This article is for non-finance people who want to understand capital gains, how it works and how much they will be taxed when they sell/transfer/dispose something they held as asset/ investment. Obviously, capital gains does not cover revenue from sale of items that are held in course of trade.
What are Capital Assets?
As is relevant to us, Sec 2(14) of Income Tax Act is what that defines a capital asset.
Defined as ‘Property of any kind held by an assessee, whether or not connected with their business or profession, but with specific exclusions of assets such as stock-in-trade, consumables, raw materials, personal effects, and certain Rural agricultural land.
Over time, amendments have added specific inclusions and exclusions.
To analyse the definition,
- It is basically property of any kind held by an assessee, meaning it can be movable or immovable, tangible or intangible, except those specifically excluded.
- Although ‘personal effects’ are excluded from capital assets definition, Act carves out exception for Jewelry, archaeological collections and works of art which are always treated as capital assets, even if held for personal use.
- Also, the amendments made over a period of time have added specific inclusions like Securities held by FII and certain Unit linked insurance policies (those nonexempt under S 10(10D). Revenue from sale of these shall be treated as capital gains rather than business income.
- Subsequent exclusions from scope of capital assets (thru amendment) were certain government notified bonds and notified deposit schemes/investment instruments, in order to encourage public participation in government programs without triggering capital gains tax.
Regarding notified bonds and instruments:
Currently, most of the older excluded bonds and schemes (like Special Bearer Bonds, National Defence Bonds, Capital Investment Bonds, Gold Deposit Bonds, Relief Bonds) have already matured or been discontinued.
Those Exclusions that are live, mainly cover :
Government‑notified securities that are currently issued and specifically exempted under Section 2(14) and Any future bonds or deposit schemes that may be notified by the Central Government.
Coming to Capital Gains, what are they?
Profit earned from selling a capital asset is called Capital Gain. There are two types of Capital Gains. Short term capital gain (STCG) and Long term capital gain (LTCG).
As the name suggests, when an asset held for short term is disposed off, the resulting profit is STCG and when an asset held for long term is disposed off, the profit it generates is called LTCG
What is short term or long-term holding depending upon the type of asset.
| Type of Asset | Short-term holding | Long-term holding |
|---|---|---|
| Equity shares / equity mutual funds / Real Estate Investment Trusts* / Infrastructure Investment Trusts* |
Held for less than 12 months | Held for 12 months or more |
| debt securities, property, unlisted shares, gold and all other assets |
Held for less than 36 months | Held for 36 months or more |
*Note: In the context of capital gains, Business Trusts refer to REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts), which were formally introduced in India by SEBI regulations in 2014. The first InvITs were listed in 2017, and the first REIT was listed in 2019.
They are investment vehicles that pool money from investors and invest in real estate or infrastructure projects. Units of these trusts are listed and traded on stock exchanges, so they are treated like equity for tax purposes.
Taxation:
Regarding the applicable tax rates: Tax rates depend on the type of asset
| Type of Asset | STCG Tax rate | LTCG Tax rate |
|---|---|---|
| Equity shares / equity mutual funds Real Estate Investment Trusts / Infrastructure Investment Trusts |
At 15% | At 10%, on gains above ₹1.25 lakh. No indexation benefit available |
| debt securities, property, unlisted shares, gold and all other assets |
At Tax slab applicable for the individual | 20% with indexation benefit (except Debt mutual funds, which are taxed at slab rate). |
Buyback of Shares
Under the old law, Company was taxed for the buyback. Meaning, When a company repurchased its own shares from shareholders (a buyback), the company itself had to pay a special tax of 20% on the amount distributed to shareholders. (BBT). Shareholders did not pay any capital gains tax on the buyback proceeds. The income was exempt in their hands.
Starting from FY 2026-2027, Buyback proceeds shall be taxed as capital gains in the hands of shareholders as short‑term or long‑term capital gain, depending on holding period and type.
Listed buyback = treated like listed equity shares and taxed accordingly
Unlisted buyback = treated like unlisted shares and taxed at corresponding rate.
Let us come to Exemptions part.
Under the Old Income tax act, which is replaced by new Act wef April 2026, there are 5 major types of exemptions that were available.
- Section 54 - Sale of Residential Property
- Section 54F - Sale of any asset
- Section 54EC - Bonds Exemption
- Section 54B - Agricultural Land
- Section 54D – Compulsory Acquisition
If you are an Individual or HUF selling your residential property, the capital gains from the sale shall be exempted fully from taxation, provided you re-invest the proceeds in another residential house property (only 1) within prescribed timelines which is Purchase within 2 years or construct within 3 years.
But for this exemption to be applicable, the said assessee can, in addition to the one sold, have at the maximum 1 more house.
Though Budget 2019, Govt introduced a special once in lifetime concession, that if the gain is ≤ ₹2 crore, the assessee can claim exemption by reinvesting in 2 houses instead of 1.
If you are an Individual or HUF selling assets like land, gold, shares, etc, the capital gains from the sale shall be exempted fully from taxation, provided you re-invest the entire proceeds in residential house property, within prescribed timelines which is Purchase within 2 years or construct within 3 years.
Similar to S. 54, the said assessee can, in addition to the one sold, have at the maximum 1 more house.
If you are an Individual or HUF selling your land or building (any type: whether used for residential or commercial), the capital gains from the sale shall be exempted fully from taxation, provided you re-invest the entire proceeds in specified bonds (NHAI, REC, etc.) within 6 months. The Maximum eligible investment is ₹50 lakh and the investment cannot be withdrawn before 5 years. There is no restriction on number of houses held to qualify for this exemption.
If you are an Individual or HUF selling Sale of agricultural land used for farming for at least 2 years, the capital gains from the sale shall be exempted fully from taxation, provided you re-invest the entire proceeds in another agricultural land within 2 years.
Any assessee whose Industrial land/building is compulsorily acquired, the capital gain from the proceeds received on compulsory acquisition shall be exempt fully, If reinvested in similar assets within 3 years.
W.e.f 01st April 2026, ie FY 2026‑27, all these reinvestment‑based exemptions have been withdrawn.
You will be surprised to find out that many exemption section or rules, which you might have heard from your accountant are no longer applicable from FY 2026-2027.
Under the New Income Tax Act that takes effect from 1st April 2026, all reinvestment-based exemptions are removed and only relief available is a threshold‑based relief for LTCG on equity shares/equity MF/REITs/InvITs, ie Relief upto ₹1.25 lakh per year, as already mentioned in tax table paragraph.