Capital Gains in India – Definition | Types | Tax Rates

Capital gains are the profits earned when a capital asset—such as stocks, bonds, real estate, or precious metals—is sold for more than its purchase price. They are typically categorized as short-term or long-term based on the duration the asset is held. Various tax rules govern capital gains, including rates that differ depending on factors like the type of asset and holding period. Exemptions and deductions may also apply, potentially reducing the tax burden on these gains.

Table of Contents

1. Basis of Charge – [Sec. 45(1)]
2. Definition of ‘Capital Asset’ – [Sec. 2(14)]
3. Determining Whether an Asset is Stock-in-trade or Capital Asset
4. Items of Precious Metals; to What Extent Constitutes Jewellery
5. Types of Capital Asset [Sec. 2(42A) & Sec. 2(29AA)]
6. Types of Capital Gain
7. Tax on Short Term Capital Gains Where STT is Charged – [Sec. 111A]
8. Tax on Long Term Capital Gains – [Sec. 112]
9. Option to Tax LTCG @ 10% without Indexation for Specified Securities – (First Proviso to Sec. 112)
10. Deductions under Chapter VI-A Not Allowed Against Any LTCG – [Sec. 112(2)]
11. Tax on LTCG on Transfer where STT is Charged – [Sec. 112A]
12. Definition of Transfer – [Sec. 2(47)]

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1. Basis of Charge – [Sec. 45(1)]

Any profits and gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head ‘Capital Gains’ in the previous year in which transfer took place unless such capital gain is exempt under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54H.

2. Definition of ‘Capital Asset’ – [Sec. 2(14)]

Capital Asset means

• property of any kind held by an assessee, whether or not connected with his business or profession,
• any Securities held by a Foreign Institutional Investor (FII) which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992,
• any Unit Linked Insurance Policy (ULIP) issued on or after 01.02.2021 to which exemption u/s 10(10D) does not apply.

but does NOT include:

• Any stock-in-trade [other than the securities referred to in sub-clause (b) above], consumable stores or raw materials held for the purposes of his business or profession;

Note – Securities held by FIIs (Foreign Institutional Investors) shall always be regarded as capital asset, whether held as stock-in-trade or as investment by the FIIs.

• Personal effects of movable nature (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, other than

1. 1. Jewellery;
   2. Drawings;
   3. Painting;
   4. Archaeological collections;
   5. Sculptures; or
   6. Any work of art.

• Agricultural land in India, not being land situated –

1. 1. in any area which is comprised within the jurisdiction of a municipality or a cantonment board and which has a population of not less than 10,000; or
   2. in any area within the distance, measured aerially–

1. 1. 1. not being more than 2 kms, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,000 but not exceeding 1,00,000; or
      2. not being more than 6 kms, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
      3. not being more than 8 kms, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,00,000;

• Special Bearer Bond, 1991, issued by the Central Government;
• Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or Deposit Certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.

Explanation to Sec. 2(14)

To nullify the judgment of SC in Vodafone International Holdings B.V. v. Union of India (2012), an Explanation has been inserted by the Finance Act, 2012, which clarifies as under:

For the removal of doubts, it is hereby clarified that ‘property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

3. Determining Whether an Asset is Stock-in-Trade or Capital Asset

The determination of the issue that whether an asset will be regarded as a Capital asset or stock-in-trade does not depend upon the nature of article, but the manner in which it is held.

For example, a dealer in real estate holds a piece of land or house property as stock-in-trade. But it will be a capital asset in the hand of a person who holds it as an investment and derives income from leasing and renting of the property.

The question whether the shares are held as an investment so as to attract capital gain on its sale or as a trading asset to give rise to business income is not a pure question of law but essentially a question of fact. The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. The facts that may be considered while determining the same are the magnitude and frequency of buying and selling of shares, the period of holding of such shares, ratio of sales to purchases and the total holdings, etc. Mere classification of shares in the books of account of the assessee is not relevant for determining the nature of income for income-tax purposes.

[PVS Raju v. ACIT (2012) 340 ITR 75 (AP)]

Surplus on sale of shares or securities taxable as ‘Business Income’ or ‘Capital Gains’?

[Circular No. 06/2016, dated 29.02.2016]

Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The CBDT has also, through various circulars and instructions, summarized the said principles for guidance of the field formations. But, however, disputes continue to exist on the application of these principles.

In this background, while recognizing that no universal principle in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), the CBDT has, with a view to reduce litigation and uncertainty in the matter, in partial modification to the Circulars issued earlier, further instructed vide Circular No. 06/2016 dated 29.02.2016 that the Assessing Officers in holding whether the surplus from sale of listed shares or securities would be treated as Capital Gain or Business Income, shall take into account the following:

• If the assessee opts to treat such shares and securities as stock in trade, the income arising from transfer of such shares/securities would be treated as its business income,
• Where the assessee desires to treat the income arising from the transfer of listed shares or securities held for more than 12 months as Capital Gains, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;
• In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the Circulars issued by the CBDT.

As per an instruction issued by CBDT on 2nd May, 2016 as regard unlisted shares, irrespective of the period of holding, it shall be treated as Capital asset.

4. Items of Precious Metals; to What Extent Constitutes Jewellery

As per Explanation 1 to section 2(14), jewellery includes:

• ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
• precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

Gold utensils cannot be regarded as of personal effects and thereby they are capital assets. Capital gains shall arise on sale of gold utensils. It is a tradition in Indian families to use silver utensils for various occasions but there is no such tradition to use gold utensils.

4.1 Judicial Decisions

CIT v. Benarashilal Kataruka (1990) 185 ITR 493 (Cal.)

Items of silverware including dinner plates of different sizes, finger bowls, and jugs were held to be personal effects.

The High Court held that silver utensils, in the given case, consisted of thalis, katoris, jugs, etc. are meant for personal use although not used daily. The main factor in deciding whether an article constitutes personal effect is the nature of the article. Therefore, in the present case, silver utensils constitute personal effects and no capital gains will arise on the sale of silver utensils.

But at the same time, in the case of Ramanathan Chettiar v. CIT (1985) (Mad.), it was held that a large number of the same type of silver articles cannot be treated as having been held for personal use and the assessing authority has to find out as to what are the articles which should reasonably be held by the assessee for personal use.

Maharaja Rana Hemanth Singhji v. CIT (1976) 103 ITR 61 (SC)

Only those effects can be legitimately said to be personal which pertain to the assessee’s person. In other words, an intimate connection between the effect and the person of the assessee must be shown to render them ‘personal effects’. In this case, the Supreme Court held that the gold sovereigns, silver coins and silver bars have been used for puja of the deities as a matter of pride or ornamentation and it is difficult to understand how such use can be characterized as personal use. Therefore, capital gains are taxable in the present case.

Loose diamonds held by an assessee are not personal effects and thus, are capital assets.

CIT v. Saroj Goenka (1983) 140 ITR 88 (Chen.)

5. Types of Capital Asset [Sec. 2(42A) & Sec. 2(29AA)]

In case of Non-Resident Individual:

Note:

•  Specified Mutual Funds (acquired on or after 01.04.2023) or Market Linked Debentures are always deemed as Short Term Capital Asset.
• Unlisted Bond or Unlisted Debenture which is transferred, matured or redeemed on or after 23.07.2024 shall always be deemed as Short Term Capital Asset irrespective of period of holding.

[Inserted by Finance (No.2) Act 2024]

Long Term Capital Asset means any Capital Asset other than Short term capital asset. [Sec. 2(29AA)]

Note – The Period of holding and the period of ownership need not be same. Explanations to Sec. 2(42A) deal with different cases where the period of holding is determined by excluding or including specified periods, as provided therein. These provisions are explained further with the relevant sections.

An asset which is sold the very next day after the period of 12/24/36 months is over, would be treated as long-term capital asset by including both the date on which the asset is acquired and the date on which the asset is transferred for computing period of holding. Bharti Gupta Ramola v. CIT [2012] (Delhi)

6. Types of Capital Gain

Short Term Capital Gain [Sec. 2(42B)] – Capital gain arising on the transfer of short term capital asset.

Long Term Capital Gain [Sec. 2(29B)] – Capital gain arising on the transfer of long term capital asset.

Tax Rates on Capital Gains

Short Term Capital Gains – Short Term Capital Gains is taxable at the regular income-tax rate applicable to the assessee, except in the case covered under section 111A as below.

7. Tax on Short Term Capital Gains Where STT is Charged – [Sec. 111A]

(1) Where the total income of an assessee includes any Short Term Capital Gains from the transfer of a short term capital asset, being:

• an equity share; or
• unit of an equity oriented mutual fund or ULIP to which exemption u/s 10(10D) does not apply, or
• unit of business trust;

and such transaction is chargeable to Securities Transaction Tax (STT),

the tax payable shall be the aggregate of:

1. tax @ 15% on such short term capital gains; and
2. regular income-tax on the balance income.

Provided that in the case of a Resident Individual or Resident HUF, where the total income as reduced by such short term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short term capital gains shall be @ 15%.

Example – Total income of Mr Ashish for A.Y. 2024-25 is ₹ 6,00,000 including short term capital gain of ₹ 4,60,000 on transfer of equity shares on which STT was levied. Tax u/s 111A shall be on following amount:

STCG referred in Sec. 111A – [Basic Exemption limit – (total income other than STCG as per Sec. 111A)]

= ₹ 4,60,000 – [₹ 2,50,000 – (₹ 6,00,000 – ₹ 4,60,000)]

= ₹ 4,60,000 – [₹ 2,50,000 – ₹ 1,40,000]

= ₹ 4,60,000 – ₹ 1,10,000 = ₹ 3,50,000

Tax under Sec. 111A @ 15% on ₹ 3,50,000 = ₹ 52,500 and Tax on regular income is Nil.

Provided further that this section shall also apply on transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre (IFSC), even if STT is not paid on such transaction.

[For Details on Taxation of transactions under International Financial Services Centre (IFSC) refer at the end of the Chapter ‘Miscellaneous Topics’]

(2) Where the gross total income includes any STCG referred to in this section, the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains i.e. deductions under sections 80C to 80U shall not be allowed from STCG referred u/s 111A.

8. Tax on Long Term Capital Gains – [Sec. 112]

Where the total income of an assessee includes Long Term Capital Gains, then the tax payable by the assessee, as per section 112(1), shall be the aggregate of:

• In case of a Resident Individual or Resident HUF:

1. 1. tax @ 20% on Long Term Capital Gains included in total income; and
   2. regular income-tax on the total income as reduced by Long Term Capital Gains, had the total income as so reduced been his total income; and:

Provided that in the case of a Resident individual or Resident HUF, where the total income as reduced by long term capital gains is below the maximum amount which is not chargeable to income-tax, then, long term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of long term capital gains shall be @ 20%.

• In case of a Domestic Company:

1. 1. tax @ 20% on Long Term Capital Gains included in total income; and
   2. regular income-tax on the balance income.

• In case of a Non-resident (not being a company) or a Foreign Company:

1. 1. tax @ 20% on long term capital gains included in total income; other than the LTCG on unlisted securities or shares of closely held company referred to in (ii)below; and
   2. tax @ 10% on Long Term Capital Gains on transfer of Unlisted Securities or Shares of Closely Held Company (i.e. company in which the public are not substantially interested) computed without giving effect to the 1st Proviso and 2nd Proviso to section 48;
   3. regular income-tax on the balance income.

 Example:

If the Taxable Income (other than Long Term Capital Gain) is ₹ 1,50,000 and Long Term Capital Gain is ₹ 1,90,000. Tax liability for a resident individual and for a non-resident individual shall be calculated as under [Ignore Sec. 115BAC]:

In case of Resident Individual:

 Tax will be computed as under:

In case of Non-Resident Individual:

9. Option to Tax LTCG @ 10% Without Indexation for Specified Securities – (First Proviso to Sec. 112)

Where tax payable on income arising from transfer of long term capital asset, being:

• listed securities (other than units), or
• zero coupon bonds,

exceeds 10% of the amount of capital gains computed before giving effect to 2nd proviso to section 48 (i.e. indexation), then such excess shall be ignored for computing tax payable by the assessee.

In other words, tax on long term capital gains arising from transfer of listed securities (other than units) or zero coupon bonds shall be lower of the following:

• tax @ 20% on LTCG after indexation; OR
• tax @ 10% on LTCG but without giving the benefit of indexation.

Note – This Proviso is applicable only where transfer is made before 23.07.2024

[Inserted by Finance (No. 2) Act, 2024 w.e.f. 23.07.2024]

10. Deductions under Chapter VI-A Not Allowed Against Any LTCG  [Sec. 112(2)]

The Gross Total Income (GTI) shall be reduced by Long Term Capital Gains, if any included, and deduction under Chapter VI-A shall be allowed as if the GTI so reduced were the gross total income of the assessee.

11. Tax on LTCG on Transfer Where STT is Charged – [Sec. 112A]

Notwithstanding anything contained in section 112, where the capital gains arises from the transfer of long term capital asset being:

• equity share in a company or
• unit of equity oriented mutual fund or unit linked insurance policies to which exemption u/s 10(10D) does not apply, or
• unit of business trust,

and STT has been paid

• on acquisition and transfer of such capital asset (in the case equity share in a company); or
• on transfer of such capital asset (in the case of a unit of an equity oriented mutual fund or a ULIP to which exemption u/s 10(10D) does not apply or a unit of a business trust).

the tax payable on such long term capital gains exceeding ₹ 1,25,000 shall be 12.5%.

[Amended by Finance (No. 2) Act, 2024 w.e.f. 23.07.2024]

However. if transferred is made before 23.07.2024 the tax payable on such long term capital gains exceeding 1,00,000 shall be 10%.

Note: Aggregate limit of long term capital gains not taxable during the previous year shall not exceed ₹ 1,25,000.

Provided that in case of an individual or a HUF, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

This section shall also be applicable in case of a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre (IFSC) and consideration for which is paid or payable in foreign currency, even if STT has not been paid on such transfer.

The Central Government may, by notification in the official gazette, specify the nature of acquisition of equity share where this section shall be applicable even if the STT has not been paid on its acquisition.

Points to Note:

• Where the gross total income of an assessee includes any long-term capital gains u/s 112A, deduction under Chapter VI-A shall be allowed from GTI as reduced by such capital gains.
• Where the total income of an assessee includes any long-term capital gains u/s 112A, the rebate u/s 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

The following are the transactions where benefit of Sec. 112A shall not be available, if STT was not paid at the time of acquisition:

[Notification 60/2018, dated 01.10.2018]

The condition of payment of STT on acquisition of equity shares shall not apply to equity shares acquired before 01.10.2004. For equity shares acquired on or after 01.10.2004, section 112A shall not apply to the following acquisition where STT has not been paid.

• Where acquisition of existing listed equity share in a company whose equity shares are not frequently traded in a recognised stock exchange is made through a preferential issue other than acquisition of listed equity shares in a company:

1. 1. which has been approved by Supreme Court, High Court, NCLT, SEBI or RBI in this behalf;
   2. by any non-resident as per foreign direct investment guidelines issued by the Government;
   3. by an investment fund referred to in clause (a) of Explanation 1 to section 115UB or a venture capital fund referred to in clause (23FB) of section 10 or a Qualified Institutional Buyer;
   4. through preferential issue to which the provisions of Chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 does not apply.

• Where transaction for acquisition of existing listed equity share in a company is not entered through recognised stock exchange other than the following acquisition of listed equity shares in a company made as per Securities Contracts (Regulation) Act, 1956, if applicable:

1. 1. acquisition through an issue of share by a company other than the issue referred to in clause (a);
   2. acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business;
   3. acquisition which has been approved by Supreme Court, High Courts, NCLT, SEBI or RBI in this behalf;
   4. acquisition under employee stock option scheme or employee stock purchase scheme framed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
   5. acquisition by any non-resident as per foreign direct investment guidelines of the Government;
   6. where acquisition of shares of company is made under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011;
   7. acquisition from the Government;
   8. acquisition by an investment fund referred to in Explanation 1 to section 115UB(a) or a venture capital fund referred to in Sec. 10(23FB) or a Qualified Institutional Buyer;
   9. acquisition by mode of transfer referred to in section 47 or 50B or 45(3) or 45(4), if the previous owner of such shares has not acquired them by any mode referred to in clause (a) or clause (b) or clause (c) [other than the transactions referred to in the proviso to clause (a) or clause (b)].

• Acquisition of equity share of a company during the period beginning from the date on which the company is delisted from a recognised stock exchange and ending on the date immediately preceding the date on which the company is again listed on a recognised stock exchange as per the Securities Contracts (Regulation) Act, 1956 read with SEBI Act, 1992 and the rules made thereunder.

12. Definition of Transfer – [Sec. 2(47)]

Transfer, in relation to capital asset, includes:

1. the sale, exchange or relinquishment of the capital asset; or
2. the extinguishment of any rights therein; or
3. the compulsory acquisition thereof under any law; or
4. where the capital asset is converted by the owner into, or is treated by him, as stock-in-trade of a business carried on by him, such conversion or treatment; or
5. the maturity or redemption of Zero Coupon Bonds; or
6. any transaction involving the allowing the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or
7. any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.

On reduction of share capital, payment made by the company to the shareholders towards such reduction shall be treated as an extinguishment of right in shares held by shareholders. Consequently, reduction of share capital is subject to capital gain.

Kartikeya Sarabhai v. CIT (1997) 228 ITR 163 (SC)

Redemption of Preference shares amounts to transfer and taxable to the shareholder. There is a relinquishment of rights in shares which amount to transfer resulting in capital gains.

Anarkali Sarabhai v. CIT (1982) 224 ITR 422 (SC)

12.1 Explanation 2 to Sec. 2(47)

To nullify the judgment of SC in Vodafone International Holdings B.V. v. Union of India (2012), an Explanation has been inserted by the Finance Act, 2012, which clarifies as under:

‘Transfer’ includes and shall be deemed to have always included:

1. disposing of or parting with an asset or any interest therein, or
2. creating any interest in any asset in any manner whatsoever,

• • directly or indirectly, absolutely or conditionally, voluntarily or involuntarily,
  • by way of an agreement (whether entered into in India or outside India) or otherwise.

The above transaction will be deemed as Transfer notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

Seshasayee Steels (P.) Ltd. v. ACIT [2020] 421 ITR 46 (SC)

Any transaction which enables the enjoyment of immovable property will be considered as enjoyment as a purported owner thereof for being treated as a “transfer” of a capital asset u/s 2(47)(vi).

Facts – The assessee (land owner) entered into an “agreement to sell” with a builder (V Ltd.) which provided that both parties were entitled to specific performance of the agreement. Under the agreement, the assessee gave permission to the builder to start construction on the land. Pursuant to the agreement, a power of attorney was given by the assessee to a director of the builder-company to execute, and join in execution of, the sale agreements or sale deeds in respect of the subject property after developing it into flats. The A.O. opined that such transaction enables the enjoyment of immovable property to be considered as enjoyment as a purported owner thereof for being treated as a “transfer” of a capital asset u/s 2(47)(vi) and levy tax on capital gains arising therefrom.