Capital Gains under Income-tax Act: Complete Guide

Jurisdiction and date: India. This guide explains the law applicable to income earned during FY 2025-26 (AY 2026-27) under the Income-tax Act, 1961, and separately explains the transition to the Income-tax Act, 2025 from 1 April 2026. Legal position reviewed on 26 July 2026.

Capital gains tax in India: the practical answer

Capital gain normally arises when a person transfers a capital asset for more than its tax cost. The final tax cannot be determined from the profit figure alone. The answer depends on the type of asset, whether it is an investment or stock-in-trade, the transfer date, the period of holding, special valuation provisions, the applicable tax rate, available exemption, capital losses and the return schedule.

Correct sequence: classify the asset first, calculate the gain second, and apply the rate last.

Important: AIS, a broker tax P&L or a mutual-fund statement is supporting data. It is not a legal conclusion. It may not contain previous-owner cost, grandfathering value, corporate actions, cross-demat FIFO, exemptions or the correct instrument classification.

Choose your reading path

Which Income-tax Act applies?

Income earned from 1 April 2025 to 31 March 2026 is reported for AY 2026-27 under the Income-tax Act, 1961. The Income-tax Act, 2025 came into force on 1 April 2026 and applies to Tax Year 2026-27 onward. Filing an AY 2026-27 return after 1 April 2026 does not shift that return to the new Act.

Student rule: In an answer relating to AY 2026-27, use the section numbers of the 1961 Act. In work relating to Tax Year 2026-27 onward, check the corresponding provisions of the 2025 Act and the Income-tax Rules, 2026.

The CAPITAL-G method for every capital-gain problem

The following sequence works for examinations, client computations and personal tax planning.

1. C — Confirm the capital asset: Decide whether the item is an investment, stock-in-trade, personal effect, rural agricultural land or another excluded asset.
2. A — Ascertain the transfer: Identify the event and the correct year of taxation. A sale, exchange, redemption, extinguishment, compulsory acquisition or conversion may have different timing rules.
3. P — Period of holding: Apply the 12-month, 24-month or deemed-short-term rule. Include the previous owner's period where the law requires it.
4. I — Identify the consideration: Test whether actual sale value is replaced by stamp-duty value, fair market value, deemed nil consideration or another statutory figure.
5. T — Take the correct deductions: Deduct eligible transfer expenses, cost and improvement cost. Exclude STT and avoid double deduction.
6. A — Apply the tax rate: Use section 111A, section 112A, section 112, normal rates, section 115BBH or another special provision.
7. L — Look for exemption and losses: Test sections 54 to 54GB, current-year losses and brought-forward losses.
8. G — Give correct disclosure: Select the ITR form, complete the relevant schedules and preserve supporting evidence.

What is a capital asset?

Section 2(14) broadly covers property of any kind held by a taxpayer, whether or not connected with business. Property can be movable, immovable, tangible or intangible. Shares, mutual-fund units, bonds, land, buildings, jewellery, artworks, business rights and many foreign assets can therefore be capital assets.

Common assets included

Important exclusions

• Stock-in-trade, consumable stores and raw material: Profit is generally business income.
• Qualifying personal effects: Movable property held for personal use is generally excluded. Jewellery, archaeological collections, drawings, paintings, sculptures and works of art are specifically not protected by this exclusion.
• Rural agricultural land in India: Land outside the statutory municipal and distance limits is not a capital asset. Urban agricultural land remains a capital asset.
• Specified old bonds and certificates: Limited statutory exclusions exist for identified instruments.

Simple example: A privately used car is ordinarily a personal effect. Its sale normally does not create taxable capital gain. A diamond necklace is jewellery, so its sale can create capital gain even though it was used personally.

Investment or business stock?

A share can be an investment for one taxpayer and stock-in-trade for another. Intention, accounting treatment, frequency, volume, source of finance, holding behaviour and consistency across years are relevant. Intraday equity transactions are ordinarily speculative business transactions. Futures and options are ordinarily business transactions rather than capital gains.

What counts as transfer?

Section 2(47) gives “transfer” a wider meaning than sale. It includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, conversion into stock-in-trade, maturity or redemption of a zero-coupon bond and specified arrangements involving possession or enjoyment of immovable property.

Transactions that may not be regarded as transfer

Do not equate tax-neutral with tax-free forever. Many section 47 transactions postpone tax. The cost and holding history continue into the replacement asset.

Short-term or long-term: the 12-24 rule

For transfers on or after 23 July 2024, the law broadly uses two ordinary holding periods. Listed securities and specified units generally use 12 months. Most other assets use 24 months. Some assets are deemed short-term regardless of actual holding.

Exact-period point: “More than 12 months” and “more than 24 months” are strict tests. Exactly 12 months is not more than 12 months.

How capital gain is calculated

Full value of consideration
Less: Eligible expenditure wholly and exclusively connected with transfer
Less: Cost of acquisition
Less: Cost of improvement, where allowed
Equals: Capital gain or capital loss
Less: Eligible exemption under sections 54 to 54GB
Equals: Taxable capital gain

Each line must be tested. Actual sale price can be replaced by a deemed value. Cost may belong to the previous owner. A bonus share may have nil cost. An old equity asset may use the 31 January 2018 grandfathering formula. A property acquired before 1 April 2001 may use an eligible fair market value. A depreciable asset uses block computation.

Step 1: determine the correct consideration

• Section 50C: Stamp-duty value can replace consideration for land or building. The 110% safe harbour and agreement-date relief must be checked.
• Section 50CA: Prescribed fair market value can replace inadequate consideration for unquoted shares.
• Section 50D: Fair market value is used where consideration cannot be ascertained or determined.
• Slump sale: Section 50B uses special fair-market-value and net-worth rules.
• Post-1 October 2024 buyback: Capital-gain consideration is deemed nil, while the amount received is generally dividend income.

Step 2: identify eligible transfer expenses

Brokerage, commission, legal charges and other direct selling expenses may qualify when incurred wholly and exclusively in connection with transfer. The nature and evidence of the expense matter.

STT is not deductible. If a broker report imports “total charges,” split the amount and remove Securities Transaction Tax from the deduction.

Step 3: establish cost and improvement

Cost generally includes purchase price and direct acquisition expenses such as stamp duty and registration charges. Cost of improvement covers eligible capital additions or alterations, not routine repairs or expenditure already deducted elsewhere.

Step 4: understand indexation after 23 July 2024

For transfers on or after 23 July 2024, other LTCG is generally taxed at 12.5% without indexation. A resident individual or HUF transferring land or building acquired before 23 July 2024 receives a statutory tax protection: tax under the new method is restricted so it does not exceed the specified old-law computation at 20% with indexation.

Capital-gain tax rates for FY 2025-26

Surcharge and 4% health and education cess are added where applicable. Chapter VI-A deductions generally cannot be used against income taxed at the special capital-gain rates.

Unused basic exemption limit

A resident individual or resident HUF may adjust the unutilised basic exemption limit against specified capital gains under the relevant provisions. This benefit is not automatically available to a non-resident.

Section 87A for AY 2026-27

Under the new regime for AY 2026-27, section 87A rebate can reach ₹60,000 where the total-income condition is satisfied. Finance Act 2025 restricts the rebate so that it cannot exceed the tax computed at the slab rates under section 115BAC(1A). In practical terms, tax calculated at special rates such as sections 111A, 112 and 112A is not wiped out merely because total income is within ₹12 lakh.

Practical cases and calculations

Case 1: listed equity sold within 12 months

The example assumes the shares are investments, the transaction satisfies section 111A and no loss or basic-exemption adjustment changes the result.

Case 2: section 112A LTCG

Eligible aggregate LTCG is ₹3,25,000. The first ₹1,25,000 is outside the taxable portion under section 112A. Taxable LTCG is ₹2,00,000 and base tax is ₹25,000 at 12.5%, before surcharge and cess.

Case 3: share acquired before 1 February 2018

Deemed cost = Higher of:
A. Actual cost; and
B. Lower of:
   1. Fair market value on 31 January 2018; and
   2. Sale consideration

Assume actual cost is ₹40,000, 31 January 2018 fair market value is ₹90,000 and sale consideration is ₹80,000. Lower of ₹90,000 and ₹80,000 is ₹80,000. Higher of actual cost ₹40,000 and ₹80,000 is ₹80,000. The deemed cost is therefore ₹80,000 and the gain before transfer expenses is nil.

Case 4: property, section 50C and indexation protection

A resident individual sells a long-term property acquired before 23 July 2024. Sale consideration is ₹90 lakh, stamp-duty value is ₹96 lakh, transfer expenses are ₹1 lakh, actual cost is ₹30 lakh and the eligible indexed cost under the old method is ₹55 lakh.

1. Section 50C: Stamp value is 106.67% of consideration, so it is within the general 110% safe harbour. Consideration remains ₹90 lakh, subject to the conditions.
2. New computation: ₹90 lakh − ₹1 lakh − ₹30 lakh = ₹59 lakh. Base tax at 12.5% is ₹7.375 lakh.
3. Protected old computation: ₹90 lakh − ₹1 lakh − ₹55 lakh = ₹34 lakh. Base tax at 20% is ₹6.80 lakh.
4. Result: The eligible resident individual receives the lower protected tax of ₹6.80 lakh, before surcharge and cess.

Professional file requirement: Preserve the purchase deed, sale deed, stamp valuation, improvement evidence, fair-market-value report where applicable and the old-versus-new tax working.

Case 5: debt-oriented mutual-fund unit acquired after 1 April 2023

A unit acquired on or after 1 April 2023 can be covered by section 50AA if it satisfies the statutory definition of a specified mutual fund. For AY 2026-27, the definition focuses on funds investing more than 65% of total proceeds in debt and money-market instruments, or qualifying fund-of-funds. The gain is deemed short-term regardless of holding period.

Practical warning: Do not classify a gold fund, silver fund or international fund only from its name. Check portfolio composition, listing status and the law applicable to the assessment year.

Case 6: unlisted bond held for four years

An unlisted bond purchased in 2021 and redeemed in FY 2025-26 is covered by section 50AA because the redemption occurs after 23 July 2024. The gain is deemed short-term even though the bond was held for more than 24 months.

Case 7: domestic-company buyback after 1 October 2024

Dividend and capital loss belong to different heads and cannot simply be netted in one line.

Case 8: inherited property

A mother purchased property in 2008 for ₹20 lakh. Her child inherited it in 2024 and sold it in 2025 for ₹80 lakh. Subject to section 49, the previous owner's cost is generally carried over and the previous owner's holding period is included. The asset is therefore long-term; it does not become short-term merely because the child held it for one year.

Case 9: set-off of STCL and LTCL

Capital-gain exemptions: sections 54, 54B, 54EC and 54F

These provisions are rollover exemptions. They reduce current capital gain when the taxpayer invests in a specified new asset within the prescribed period and observes the conditions and lock-in.

Section 54: house sold and another house acquired

Assume LTCG from an old residential house is ₹18 lakh and the eligible investment in a new residential house is ₹12 lakh. Exemption is ₹12 lakh and taxable LTCG is ₹6 lakh. If the eligible investment were ₹20 lakh, exemption would be restricted to the ₹18 lakh gain.

A once-in-a-lifetime option permits investment in two residential houses where the capital gain does not exceed ₹2 crore, subject to the statutory conditions. Eligible investment exceeding ₹10 crore is ignored for the exemption computation.

Section 54F: another long-term asset sold

Exemption = Long-term capital gain × Amount invested in new house ÷ Net consideration

Assume net consideration is ₹80 lakh, LTCG is ₹30 lakh and eligible investment in the new house is ₹40 lakh. Exemption is ₹30 lakh × ₹40 lakh ÷ ₹80 lakh = ₹15 lakh. Taxable LTCG is ₹15 lakh.

Section 54 compares investment with capital gain. Section 54F uses net consideration for proportionate exemption.

Capital Gains Account Scheme

If the required amount is not used before the due date under section 139(1), the unutilised amount may need to be deposited in the Capital Gains Account Scheme before that due date. A belated-return deadline does not automatically extend the CGAS deposit deadline.

Action point: Exemption planning should begin before the section 139(1) due date. Keep bank trail, purchase deed, construction invoices, CGAS proof and completion or possession evidence.

Set-off and carry forward of capital losses

Capital loss cannot be set off against salary, house-property income, business income or income from other sources. To preserve ordinary carry forward, the return of loss should generally be filed within the section 139(1) due date.

VDA exception: A loss from transfer of a virtual digital asset cannot be set off against other income and cannot be carried forward under section 115BBH.

Special assets, cost rules and corporate actions

FIFO and transfers between demat accounts

Dematerialised securities are generally matched using FIFO. A broker report may be incomplete where securities were transferred between brokers or demat accounts, opening holdings are missing, or corporate actions are not fully captured. Obtain the complete demat statement and reconstruct lots before relying on a gain figure.

Section 50AA classification control

For AY 2026-27, a specified mutual fund is broadly a fund investing more than 65% of total proceeds in debt and money-market instruments, or a fund investing at least 65% in units of such a debt-focused fund. The percentage is tested using the statutory annual-average method. Section 50AA also covers market-linked debentures and specified unlisted bonds or debentures.

System-design warning: An Indian ISIN prefix does not prove that a security is listed equity. A fund name does not prove section 50AA classification. Use a security master, listing data, fund-composition data, STT information and acquisition date.

ITR forms, schedules and records

Schedules commonly involved

• Schedule CG: Main capital-gain computation.
• Schedule 112A: Eligible listed-equity, equity-oriented-fund and business-trust LTCG details.
• Schedule VDA: Virtual digital asset transactions.
• Schedule SI: Income taxable at special rates.
• Schedule CYLA: Current-year loss adjustment.
• Schedule BFLA: Brought-forward loss adjustment.
• Schedule CFL: Loss carried forward.
• Schedules FSI, TR and FA: Foreign income, foreign tax relief and foreign assets, where applicable.

Records to collect before computation

1. Broker tax P&L, trade book and complete demat statement.
2. Mutual-fund capital-gain statements from the relevant RTA or AMC.
3. AIS and TIS for reconciliation, not as a substitute for cost records.
4. Property purchase deed, sale deed, stamp values and improvement invoices.
5. Corporate-action records for bonus, split, merger and demerger.
6. Previous-owner documents for gift or inheritance.
7. Evidence of section 54-series investment and CGAS deposit.
8. Foreign broker statements and exchange-rate workings where relevant.

AY 2026-27 return change: The separate pre- and post-23 July 2024 reporting split in Schedule CG is not required for AY 2026-27 because the whole financial year falls after the rate-change date.

CA/CMA student revision sheet

Remember the three layers

Ten-point memory list

1. Capital gain requires a capital asset and a transfer, unless a special charging rule applies.
2. Listed securities generally use 12 months; most other assets use 24 months.
3. Section 50 and section 50AA create deemed-short-term gains.
4. Section 48 gives the basic computation formula.
5. Section 50C deals with land/building stamp value; section 50CA deals with unquoted shares.
6. Section 111A rate is 20% for eligible STCG.
7. Section 112A rate is 12.5% above aggregate ₹1.25 lakh for eligible LTCG.
8. Other LTCG is generally 12.5% without indexation for current transfers.
9. STCL can adjust against STCG and LTCG; LTCL can adjust only against LTCG.
10. Section 54 is house-to-house; section 54F is other long-term asset-to-house and uses net consideration.

Suggested exam-answer order

1. State the nature of the asset and applicable section.
2. Determine holding period and character of gain.
3. Write the computation in a table.
4. Apply special consideration or cost provisions.
5. Deduct the eligible exemption.
6. State the tax rate, surcharge and cess.
7. Mention material assumptions and the relevant date.

Professional review checklist

1. Scope: Confirm assessee status, residential status, tax regime, FY/AY and governing Act.
2. Completeness: Obtain all brokers, demat accounts, RTAs, property transactions and foreign holdings.
3. Character: Separate investment transactions from business stock, intraday and F&O.
4. Classification: Validate instrument type, listing, STT, acquisition date and fund composition.
5. FIFO: Reconstruct opening lots, off-market transfers and corporate actions.
6. Expenses: Separate STT from deductible charges.
7. Deeming sections: Test sections 50, 50AA, 50B, 50C, 50CA and 50D.
8. Cost: Test previous-owner cost, 1 April 2001 FMV, 31 January 2018 grandfathering and ESOP perquisite value.
9. Exemption: Verify ownership conditions, investment date, lock-in, CGAS and ₹10 crore/₹50 lakh limits.
10. Losses: Reconcile current-year and brought-forward losses in legal order.
11. Return: Reconcile Schedule CG, 112A, SI, CYLA, BFLA, CFL and Part B-TI.
12. Evidence: Preserve the source file, assumptions, calculation version and reviewer sign-off.

Common errors and how to avoid them

What changes under the Income-tax Act, 2025?

The Income-tax Act, 2025 mainly reorganises and simplifies the law. It uses “Tax Year” instead of the previous-year and assessment-year structure for years governed by the new Act. The substantive tax result should still be checked against the applicable Finance Act, Rules and transition provisions.

Practical transition rule: Do not mechanically replace every old section number in an AY 2026-27 computation. Use the 1961 Act for that return. Use the official comparison utility when preparing work under the 2025 Act.

Dates that change the answer

Frequently asked questions

Official sources and references

Professional-review note: This article is educational. A final computation may change because of residential status, DTAA, the precise instrument, acquisition mode, corporate action, valuation, judicial interpretation or facts absent from the available statement.

Conclusion

The reliable way to solve capital gains is to follow the sequence: capital asset, transfer, holding period, consideration, cost, rate, exemption, losses and disclosure. For FY 2025-26, the most useful memory points are the 12-month and 24-month holding framework, 20% section 111A rate and 12.5% section 112A rate above ₹1.25 lakh.

Before filing, reconcile the computation with original records and the return schedules. A correct tax rate cannot repair a wrong asset classification, missing FIFO history, incorrect cost or missed exemption deadline.