Computation of income from Capital Gain
Direct Taxation • Income from Capital Gains
Income from Capital Gains: Meaning, Types & Computation (AY 2026-27)
A complete working guide to capital gains under the Income-tax Act — what counts as a capital gain, how short-term and long-term gains are classified and computed, and every exemption from Section 54 to Section 54GB, referenced to Assessment Year 2026-27 (FY 2025-26).
Every capital asset sold generates a capital gain that falls into one of two tracks — short-term or long-term — each taxed under its own rules
I. Meaning of Capital Gains
Under Section 45 of the Income-tax Act, 1961, any profit or gain arising from the transfer of a capital asset during a financial year is chargeable to tax under the head "Capital Gains," and is deemed to be the income of the previous year in which the transfer took place.
A capital asset is broadly defined under Section 2(14) to mean property of any kind held by an assessee — whether or not connected with their business or profession — such as land, buildings, shares, securities, mutual funds, jewellery, and other investments. It specifically excludes stock-in-trade, personal effects like clothing and furniture (with some exceptions such as jewellery, archaeological collections, and works of art), agricultural land in rural India, and certain specified gold bonds and deposit certificates.
Transfer under Section 2(47) is defined broadly and includes sale, exchange, relinquishment of an asset, extinguishment of rights in it, and compulsory acquisition, among other transactions.
II. Types of Capital Gains
Capital gains are classified into two types based on how long the asset was held before transfer — Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG). The Finance (No. 2) Act, 2024 simplified and unified the holding-period thresholds with effect from 23 July 2024, as follows:
| Asset Class | Long-Term if Held For |
|---|---|
| Listed securities — equity shares, equity mutual funds, units of UTI, zero-coupon bonds, listed business trust units (REITs/InvITs) | More than 12 months |
| Unlisted shares and immovable property (land or building) | More than 24 months |
| Gold, jewellery, and unlisted securities other than shares | More than 24 months |
| All other capital assets (e.g., debt mutual funds purchased before 1 April 2023, movable property) | More than 36 months |
| Units of specified (debt-oriented) mutual funds acquired on/after 1 April 2023; market-linked debentures; unlisted bonds/debentures transferred or redeemed on/after 23 July 2024 | Always short-term, regardless of holding period |
An asset held for a period at or below the applicable threshold gives rise to Short-Term Capital Gain (STCG); held beyond it, the gain is a Long-Term Capital Gain (LTCG).
Tax Rates Applicable — AY 2026-27
| Nature of Gain | Section | Rate | Notes |
|---|---|---|---|
| STCG on listed equity shares / equity mutual funds (STT paid) | 111A | 20% | Raised from 15%, effective transfers on/after 23-07-2024 |
| LTCG on listed equity shares / equity mutual funds / business trust units | 112A | 12.5% | On gains exceeding ₹1.25 lakh per financial year; no indexation; no Section 87A rebate |
| LTCG on other assets (property, unlisted shares, gold, etc.) | 112 | 12.5% | Without indexation, for transfers on/after 23-07-2024 |
| LTCG on land/building acquired before 23-07-2024 | 112 (proviso) | Lower of 12.5% (no indexation) or 20% (with indexation) | Transitional option for resident individuals/HUFs only |
| STCG on assets other than equity (property, gold, debt funds, etc.) | — | Slab rate | Added to total income and taxed at the applicable income-tax slab |
| Gains on Virtual Digital Assets (crypto, NFTs) | 115BBH | 30% | Flat rate; no deduction other than cost of acquisition; losses cannot be set off |
4% health & education cess applies on tax computed in every case above; surcharge applies where total income exceeds ₹50 lakh (capped at 15% specifically on gains taxed under Sections 111A and 112A).
III. Format for Computing Short-Term Capital Gain (STCG)
No indexation benefit is available on short-term capital assets under any circumstances. Section 54 series exemptions generally do not apply to STCG, with the notable exception of Section 54B (agricultural land), which is available for both short-term and long-term gains.
IV. Format for Computing Long-Term Capital Gain (LTCG)
Indexation — What Still Applies for AY 2026-27
The Finance (No. 2) Act, 2024 withdrew indexation for most assets transferred on or after 23 July 2024, replacing it with a flat 12.5% LTCG rate. Indexation survives only in this transitional form:
- Land or building acquired before 23 July 2024: resident individuals and HUFs may compute tax both ways — 12.5% without indexation, or 20% with indexation — and pay whichever is lower.
- Indexed Cost of Acquisition (where applicable) = Cost of Acquisition × (CII of year of transfer ÷ CII of year of acquisition, or CII of FY 2001-02, whichever is later).
- The Cost Inflation Index (CII) for FY 2025-26 (AY 2026-27) is 376, as notified by the CBDT vide Notification No. 70/2025 dated 1 July 2025.
- Listed equity, equity mutual funds, and business trust units under Section 112A never get indexation, regardless of acquisition date.
V. Exemptions from Capital Gains — Sections 54 to 54GB
The Act allows an assessee to reduce or entirely eliminate LTCG tax by reinvesting the gain (or, in some sections, the full sale proceeds) into specified assets within a prescribed time. The major exemption provisions, with their conditions for AY 2026-27, are summarised below.
(Scroll sideways on mobile to see the full table →)
| Section | Asset Transferred | Eligible Assessee | Amount to be Reinvested In | Time Limit for Reinvestment | Exemption Amount | Lock-in Period |
|---|---|---|---|---|---|---|
| 54 | Residential house (LTCG, held > 24 months) | Individual / HUF | One residential house in India (two houses allowed once-in-a-lifetime if gain ≤ ₹2 crore) | Buy 1 yr before – 2 yrs after transfer, or construct within 3 yrs | Lower of capital gain or cost of new house (capped at ₹10 crore) | 3 years |
| 54B | Urban agricultural land used for farming by assessee/parent (or HUF member) for 2 yrs before transfer | Individual / HUF | New agricultural land | Within 2 years from date of transfer | Lower of capital gain or cost of new agricultural land | 3 years |
| 54D | Land/building forming part of an industrial undertaking, compulsorily acquired (used for 2 yrs before acquisition) | Any assessee | New land/building for shifting or re-establishing the industrial undertaking | Within 3 years from date of receipt of compensation | Lower of capital gain or cost of new asset | 3 years |
| 54EC | Land or building or both (LTCG only) | Any assessee | Notified bonds — NHAI, REC, PFC, IRFC | Within 6 months from date of transfer | Lower of capital gain or amount invested (capped at ₹50 lakh per FY) | 5 years |
| 54F | Any long-term capital asset other than a residential house | Individual / HUF | One residential house in India (assessee must not already own more than one house on date of transfer) | Buy 1 yr before – 2 yrs after transfer, or construct within 3 yrs | Proportionate: Capital Gain × (Amount invested ÷ Net Sale Consideration); capped via ₹10 crore cost ceiling | 3 years |
| 54G | Plant, machinery, land or building used for an industrial undertaking, shifted from an urban area to a non-urban (rural) area | Any assessee | New plant & machinery, land/building, plus shifting expenses | 1 yr before – 3 yrs after the transfer | Lower of capital gain or (cost of new assets + shifting expenses) | 3 years |
| 54GA | Same as Section 54G, but the undertaking shifts from an urban area to a Special Economic Zone (SEZ) | Any assessee | New plant & machinery, land/building, plus shifting expenses | 1 yr before – 3 yrs after the transfer | Lower of capital gain or (cost of new assets + shifting expenses) | 3 years |
| 54GB | Long-term residential property (house or plot) | Individual / HUF | Equity shares of an eligible start-up/small company, which must itself use the funds to buy new plant & machinery | Before the due date of filing the return of income | Proportionate to amount invested, subject to conditions on shareholding and use of funds | 5 years (3 years for computers/software in eligible start-ups) |
- If the reinvestment cannot be made before the due date of filing the return, the unutilised amount must be deposited in the Capital Gains Account Scheme (CGAS) with an authorised bank to preserve the exemption.
- If the new asset is transferred within its lock-in period, the exemption earlier claimed is withdrawn and added back as a capital gain in the year of that subsequent transfer.
- Section 54EC is available to all categories of assessees (individuals, firms, companies), unlike Sections 54, 54F and 54GB, which are restricted to individuals/HUFs.
- More than one exemption can often be claimed together on the same gain (e.g., Section 54 and Section 54EC), provided the conditions of each are independently satisfied.
VI. Quick Reference — Key Numbers for AY 2026-27
| Item | Value |
|---|---|
| Cost Inflation Index (CII), FY 2025-26 | 376 |
| LTCG exemption threshold, Section 112A (listed equity/equity MFs) | ₹1.25 lakh per financial year |
| STCG rate, Section 111A (listed equity/equity MFs) | 20% |
| LTCG rate, Section 112 / 112A | 12.5% (no indexation, except transitional property option) |
| Section 54 / 54F — cap on cost of new residential house counted | ₹10 crore |
| Section 54EC — maximum investment in bonds | ₹50 lakh per financial year |
| Section 54 / 54F — two-house option threshold | Available once-in-a-lifetime if capital gain ≤ ₹2 crore |
Note: A new Income-tax Act, 2025 has been enacted and is being phased in, under which some sections (for example, Section 54F) are being renumbered (Section 54F → Section 86) while the underlying exemption rules remain substantively the same. This post uses the familiar Income-tax Act, 1961 section numbers, as they remain in common use for AY 2026-27 filings. This content is for educational purposes and general understanding; please verify current provisions and consult a qualified professional before making tax-filing or investment decisions.
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