How capital gains are taxed in India: Key rules for stocks, property, and mutual funds

Capital gains taxes are levied on profits earned from selling capital assets such as property, stocks, or mutual funds. In the nation, the tax treatment depends on whether the gains are categorised as short-term in nature or long-term based on how long the asset was held by the investor.

What are short-term and long-term capital gains?

Short-Term Capital Gains (STCG): Gains from assets held for less than a specified period. This period is the main defining factor in categorising these gains as short-term in nature.

Long-Term Capital Gains (LTCG): Gains from assets held longer than the specified period. In this particular case again, the holding period acts as the main deciding factor in categorising these gains as long term gains.

Key tax rates and rules for FY 2024-25 (AY 2025-26)

• STCG on equities is taxed at 20%, an increase from the earlier 15%. This means any gains made within 12 months of the holding period on equities will require a tax payment of 20% on the total capital gain made.
• LTCG on all asset classes, including equities, gold, and property, is taxed at 12.5%. This simply means that if you hold your assets for more than 12 months, you will be required to pay 12.5% tax on capital gains made, with rebates in different asset classes.
• The exemption limit for LTCG on equity shares has been raised from ₹1 lakh to ₹1.25 lakh. This has been done to facilitate equity shareholders and to provide them with an opportunity to make the most of tax-free capital gains.
• Indexation benefits (which help adjust cost for inflation) have been removed for LTCG calculation. This step was taken to streamline and make the process of taxation smooth and seamless.
• The holding period to qualify for LTCG has also been simplified, 12 months for financial assets, 24 months for property and other non-financial assets. The objective behind this was to bring uniformity and tax filing compliance.

Why is this important?

• Understanding the difference helps investors plan when to sell assets to minimize tax liability. It can also help with proper investment and tax planning for the future. Thus ensuring that the taxpayer makes the most of the benefits provided to them by the government of the day.
• Knowing the exemption limits and tax rates helps optimize returns. Along with the same, fair guidance from a financial advisor or tax consultant can further consolidate the tax planning of a well-aware taxpayer.
• In all cases of indexation, its removal requires careful tax planning, especially for property transactions, as there are a lot of overlapping legal provisions that apply.
• Tax-saving investments under sections such as 54 and 54F of the Income Tax Act provide ways to save on capital gains tax when reinvesting in residential property. These sections help in the efficient planning of property sales and purchases.
• Keeping good records of purchase and sale dates, along with expenses incurred on the asset, can further facilitate accurate capital gains calculation and reduce tax liability for individuals who are planning to sell their property.

Hence, an informed approach towards capital gains tax assists taxpayers in complying with tax laws efficiently and avoids surprises during income tax filing. Efficient tax planning and awareness can result in substantial savings and better wealth management.

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Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or investment advice. Capital gains taxation is subject to periodic changes and individual circumstances. Readers are advised to consult a qualified tax professional or financial advisor before making any investment or tax-related decisions.