Capital Gains Tax is the tax levied on the profit arising from the transfer of a capital asset, computed as the difference between the sale consideration and the cost of acquisition (adjusted for indexation in the case of long-term assets). Under Indian law, capital gains are taxed under Sections 45 to 55 of the Income Tax Act, 1961, with the tax rate depending on whether the gain is classified as short-term or long-term based on the holding period of the asset.
Legal definition
Section 45 of the Income Tax Act, 1961 is the charging section:
(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54EC, 54F, 54G and 54GA, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.
Key definitions:
- Capital asset (Section 2(14)): Property of any kind held by an assessee, whether or not connected with their business or profession. It excludes stock-in-trade, personal effects (other than jewellery, archaeological collections, drawings, paintings, sculptures, or art works), agricultural land in India (outside specified urban areas), and specified gold bonds.
- Transfer (Section 2(47)): Includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, and conversion of capital asset into stock-in-trade.
Short-term vs long-term classification:
| Asset Type | Short-term if held for | Long-term if held for |
|---|---|---|
| Listed equity shares / equity mutual funds | Up to 12 months | More than 12 months |
| Unlisted shares | Up to 24 months | More than 24 months |
| Immovable property (land/building) | Up to 24 months | More than 24 months |
| All other capital assets | Up to 36 months | More than 36 months |
Tax rates (as of Assessment Year 2025-26):
- Short-term capital gains (STCG) on listed equity (Section 111A): 15% (increased to 20% from AY 2025-26 by the Finance (No. 2) Act, 2024).
- STCG on other assets: Taxed at the applicable slab rate.
- Long-term capital gains (LTCG) on listed equity (Section 112A): 10% on gains exceeding Rs 1 lakh (increased to 12.5% with threshold of Rs 1.25 lakh from AY 2025-26).
- LTCG on other assets (Section 112): 20% with indexation benefit (changed to 12.5% without indexation from AY 2025-26 for transfers after July 23, 2024).
Indexation: For long-term capital assets acquired before AY 2025-26 changes, the cost of acquisition is indexed using the Cost Inflation Index (CII) notified by the government, adjusting the purchase price for inflation. The base year for CII is 2001-02 (CII = 100).
How courts have interpreted this term
CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC)
The Supreme Court held that capital gains tax can be levied only when the capital asset has a determinable cost of acquisition. Where the cost of acquisition cannot be determined — as in the case of self-generated goodwill — no capital gains tax is chargeable. The Court reasoned that the computation mechanism under Section 48 is integral to the charging section, and if the computation cannot be made, the charge itself fails. This principle has been applied to self-generated trademarks, tenancy rights, and other intangible assets.
CIT v. Vodafone International Holdings (2012) 6 SCC 613
The Supreme Court, in the landmark Vodafone case, held that the transfer of shares of a foreign company having underlying assets in India does not automatically attract capital gains tax in India. The Court distinguished between direct and indirect transfers and held that the tax must be levied on the direct transferor, not on the indirect change in control of Indian assets. This decision led to the retrospective amendment of Section 9(1)(i) by the Finance Act, 2012, and its subsequent partial reversal by the Taxation Laws (Amendment) Act, 2021.
Sanjeev Lal v. CIT (2014) 365 ITR 389 (SC)
The Supreme Court held that for the purpose of computing capital gains on sale of immovable property, the date of execution of the agreement to sell (when full consideration was received) should be taken as the date of transfer, not the date of registration of the sale deed.
Why this matters
Capital gains tax affects every Indian who sells or transfers a capital asset — from a salaried individual selling a residential flat to a promoter selling shares in a company. It is one of the most litigated areas of Indian tax law, with disputes regularly arising over the characterisation of transactions (whether a transfer occurred), the classification of assets (short-term vs long-term), the computation of cost of acquisition, and the availability of exemptions.
For property owners and investors, the exemption provisions under Sections 54 to 54GB are critically important. Section 54 allows individuals to exempt LTCG on residential property if the proceeds are reinvested in another residential property within specified time limits. Section 54EC allows exemption if gains are invested in specified bonds (NHAI or REC) within six months of transfer, subject to a Rs 50 lakh cap. These exemptions are heavily utilised and frequently contested.
Practitioners should note the significant changes introduced by the Finance (No. 2) Act, 2024 (effective from July 23, 2024), which overhauled the capital gains framework: removal of indexation benefit for most assets, introduction of a uniform 12.5% LTCG rate, and increase in STCG rate on listed equity from 15% to 20%. A grandfathering provision allows taxpayers to compute LTCG on assets acquired before July 23, 2024, using either the old rate with indexation or the new rate without indexation — whichever is more beneficial.
Related terms
Parent concept:
Related processes:
Frequently asked questions
What is the difference between short-term and long-term capital gains?
The distinction depends on the holding period. For listed equity shares and equity-oriented mutual funds, gains are long-term if held for more than 12 months. For immovable property and unlisted shares, the threshold is 24 months. For all other assets, it is 36 months. Short-term gains are taxed at higher rates (slab rate or 20% for listed equity), while long-term gains enjoy concessional rates (12.5% for most assets from AY 2025-26).
How is capital gains tax calculated on property?
Capital gains on property are computed as: Sale consideration minus (indexed cost of acquisition + indexed cost of improvement + transfer expenses). For properties acquired before April 1, 2001, the fair market value as of that date can be substituted for actual cost. From AY 2025-26 for transfers after July 23, 2024, the LTCG rate is 12.5% without indexation, with a grandfathering option available.
What exemptions are available for capital gains tax?
Key exemptions include: Section 54 (reinvestment in residential property for individuals/HUFs), Section 54EC (investment in specified bonds within 6 months, up to Rs 50 lakh), Section 54F (reinvestment of consideration in residential property when the transferred asset is not a residential property), and Section 54GB (investment in eligible startups). Each exemption has specific conditions regarding investment amounts, time limits, and holding periods.
Is TDS deducted on capital gains?
TDS is deducted on certain capital gains transactions. Under Section 194-IA, TDS at 1% is deducted on the sale consideration of immovable property exceeding Rs 50 lakh. Under Section 195, TDS at applicable rates is deducted on capital gains paid to non-residents. For listed equity transactions, no TDS is deducted — the taxpayer is responsible for self-assessment and advance tax payments.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.