Capital Gains Tax is an important aspect of taxation that applies when you sell an asset like stocks, mutual funds, real estate, gold, or bonds for a profit. Knowing how these gains are taxed can help you save money legally through proper tax planning.
In this detailed guide, we will cover:
- What is Capital Gains Tax?
- Types of Capital Gains – Short-Term vs. Long-Term
- Capital Gains Tax on Different Assets
- Indexation Benefit – How to Reduce Your Tax?
- Tax-Saving Strategies to Legally Pay Less
- FAQs: Everything You Need to Know About Capital Gains Tax
What is Capital Gains Tax?
Whenever you sell an asset for a price higher than what you bought it for, you make a capital gain. The government taxes this profit under the Capital Gains Tax system.
Capital Gains = Selling Price – Purchase Price – Expenses (if any)
But not all capital gains are taxed the same way. The tax rate depends on how long you hold the asset before selling it.
Types of Capital Gains in India
Short-Term Capital Gains (STCG)
- If you sell an asset within a short period, it is considered a short-term capital gain.
- The definition of “short-term” varies by asset class (explained below).
- Short-term capital gains tax is generally higher than long-term tax rates.
Long-Term Capital Gains (LTCG)
- If you hold an asset for a longer period before selling, the profit is considered a long-term capital gain.
- LTCG is taxed at lower rates to encourage long-term investing.
- Some assets (like debt mutual funds, gold, and property) get indexation benefits to reduce taxable income.
Capital Gains Tax Rates on Different Assets (2025)
| Asset Class | Short-Term Capital Gains (STCG) Tax | Long-Term Capital Gains (LTCG) Tax & Holding Period |
|---|---|---|
| Equity Shares & Equity Mutual Funds | 15% (if sold within 1 year) | 10% (if held for >1 year, above ₹1 lakh, no indexation) |
| Debt Mutual Funds (Before April 1, 2023) | As per income tax slab (if sold within 3 years) | 20% (if held >3 years, with indexation) |
| Debt Mutual Funds (After April 1, 2023) | No LTCG (always taxed as per income slab) | No indexation benefits |
| Gold (Physical, ETFs & Sovereign Gold Bonds) | As per income slab (if sold within 3 years) | 20% (if held >3 years, with indexation) |
| Real Estate (Property & Land) | As per income slab (if sold within 2 years) | 20% (if held >2 years, with indexation) |
| Unlisted Shares & Private Equity | As per income tax slab (if sold within 2 years) | 20% (if held >2 years, with indexation) |
| Sovereign Gold Bonds (SGBs) | As per income tax slab (if sold before 8 years) | No tax if held till maturity (8 years) |
What is Indexation & How Does It Reduce Your Tax?
Indexation is a tax benefit that adjusts your purchase price for inflation, reducing taxable capital gains and lowering your tax liability.
The Cost Inflation Index (CII), published by the Income Tax Department, helps calculate the inflation-adjusted cost of acquisition.
Indexed Cost Formula
Indexed Cost = (CII in the year of sale / CII in the year of purchase) × Original Purchase Price
Example: How Indexation Saves Tax
- You bought a debt mutual fund in 2015 for ₹1,00,000 and sold it in 2024 for ₹2,00,000.
- CII for 2015 = 254, CII for 2024 = 348.
Indexed Cost = (348 / 254) × 1,00,000 = 1,37,008
Taxable LTCG = 2,00,000 – 1,37,008 = 62,992
- Tax @20% = ₹12,598
- Without indexation, tax would have been ₹20,000 → You save ₹7,402 using indexation.
Tax-Saving Strategies for Capital Gains
- Hold investments long enough to qualify for LTCG tax rates.
- Use indexation benefits on debt mutual funds, gold, and real estate.
- Sell equity investments in parts to keep LTCG below ₹1 lakh (which is tax-free).
- Invest LTCG from real estate into Capital Gains Bonds (Section 54EC) to avoid tax.
- Use Tax-Loss Harvesting → Sell loss-making stocks to offset gains and reduce tax liability.
LTCG Tax Changes in 2024-25 (Important Updates!)
- Debt Mutual Funds (After April 1, 2023) → No More LTCG Tax Benefits
- No indexation benefit → All gains taxed as per your income tax slab.
- Gold & Real Estate LTCG Tax Rate Remains 20% (With Indexation)
- Best to use indexation to reduce taxable gains.
- LTCG Tax Change Effective from 23rd July 2024 for Some Assets
- 10% LTCG tax (before 23rd July 2024, ₹1.25 lakh exemption limit).
- 12.5% LTCG tax (after 23rd July 2024, no exemption limit).
FAQs: Everything You Need to Know About Capital Gains Tax
How much capital gain is tax-free in India?
- LTCG from equity & mutual funds – Up to ₹1,00,000 per year is tax-free.
- Real estate & debt mutual funds – No exemption, but indexation benefit applies.
What is the tax on selling property in India?
- If held for <2 years → Short-term gains (taxed as per income slab).
- If held for >2 years → LTCG tax @20% with indexation.
- Exemption under Section 54 → If you buy another property within 2 years, you don’t have to pay LTCG tax.
Is there a way to avoid capital gains tax on mutual funds?
- Switch from Equity Mutual Funds to ELSS (Tax-Saving Mutual Funds).
- Book gains under ₹1 lakh per year to avoid LTCG tax.
- Use tax-loss harvesting (sell loss-making units to offset gains).
How is gold taxed in India?
- Physical Gold & ETFs → LTCG @20% (if held for >3 years) with indexation.
- Sovereign Gold Bonds (SGBs) → No LTCG tax if held for 8 years.
Final Thoughts: Plan Smart & Save Tax
Understanding capital gains tax rules can help you save thousands of rupees legally. Always:
- Hold investments long enough for LTCG benefits.
- Use indexation to reduce taxable gains.
- Take advantage of ₹1 lakh LTCG exemption in equities.
- Invest LTCG in tax-saving bonds or properties to avoid tax.
By making tax-efficient investment decisions, you can maximize your returns while legally reducing your tax liability. Proper tax planning ensures that you not only grow your wealth but also retain more of it.