What Is Capital Gain? Meaning, Types, Tax Rates and Examples
Two people make the same ₹1 lakh profit from their investments. Yet, they may end up paying different amounts of tax.
Why? Because capital gains tax isn’t determined by profit alone. The type of asset and how long it was held can change the tax treatment.
So, what is capital gain, and how does it work?
Let’s understand.
What is Capital Gain?
Capital gain is the profit or gain that arises when a capital asset is transferred for more than its applicable cost.
Here is a simple example of capital gains tax:
Suppose you buy shares for ₹80,000 and later sell them for ₹1,10,000. Ignoring other applicable costs and adjustments, the ₹30,000 difference represents your capital gain.
Capital gains can arise from assets such as:
- Shares
- Mutual funds
- Property and land
- Gold and silver
- Other eligible capital assets
What are the Different Types of Capital Gains?
Capital gains are broadly divided into two categories based on the holding period of the asset.
Short-Term Capital Gain (STCG)
A Short-Term Capital Gain arises when you sell a capital asset within the prescribed short-term holding period.
For example, eligible listed equity shares held for 12 months or less generally fall under the short-term category.
Long-Term Capital Gain (LTCG)
A Long-Term Capital Gain arises when you hold an asset beyond its prescribed short-term holding period before selling it.
For example, eligible listed equity shares held for more than 12 months are generally treated as long-term capital assets.
How is Capital Gains Tax Calculated?
Capital gains tax is calculated on the profit earned from selling an asset, such as shares, mutual funds or property.
Capital Gain Calculation Formula
Capital Gain = Sale Price − (Purchase Cost + Improvement Cost + Transfer Expenses)
Here’s what each term means:
- Sale Price: The amount received from selling the asset.
- Purchase Cost: The original amount paid to buy the asset.
- Improvement Cost: Eligible expenses incurred to improve the asset, such as property renovations.
- Transfer Expenses: Eligible costs directly related to selling the asset, such as brokerage or legal fees.
How Is Short-Term Capital Gain (STCG) Calculated?
Eligible listed equity shares held for 12 months or less generally fall under STCG.
Formula:
STCG=SalePrice-(PurchaseCost+EligibleSaleExpenses)
Short-Term Capital Gain on Shares
Suppose you purchase shares worth ₹85,000 and sell them after 8 months for ₹1,25,000. You also pay ₹500 in eligible brokerage expenses.
| Particulars | Amount |
| Sale Price | ₹1,25,000 |
| Less: Brokerage | ₹500 |
| Net Sale Value | ₹1,24,500 |
| Less: Purchase Cost | ₹85,000 |
| Short-Term Capital Gain | ₹39,500 |
Tax Calculation:
For eligible listed equity shares covered under Section 111A, the STCG tax rate is 20%.
Tax = ₹39,500 × 20% = ₹7,900
The tax amount is ₹7,900 before applicable cess and surcharge, if any.
How Is Long-Term Capital Gain (LTCG) Calculated?
For example, eligible equity mutual funds held for more than 12 months generally qualify for LTCG treatment.
Formula:
LTCG=SalePrice-(PurchaseCost+EligibleSaleExpenses)
Long-Term Capital Gain on Equity Mutual Funds
Suppose you invest ₹2,50,000 in an eligible equity mutual fund and redeem the units after 18 months for ₹4,30,000. Assume there are no additional expenses.
| Particulars | Amount |
| Sale Value | ₹4,30,000 |
| Less: Purchase Cost | ₹2,50,000 |
| Long-Term Capital Gain | ₹1,80,000 |
| Less: Annual LTCG Threshold | ₹1,25,000 |
| Taxable LTCG | ₹55,000 |
Tax Calculation:
Under Section 112A, eligible aggregate LTCG exceeding ₹1.25 lakh in a financial year is generally taxed at 12.5%.
Tax = ₹55,000 × 12.5% = ₹6,875
The tax amount is ₹6,875 before applicable cess and surcharge, if any.
Note: Actual tax liability may differ based on applicable deductions, adjustments and tax rules.
What are the Capital Gains Tax Rates in 2026?
Here is the list of the latest capital gains taxes that are chargeable across various categories-
| Asset Class / Special Category | Statutory Section | Short-Term (STCG) Rules | Long-Term (LTCG) Rules | When is the Tax Charged? |
| Listed Shares & Equity Mutual Funds | Sec 111A / 112A | 20% if held ≤ 12 months | 12.5% if held > 12 months (First ₹1.25 Lakh/yr is free) | Year of asset sale or transfer |
| Real Estate (Property & Land) | Sec 45(1) | Slab Rate if held ≤ 24 months | 12.5% if held > 24 months (Flat rate; no indexation) | Year of asset sale or transfer |
| Physical Gold & Silver / Digital Gold | Sec 45(1) | Slab Rate if held ≤ 24 months | 12.5% if held > 24 months | Year of asset sale or transfer |
| Unlisted Shares (Startups/Private Co.) | Sec 45(1) | Slab Rate if held ≤ 24 months | 12.5% if held > 24 months | Year of asset sale or transfer |
| Debt Mutual Funds & Fixed Income | Sec 50AA | Slab Rate (No Long-Term bucket exists) | Slab Rate (Taxed as STCG regardless of holding time) | Year of redemption or payout |
| Insurance Compensation Receipts | Sec 45(1A) | Added to income if held ≤ 24 months | 12.5% flat tax if asset held > 24 months | Year the compensation cash/asset is actually received |
| Repurchase of ELSS Mutual Funds | Sec 45(6) | 20% if plan terminates early (under 12 months) | 12.5% standard equity long-term rules apply | Year the units are repurchased or plan terminates |
How Is Capital Gain on Property Calculated?
Capital gain on property is the profit earned from selling land or a building. The tax depends on how long you owned the property.
- Short-Term Capital Gain (STCG): Property held for 24 months or less. The gain is generally taxed at applicable income tax slab rates.
- Long-Term Capital Gain (LTCG): Property held for more than 24 months. The general tax rate is 12.5% without indexation.
Is Indexation Available on Property?
Under the revised framework, the general LTCG rate for applicable property transactions is 12.5% without indexation.
However, certain resident individuals and HUFs selling land or buildings acquired before 23 July 2024 have transitional protection under the applicable provisions.
Therefore, the tax treatment can depend on when the property was acquired and when it was sold.
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Can You Save Tax on Capital Gains?
The Income-tax Act provides relief routes to legally lower or eliminate your real estate tax liabilities using reinvestment provisions:
- Section 54: Provides an exemption when eligible LTCG from selling a residential house is reinvested to purchase or construct another residential house. The new home must be purchased within one year before or two years after the sale date, or constructed within three years of the sale date.
- Section 54EC: Provides an exemption when capital gains from selling land or buildings are invested in specified government infrastructure bonds (like NHAI or REC). The investment must be completed within six months of the property transfer date and is capped at a maximum limit of ₹50 lakh per financial year.
Conclusion
Capital gain is not simply about how much profit you made. What you sold, how long you held it and which tax rules apply determine how that profit is treated.
For investors, especially those dealing in shares, mutual funds, property or gold, understanding the difference between STCG and LTCG can make capital gains tax much easier to understand.
FAQs
A capital gain is the profit earned from selling or transferring a capital asset, such as shares, mutual funds, property or gold, for more than its applicable cost.
Capital gain is calculated by subtracting the purchase cost, eligible improvement costs and transfer expenses from the sale value.
There are two main types of capital gains: Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG). They are classified according to the asset’s holding period.
STCG arises when an asset is sold within its prescribed short-term holding period, while LTCG arises when it is held beyond that period. The holding period and tax rates depend on the asset type.
Capital gains tax can apply to profits from selling shares, mutual funds, property, land, gold and other eligible capital assets. The applicable tax rules vary by asset.
First, calculate the taxable capital gain and determine whether it is STCG or LTCG. Then apply the relevant tax rate, exemptions and adjustments, along with applicable cess and surcharge.
Capital gains tax exemptions reduce the taxable amount when specified conditions are met. For example, eligible LTCG under Section 112A has an annual threshold of ₹1.25 lakh, while Sections 54 and 54EC provide exemptions for certain qualifying investments.
You may reduce capital gains tax through eligible exemptions, permitted capital loss adjustments and applicable reinvestment provisions. The available benefits depend on the asset and tax rules.
Capital gains are generally taxable in the financial year in which the asset is transferred. Advance tax may be payable during the year, depending on your total tax liability and applicable rules.
Capital gains are generally reported under Schedule CG in the applicable Income Tax Return (ITR) form. You must provide details such as the asset type, sale value, purchase cost, holding period and eligible deductions or exemptions.
