Capital Gains Tax – Types, Calculation, and Exemptions

When you sell a property, shares, gold, or any other capital asset, the profit you earn is called a capital gain. Under the Indian Income Tax Act, this gain is taxable and is referred to as Capital Gains Tax.

Understanding capital gains tax, its types, and the available exemptions can help you legally save taxes and plan your investments better. In this blog, we will cover everything you need to know about capital gains tax in India, including how it is calculated, the types of capital gains, and the exemptions available.

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What is Capital Gains Tax?

Capital Gains Tax is the tax levied on the profit earned when a capital asset is sold. A capital asset includes:

• Land and building

• House property

• Stocks, bonds, mutual funds

• Gold, jewellery, and other valuable assets

Capital gains are divided into two categories based on the holding period of the asset – Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).

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Types of Capital Gains

1. Short-Term Capital Gains (STCG)

If you sell an asset within a short period, the profit is treated as short-term.

Taxation:

• For listed shares and equity mutual funds – 15% (plus surcharge & cess) under Section 111A.

• For other assets – Taxed as per your income tax slab rate.

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2. Long-Term Capital Gains (LTCG)

If you hold an asset for a longer period before selling, the profit is treated as long-term.

Taxation:

• For listed shares & equity mutual funds – LTCG exceeding ₹1,00,000 is taxed at 10% without indexation (Section 112A).

• For other assets – 20% with indexation benefit under Section 112.

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Calculation of Capital Gains

The formula to calculate capital gains is simple:

For Short-Term Capital Gain (STCG):

STCG = Full Value of Consideration – (Cost of Acquisition + Cost of Improvement + Expenses on Transfer)

For Long-Term Capital Gain (LTCG):

LTCG = Full Value of Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Expenses on Transfer)

Indexation adjusts the purchase cost for inflation, reducing taxable gains and helping you save tax.

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Exemptions Under Capital Gains Tax

The Income Tax Act provides several exemptions to reduce or eliminate tax on capital gains, if the amount is reinvested:

1. Section 54 – Sale of Residential Property

If you sell a residential property and reinvest the capital gain in another residential property (within 2 years) or construct a new property (within 3 years), you can claim full exemption.

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2. Section 54EC – Investment in Bonds

You can invest up to ₹50 lakhs in NHAI/REC bonds within 6 months of selling the property to claim exemption.

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3. Section 54F – Sale of Any Asset (Other Than Residential House)

If you sell land, gold, or other assets and use the entire sale proceeds to buy a residential property, you can claim full exemption.

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4. Section 54B – Agricultural Land

Capital gains from the sale of agricultural land can be exempt if the proceeds are used to purchase another agricultural land within 2 years.

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Best Practices for Saving Capital Gains Tax

✅ Plan Sales Strategically: Hold assets long enough to qualify for LTCG and enjoy lower tax rates.
✅ Use Indexation Benefit: It reduces taxable gains and saves a significant amount of tax.
✅ Reinvest Smartly: Utilize Sections 54, 54EC, and 54F exemptions to avoid tax legally.
✅ Maintain Proper Records: Keep purchase agreements, cost improvement bills, and sale deeds for tax filing.
✅ Consult a Tax Expert: For large transactions, professional advice ensures maximum savings and compliance.

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Conclusion

Capital gains tax can significantly impact your overall profits if not planned properly. Understanding types of capital gains, calculation methods, and exemptions can help you save tax legally and maximize wealth. Whether you are selling property, shares, or other assets, plan ahead to take full advantage of indexation and exemption provisions.