Act deems the resulting gain or loss short-term even if the asset was held for years.
Q: How is a buy-back of shares taxed now? A: For buy-backs on or after 1 October 2024 the whole amount received is a deemed dividend taxed at slab rates in the shareholder's hands, and the cost of the shares becomes a capital loss.
Q: What if the new house is not purchased before the return is filed? A: The unutilised gain must be deposited in a Capital Gains Account Scheme account before the Section 139(1) due date; otherwise the exemption is denied, and any unused balance is taxed when the time limit expires.
Q: Can a non-resident claim the ₹1,25,000 exemption and the basic exemption adjustment? A: The ₹1,25,000 under 112A applies to all assessees, but the adjustment of unused basic exemption limit against special-rate gains is available only to residents.
Q: How is the gain on a slump sale computed? A: Consideration is the higher of the agreed price and the Rule 11UAE fair value; cost is net worth (depreciable assets at WDV, revaluation ignored); it is long-term if the undertaking was held for more than 36 months, taxed without indexation.
Q: Client sells shares on 31 March but money is received on 5 April. Which year is it taxed in? A: The year of transfer, i.e. the financial year containing 31 March, because Section 45 charges the gain in the year the transfer takes place regardless of receipt.

Common mistakes

Still writing "36 months" and applying indexation for transfers after 23 July 2024, or quoting the old 10%/15%/20% rates and the ₹1 lakh 112A exemption.
Deducting STT as a transfer expense — it is specifically disallowed by Section 48; only brokerage, stamp duty and legal costs qualify.
Applying Section 54F to the capital gain instead of the net consideration, or forgetting the proportionate formula when only part is reinvested.
Ignoring the previous owner's holding period and cost in gift and inheritance cases, and classifying the gain as short-term.
Claiming 54EC for gains on shares or gold — since AY 2019-20 it is available only for land or building — or exceeding the ₹50 lakh cap by splitting across two financial years.
Setting off a long-term capital loss against short-term gains, or claiming 80C deductions and the 87A rebate against 112A long-term gains.
Forgetting the CGAS deposit deadline, the ₹10 crore ceiling on Sections 54 and 54F, and the three-year/five-year lock-ins that reverse the exemption.