Frequently Asked Questions
What is the difference between LTCG and STCG?
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Long Term Capital Gains (LTCG) apply when you sell assets held for longer periods, while Short Term Capital Gains (STCG) apply to assets held for shorter periods. For immovable property and unlisted shares, the holding period is 24 months - assets held longer qualify for LTCG, shorter periods are STCG. For listed equity shares and equity mutual funds, the threshold is 12 months. LTCG on property is taxed at 20% with indexation benefit, significantly reducing tax liability. LTCG on equity (above ₹1.25L) is taxed at 12.5% without indexation. STCG on property is added to income and taxed at your applicable slab rate, while STCG on equity is taxed at 20% flat rate.
How to calculate capital gains on property sale?
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Capital Gains = Net Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Sale Expenses). First, calculate net sale price by deducting sale expenses like brokerage, legal fees, transfer costs. Then index the original purchase price using Cost Inflation Index (CII): Indexed Cost = (Purchase Price × CII of Sale Year) / CII of Purchase Year. Similarly index any improvement costs. For property purchased in 2010 for ₹20L and sold in 2024 for ₹50L: Indexed Cost = (20,00,000 × 363) / 167 = ₹43,47,305. Capital Gains = ₹50,00,000 - ₹43,47,305 = ₹6,52,695. Tax @ 20% = ₹1,30,539. You can claim exemptions under Section 54/54EC/54F to reduce this tax.
What is indexation benefit and how does it work?
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Indexation adjusts your purchase price for inflation, reducing taxable capital gains. The Government announces Cost Inflation Index (CII) values annually. Formula: Indexed Cost = (Original Cost × CII of Sale Year) / CII of Purchase Year. Example: Property bought in FY 2010-11 for ₹30L, sold in FY 2024-25 for ₹80L. Without indexation: Gains = ₹50L, Tax @ 20% = ₹10L. With indexation: Indexed Cost = (30,00,000 × 363) / 167 = ₹65,21,000. Gains = ₹80L - ₹65.21L = ₹14.79L. Tax @ 20% = ₹2.96L. Tax saved = ₹7.04 lakhs! Indexation is available for property, gold, unlisted shares, bonds held long-term. NOT available for listed equity, equity mutual funds, or debt MF (from April 2023).
What are exemptions available on capital gains tax?
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Section 54: Exemption on LTCG from residential property if you buy/construct another residential house. Buy within 1 year before or 2 years after sale, or construct within 3 years. Can buy 2 houses if gains under ₹2 crores. Section 54EC: Invest LTCG from any immovable property in specified bonds (REC/NHAI/PFC) within 6 months. Maximum ₹50 lakhs, 5-year lock-in. Section 54F: If you sell any asset other than residential property, invest entire net proceeds in residential house. Must not own more than one house. Section 112A: First ₹1.25 lakh of LTCG from equity is exempt every year. Key requirement: Don't sell the new property within 3 years, otherwise exemption will be reversed and added to income in the year of sale.
How to calculate capital gains on stocks and mutual funds?
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For Equity (Listed Shares/MF): Holding >12 months = LTCG. Capital Gains = Sale Price - Purchase Price - Expenses. No indexation benefit. LTCG: First ₹1.25L exempt per year, rest taxed @ 12.5%. STCG (≤12 months): 20% flat. Example: Bought shares for ₹5L, sold for ₹8L after 18 months. LTCG = ₹3L. Tax = (₹3L - ₹1.25L) × 12.5% = ₹21,875. For Debt MF: Treated as STCG regardless of holding period (from Apr 2023). Added to income, taxed at slab rate. No indexation. Important: STT must be paid on both buy and sell for equity to get concessional rates. Calculate separately for each stock - can't offset LTCL against STCG. Maintain contract notes and statements as proof.
Can I offset capital losses against capital gains?
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Yes, capital losses can offset capital gains with specific rules: STCL (Short Term Capital Loss): Can be offset against both STCG and LTCG in the same year. LTCL (Long Term Capital Loss): Can only be offset against LTCG, not against STCG. Carry forward: Unabsorbed capital losses can be carried forward for 8 years. Must file ITR on time (before due date) to carry forward. Example: STCL of ₹2L, LTCG of ₹5L from property = Tax on ₹3L only. LTCL of ₹1L from stocks, STCG of ₹3L from property = Cannot offset, pay tax on full ₹3L STCG, carry forward ₹1L LTCL. Note: Intra-head adjustment only - can't offset speculative loss or house property loss against capital gains. Plan your sales strategically to optimize tax.
When should I pay tax on capital gains?
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Property Sale TDS: Buyer deducts TDS under Section 194-IA @ 1% (if sale value >₹50L) at the time of payment. For capital gains from stocks, you must pay advance tax. Advance Tax Schedule: 15% by June 15, 45% by September 15, 75% by December 15, 100% by March 15. If expected tax liability is >₹10,000, advance tax is mandatory. Interest @ 1% per month charged for delay (Section 234B/234C). Best Practice: Sell property/stocks early in financial year to have time for tax planning. If selling late in year, pay advance tax immediately. File ITR and report capital gains even if no tax due (for exemption claims). Use Form 26QB for property TDS payments. Keep all documents ready - purchase deed, sale deed, payment proofs, investment proofs for exemptions.
Do I need to pay tax if I reinvest property sale proceeds?
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Not automatically - you need to claim exemption under specific sections. Section 54: If you sell a residential property and buy/construct another residential property within specified time (1 year before to 2 years after for purchase, 3 years for construction), LTCG is exempt. Can buy 2 houses if gains under ₹2 crores (only once). Section 54F: If you sell any other asset (stocks, gold, commercial property) and invest entire net proceeds in residential property, proportionate gains are exempt. Must not own more than one house at time of purchase. Section 54EC: Invest LTCG in specified bonds (REC/NHAI) within 6 months, get full exemption up to ₹50L. Important: Must deposit unutilized amount in Capital Gains Account Scheme before ITR due date. Don't sell new property within 3 years or exemption reverses. File ITR claiming exemption with all documents.
What is Capital Gains Account Scheme?
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Capital Gains Account Scheme (CGAS) is a government scheme to park capital gains when you can't invest immediately for exemption. When to use: If you can't purchase/construct property before ITR due date but want to claim Section 54/54F exemption. Deposit amount you plan to invest for exemption in CGAS account. Where to open: Any authorized bank or post office. Form: "Deposit in an Account under Capital Gains Accounts Scheme, 1988". Types: Account A (savings), Account B (short-term deposits), Account C (long-term deposits). Timeline: Deposit before ITR due date. Withdraw when making actual investment. Must complete investment within allowed period (2-3 years). Interest: Earns interest similar to savings account. Penalty: If investment not made within time, amount withdrawn becomes taxable as capital gains in that year.
How is inherited property taxed when sold?
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No tax on inheritance: Receiving inherited property is tax-free. Tax on sale: When you sell inherited property, you pay capital gains tax. Purchase cost: Use the cost at which previous owner (from whom you inherited) acquired it, not current market value. Purchase date: Use previous owner's purchase date for calculating holding period. Example: Father bought property in 2000 for ₹10L. You inherited in 2020 (no tax). You sell in 2024 for ₹50L. Holding period = 24 years (from 2000), qualifies for LTCG. Indexed Cost = (10,00,000 × 363) / 406 (CII of 2000-01) = ₹8,94,000 approximately. Capital Gains = ₹50L - ₹8.94L = ₹41.06L. Tax @ 20% = ₹8.21L. Can claim exemptions u/s 54/54EC/54F to reduce tax. Documents needed: Original purchase deed, death certificate, succession documents.
What documents are needed for capital gains tax calculation?
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For Property: (1) Original purchase deed/agreement showing date and price, (2) Sale deed with sale price and date, (3) Property tax receipts, (4) Improvement cost bills (renovation, construction), (5) Payment receipts/bank statements, (6) Valuation report from registered valuer, (7) Form 26QB (TDS certificate from buyer), (8) Electricity/water bills showing possession dates. For Stocks/Mutual Funds: (1) Contract notes for buy and sell transactions, (2) Demat account statements, (3) Bank statements showing payments, (4) STT payment certificates, (5) Dividend statements, (6) Broker statements showing all transactions. For Exemption Claims: (1) New property purchase deed/agreement, (2) Construction bills and receipts, (3) Capital Gains Account Scheme passbook, (4) Bond investment certificates (54EC). Keep all documents for 7 years as Income Tax can scrutinize returns up to 6 years.
Can capital gains tax be avoided legally?
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Yes, through legitimate exemptions and tax planning: Hold Long Term: LTCG rates are lower (20% vs slab for property, 12.5% for equity). Use Exemptions: Section 54/54EC/54F can eliminate entire tax if properly planned. Stagger Sales: Sell in different financial years to use ₹1.25L equity exemption annually. Offset Losses: Book capital losses to offset against gains. Gift Strategy: Gift property to spouse/family in lower tax bracket before sale (careful with clubbing provisions). Joint Ownership: Split property between spouses to distribute gains. Indexation: Use for property to reduce taxable gains significantly. Retirement Year Sales: Sell after retirement when in lower tax slab (for STCG). Agricultural Land: Agricultural land beyond municipal limits is exempt. Important: All strategies must comply with law. Avoid shell companies, fake transactions, or circular trading which are illegal.
