You have sold shares, mutual funds, land or a house, and the transaction now appears in your Annual Information Statement (AIS) or broker statement. Your next decision is whether the profit is short-term or long-term, which tax rate applies, and where it belongs in your Income Tax Return (ITR).
For income earned in Financial Year (FY) 2025-26 and reported in Assessment Year (AY) 2026-27, capital gains tax in India depends on the asset, holding period, sale date, acquisition cost and available exemption. This guide explains the tax calculation and filing steps.
It is an independent reference, not personalised legal or investment advice.
What is capital gains tax in India?
Capital gains tax is the income tax charged on a profit arising when you transfer a capital asset. A transfer can include a sale, exchange, relinquishment or another transaction treated as a transfer under income-tax law.
The calculation begins with the sale consideration. From this amount, you generally subtract eligible transfer expenses, acquisition cost and, where permitted, improvement cost.
You then account for any applicable tax exemption:
Gain = sale consideration − transfer expenses − eligible acquisition cost − eligible improvement cost
A capital asset can include property, shares, securities, jewellery and units of mutual funds. Certain personal effects and specified rural agricultural land fall outside the statutory definition when the relevant conditions are met.
The Income Tax Department explains that profit arising from the transfer of a qualifying asset is charged under the income head “Capital Gains” in its ITR-2 guidance for AY 2026-27.
The formula gives the gain, not the final tax liability. You must still consider the applicable tax rate, surcharge, Health and Education Cess, loss set-off and exemption.
Tax Deducted at Source (TDS), if any, is a credit against the tax liability. It does not reduce the underlying gain.
Remember: tax applies to the computed gain, not automatically to the full sale price.
Before calculating the amount due, identify exactly what asset was transferred.
Which capital assets can produce taxable income?
Capital assets that can produce taxable income include investments, immovable property and other assets held by a taxpayer, subject to statutory exclusions. The classification follows the nature of the asset rather than the name used by a broker or seller.
Common assets include:
- Listed equity shares and units of equity-oriented mutual funds
- Equity-Linked Savings Scheme (ELSS) units
- Debt-oriented mutual funds and other specified mutual fund units
- Unlisted shares, bonds, debentures and government securities
- Residential or commercial property, land and buildings
- Gold, jewellery and certain other valuable assets
Taxable profit can arise even when the transaction is not a routine market sale. A gift is generally not treated as a transfer by the giver for this purpose.
However, when the recipient later sells the asset, the previous owner’s cost and holding history can become relevant. Inheritance has similar cost and holding-period implications.
Business inventory is different from a capital asset. If frequent equity dealing constitutes a business based on the facts, the resulting income may be reported as business income rather than under the capital-gains category.
This affects the tax computation and whether ITR-2 or ITR-3 is appropriate.
The purchase contract, broker ledger, demat statement, sale deed and improvement invoices establish the inputs used in the calculation. AIS is a useful cross-check, but it may not contain the complete acquisition cost or all deductible expenses.
Remember: classify the asset before selecting a tax rate or an ITR schedule.
Once you have identified the asset, calculate the result using the supporting records.
How are gains calculated?
Gains are calculated by subtracting eligible costs and transfer expenses from the consideration determined under the applicable rules. The correct result depends on complete transaction records, not only the net amount credited to your bank.
Example: listed equity shares
Assume you sold listed equity shares during FY 2025-26 for ₹4,80,000. Their eligible acquisition cost was ₹3,00,000, and directly related transfer expenses other than Securities Transaction Tax (STT) were ₹2,000.
| Calculation | Amount |
|---|---|
| Sale consideration | ₹4,80,000 |
| Less: acquisition cost | ₹3,00,000 |
| Less: eligible transfer expenses | ₹2,000 |
| Capital gain | ₹1,78,000 |
The ₹1,78,000 gain alone does not determine the tax. You must next establish whether the equity was held for more than 12 months.
You must also confirm the STT conditions before applying section 111A or section 112A.
Example: property
Assume a residential property is sold for ₹85,00,000. The eligible cost is ₹55,00,000, the documented improvement cost is ₹4,00,000, and brokerage is ₹1,00,000.
Ignoring stamp-value substitution and tax exemptions for this illustration, the gain is:
₹85,00,000 − ₹55,00,000 − ₹4,00,000 − ₹1,00,000 = ₹25,00,000
The result changes if the stamp duty value replaces the stated consideration, an exemption under section 54 applies, or the resident-individual grandfathering rule produces a lower tax liability. Check these facts before filing the ITR.
Capital losses also affect the result. A short-term capital loss can generally be set off against eligible short-term or long-term gains.
A long-term capital loss can generally be set off only against eligible long-term gains. The ability to carry forward a loss depends on the applicable return-filing requirements and time limit.
Remember: retain a transaction-level calculation because AIS does not establish every allowable cost.
After calculating the gain, place that income in the correct holding-period category.
How does capital-gain income affect total income?
Capital-gain income forms part of total income, but some amounts are taxed at special rates rather than ordinary slab rates. The tax computation therefore separates ordinary income from each special-rate category before adding surcharge and cess.
Salary, house-property income, interest and investment profits can appear in the same ITR. A deduction from total income is not automatically available against every amount taxed at a special rate.
An exemption is different from a deduction because it removes an eligible amount from the tax computation when its statutory conditions are met.
For property, commonly relevant exemptions include:
- Section 54 for eligible gains from a residential house held for the required period and reinvested in a qualifying residential house.
- Section 54EC for eligible gains from land or a building held for the required period and invested in specified bonds within six months, subject to statutory conditions and limits.
- Section 54F for eligible gains from an asset other than a residential house, held for the required period, where the net consideration is invested in a qualifying residential house.
The Income Tax Department’s exemption table, updated for the law as amended by the Finance Act, 2026, sets out eligible taxpayers, assets, investment periods and withdrawal conditions for sections 54, 54EC and 54F.
For FY 2025-26 and AY 2026-27, the section 54 and section 54F rules also restrict the recognised cost of a new residential property to ₹10 crore for this purpose.
An exemption is not the same as a tax refund. An exemption removes an eligible gain from the tax computation.
A TDS credit reduces the tax payable. A refund arises only when eligible taxes already paid exceed the final determination.
Remember: combine all income in the ITR, but calculate each special-rate gain in its proper category for the financial year.
That category depends primarily on the applicable holding period.
What holding period makes a gain short-term or long-term?
The holding period is the time between acquisition and transfer, measured according to the rules for the particular asset. For FY 2025-26 and AY 2026-27, the main thresholds are 12 months for specified listed financial assets and 24 months for most other capital assets.
| Asset category | At or below the threshold | Above the threshold |
|---|---|---|
| Listed equity shares, equity-oriented mutual fund units and listed securities | Held for 12 months or less | Held for more than 12 months |
| Land, building and other property | Held for 24 months or less | Held for more than 24 months |
| Unlisted shares and most other capital assets | Held for 24 months or less | Held for more than 24 months |
The holding period can include the previous owner’s period in qualifying inheritance or gift cases. Bonus shares, rights shares and reorganisations can have separate acquisition-date and cost rules.
Verify these dates against the demat statement, allotment advice or property documents.
A sale after 11 months and 29 days is short-term for listed equity, while a sale after 13 months is long-term. For a house, a 13-month holding period remains short-term because the relevant threshold is more than 24 months.
Debt-oriented mutual funds require additional care. Section 50AA can deem gains from specified mutual funds acquired on or after 1 April 2023 to be short-term, regardless of the number of months held.
Fund labels such as “income fund” or “debt fund” do not replace the statutory test.
Remember: count the holding period according to the rule for that asset; do not assume every investment uses 12 months.
The classification determines which capital gains tax rule applies next.
How are capital gains taxed?
Capital gains are taxed under different provisions. The applicable tax rate depends on the asset, holding-period classification and transaction conditions.
For transfers during FY 2025-26 and AY 2026-27, gains covered by section 111A are taxed at 20%, while qualifying long-term gains commonly attract a 12.5% rate.
Short-Term Capital Gains on qualifying listed equity shares, equity-oriented fund units and business-trust units are taxed under section 111A at 20% when the STT conditions are met. Other short-term gains are generally added to total income and taxed at the applicable slab rate, unless another special tax rule applies.
Long-Term Capital Gains (LTCG) under section 112 generally attract a 12.5% tax rate without indexation for transfers during FY 2025-26. LTCG under section 112A from qualifying listed equity, equity-oriented funds and business-trust units is taxed at 12.5% only on aggregate LTCG exceeding ₹1,25,000, subject to the section’s conditions.
The Income Tax Department’s reference, published in March 2026, confirms the 20% section 111A tax rate, the general 12.5% LTCG tax rate and the ₹1,25,000 threshold under section 112A in its capital gains rate summary.
Contrasting tax example
Assume the ₹1,78,000 equity gain calculated earlier meets all STT conditions:
- If the shares were held for 10 months, the section 111A tax is ₹35,600 at 20%, before applicable cess and surcharge.
- If the shares were held for 18 months and there are no other section 112A gains, taxable LTCG is ₹53,000 after the ₹1,25,000 aggregate threshold. Tax is ₹6,625 at 12.5%, before applicable cess and surcharge.
The final tax amount differs if the taxpayer has other gains, an unused portion of the basic exemption limit, eligible losses or surcharge exposure.
Remember: the same ₹1,78,000 gain can produce a different tax result solely because its holding period changes.
LTCG requires a closer look because equity, property and other assets do not always receive identical tax treatment.
What is the LTCG tax treatment for equity and property?
LTCG is generally charged at 12.5% for transfers during FY 2025-26 and AY 2026-27, but equity receives a ₹1,25,000 aggregate threshold under section 112A and certain immovable assets receive a protective comparison. These tax treatments should not be combined.
For qualifying equity and equity-oriented mutual funds, the section 112A tax rate applies to aggregate LTCG exceeding ₹1,25,000. The threshold applies across eligible section 112A gains for the year, not separately to every share, fund or broker account.
Schedule 112A records the relevant transactions. The Income Tax Department describes its purpose in the Schedule 112A guidance updated 18 May 2026.
For land or a building acquired before 23 July 2024 and later transferred by a resident individual or Hindu Undivided Family, the law provides a beneficial tax comparison.
The liability at the 12.5% rate without indexation is compared with the earlier 20% method using indexation, and any excess from the newer computation is ignored. This protection is specific to the eligible asset and taxpayer.
It is not a general option for all LTCG.
Example: property comparison
Assume a resident individual has ₹30,00,000 of long-term gain without indexation and ₹18,00,000 after eligible indexation:
| Property method | Calculation | Tax before cess |
|---|---|---|
| 12.5% without indexation | ₹30,00,000 × 12.5% | ₹3,75,000 |
| 20% with indexation | ₹18,00,000 × 20% | ₹3,60,000 |
In this illustration, the protected tax amount is ₹3,60,000 before cess and any surcharge. The actual tax calculation must also test the stamp duty value, eligible improvement cost, exemptions and residential status.
Remember: calculate both permitted tax methods when the grandfathering conditions are met.
After identifying the correct tax rate, complete the ITR using reconciled transaction records.
Which tax rate and ITR filing steps should you use?
Use the tax rate attached to the asset, holding period and statutory conditions. Then report the gain in the ITR form and schedule applicable to your full income profile.
This filing decision completes the classification process that began with identifying the capital asset.
For AY 2026-27, ITR-2 generally applies to an individual or Hindu Undivided Family with capital gains but without income from business or profession. ITR-3 generally applies when business or professional income is also present.
Limited section 112A LTCG can be reported in ITR-1 or ITR-4 only when every eligibility condition for that form is satisfied. The Income Tax Department’s AY 2026-27 ITR-2 guidance confirms that ITR-2 covers both capital-gain categories and identifies when that form cannot be used.
Before filing the tax return for AY 2026-27:
- Reconcile the broker or mutual fund statement with AIS and Form 26AS.
- Separate each asset by type, acquisition date, transfer date and holding period.
- Calculate the sale consideration, eligible cost and transfer expenses.
- Apply loss set-off and eligible tax exemption conditions.
- Complete Schedule Capital Gains, Schedule 112A and Schedule Special Income where applicable.
- Match TDS, advance tax and self-assessment tax credits with Form 26AS.
- Review the tax computation, submit the ITR through the Income Tax Department portal and complete electronic verification.
Frequently asked questions
Is capital gains tax deducted automatically in India?
No. TDS or STT may appear in a transaction, but neither completes the capital gains tax calculation.
You must calculate the gain, claim the eligible tax credit and report the income in the correct ITR.
Can I use AIS as my capital-gain statement?
AIS is an information cross-check, not a complete capital-gain ledger. Compare it with contract notes, broker statements, mutual fund statements and property records because the acquisition cost and expenses may be incomplete.
Is every gain on mutual funds LTCG after 12 months?
No. The classification depends on the fund category, acquisition date and section 50AA where applicable.
Equity-oriented funds and specified mutual funds can follow different tax rules.
Does the old or new tax regime change the special LTCG rate?
A special tax rate under a provision such as section 112 or section 112A does not ordinarily become a slab rate because you choose a tax regime. The chosen regime can still affect other income, deductions and the overall tax computation.
Can capital losses reduce salary income?
No. Capital losses cannot be set off against salary income.
Their tax treatment depends on whether the loss is short-term or long-term and whether a qualifying capital gain is available.
India Tax provides general tax information and estimates, not a filing determination. Verify the applicable financial year, assessment year, ITR form and transaction treatment using the Income Tax Department portal or a qualified tax professional before submitting your return.