BharatNotes What is Capital Gains Tax?
Capital Gains Tax is a tax on the gain (profit) realised when a "capital asset" is transferred. Under the Income-tax Act, 1961, the gain is the difference between the sale consideration and the cost of acquisition (plus cost of improvement and transfer expenses). The tax is triggered only on transfer — an asset rising in value but still held attracts no liability. Gains are split into two categories based on the holding period, which determines the applicable rate.
Short-Term vs Long-Term
The Finance (No. 2) Act, 2024 simplified holding periods into just two thresholds (effective 23 July 2024):
| Asset type | Long-term if held for | Short-term if held for |
|---|---|---|
| Listed securities (equity shares, equity mutual funds) | more than 12 months | up to 12 months |
| Other assets (real estate, gold, unlisted shares, debt funds) | more than 24 months | up to 24 months |
Rates After the 2024 Overhaul
For transfers on or after 23 July 2024:
| Category | Rate (post 23-Jul-2024) | Earlier rate |
|---|---|---|
| LTCG on listed equity/equity MFs (Sec 112A) | 12.5% on gains above ₹1.25 lakh/year | 10% above ₹1 lakh |
| STCG on listed equity/equity MFs (Sec 111A) | 20% | 15% |
| LTCG on other assets (Sec 112) | 12.5% (without indexation) | 20% (with indexation) |
| Other STCG | Taxed at the individual's slab rate | Slab rate |
The annual exemption on equity LTCG was raised from ₹1 lakh to ₹1.25 lakh (Finance (No. 2) Act, 2024). Gains on listed equity accrued up to 31 January 2018 remain "grandfathered" under Section 112A.
Indexation and the Real-Estate Option
Indexation — adjusting an asset's purchase cost for inflation using the Cost Inflation Index (CII) — was withdrawn for most assets alongside the rate cut to 12.5%. However, after representations, an amendment to the Finance Bill gave relief on real estate: for land or buildings acquired on or before 22 July 2024 and sold thereafter, a resident individual or HUF may choose to pay either 12.5% without indexation OR 20% with indexation, whichever is lower (Finance (No. 2) Act, 2024, enacted 16 August 2024).
Significance and Current Status
The reform aimed at simplification and uniformity, replacing a patchwork of rates and holding periods. Critics argue that removing indexation can raise the effective burden on long-held real estate and gold despite the lower headline rate, while the grandfathering option cushions older property holders. Capital Gains Tax interacts with the Securities Transaction Tax (STT), which was also raised on derivatives in Budget 2024-25.
UPSC Angle
Treat this as a core direct-tax concept: know the STCG/LTCG split, the 12.5%/20% rates, the ₹1.25 lakh equity exemption, indexation, and the real-estate dual option. It connects to themes of tax rationalisation, resource mobilisation, and fiscal equity — recurring in GS3 economy questions and Union Budget analysis. Cross-link with current affairs on Ujiyari.com for each year's Budget changes.
