Capital Gains Classification and Tax Rates
Section 196 of the Income-tax Act 2025 classifies a capital asset as short-term or long-term based on the holding period: listed equity shares and equity-oriented mutual funds held for 12 months or less are short-term; held for more than 12 months, long-term. For immovable property (land and buildings) and unlisted shares, the threshold is 24 months, and for other capital assets (debt funds, gold, etc.) it is 36 months, subject to specific carve-outs for market-linked debentures and certain debt mutual funds which are always treated as short-term regardless of holding period.
Section 197 governs the tax rate on short-term capital gains: STCG on listed equity/equity-oriented funds where Securities Transaction Tax (STT) has been paid is taxed at a concessional flat rate (20% for transfers on or after 23 July 2024), while STCG on other assets is taxed at the taxpayer's applicable slab rate.
Section 198 governs long-term capital gains: LTCG on listed equity/equity-oriented funds is taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year (the exemption threshold), without indexation benefit. LTCG on immovable property acquired before 23 July 2024 allows a choice between 12.5% without indexation or 20% with indexation (whichever is more beneficial to the taxpayer); property acquired on or after that date is taxed at a flat 12.5% without indexation.
Exemptions remain available under the reinvestment provisions carried forward from the 1961 Act framework (now renumbered) — for example, reinvestment of LTCG from a residential property into another residential property, or into specified capital gains bonds, within the prescribed time limits.
Worked Example: LTCG on Listed Equity Shares
An investor sells listed equity shares held for 18 months (long-term) for a total sale consideration of ₹8,00,000, with an acquisition cost of ₹5,00,000.
Frequently Asked Questions (FAQs)
What is the holding period for equity shares to qualify as long-term?
More than 12 months under Section 196 of the Income-tax Act 2025 for listed equity shares and equity-oriented mutual funds. 12 months or less is classified as short-term.
What is the LTCG exemption limit for equity gains?
₹1,25,000 per financial year under Section 198 — long-term capital gains on listed equity/equity-oriented funds up to this amount in a year are tax-free; only the excess is taxed at 12.5%.
Is indexation available on long-term capital gains from property?
For property acquired before 23 July 2024, taxpayers can choose the more beneficial of 12.5% without indexation or 20% with indexation. For property acquired on or after 23 July 2024, only the flat 12.5% without indexation rate applies.
What is the STCG tax rate on listed equity shares?
20% (flat rate) on STT-paid short-term capital gains from listed equity shares and equity-oriented mutual funds for transfers made on or after 23 July 2024, under Section 197.
How is capital gains tax on unlisted shares different?
Unlisted shares require a longer 24-month holding period to qualify as long-term (versus 12 months for listed equity), and short-term gains on unlisted shares are taxed at the taxpayer's applicable slab rate rather than the concessional flat STCG rate.