Summary

Profits or gains arising from the "transfer" of a "capital asset" are chargeable to tax under the head "Capital Gains" as per Section 67 of the Income-tax Act, 2025. The computation involves deducting the cost of acquisition, cost of improvement, and transfer expenses from the full value of consideration. Long-term capital gains are generally taxed at a concessional rate of 12.5% under Section 197 of the Income-tax Act, 2025, with a special provision allowing taxpayers to opt for a 20% rate with indexation for land or buildings acquired before July 23, 2024. Tax liability on such gains can be mitigated by claiming exemptions through reinvestment in specified assets, primarily residential property, under Sections 82 and 86 of the Income-tax Act, 2025. These provisions correspond to Sections 45, 48, 54, and 54F of the Income-tax Act, 1961.

1. Understanding Capital Gains

Capital gains represent the profits earned from the sale or transfer of a capital asset. The tax is levied in the year the transfer takes place.

• Capital Asset: This is broadly defined to include property of any kind held by an assessee, whether or not connected with their business or profession. It includes real estate, shares, securities, gold, etc.
• Transfer: As per Section 2(109) of the Income-tax Act, 2025, "transfer" is an inclusive term covering sale, exchange, relinquishment of the asset, extinguishment of any rights therein, or compulsory acquisition under any law.

Capital gains are classified based on the holding period of the asset:

• Short-Term Capital Asset: An asset held for not more than 24 months immediately preceding the date of its transfer. For listed securities, the holding period is 12 months.
• Long-Term Capital Asset: An asset that is not a short-term capital asset.

2. Computation of Capital Gains

The mechanism for computing capital gains is laid out under both the new and old tax laws.

A. Under the Income-tax Act, 2025 (Applicable from FY 2026-27)

As per Section 72, capital gains are computed as follows:

Key Points under the 2025 Act:

• Indexation Benefit: The concept of "indexed cost of acquisition" and "indexed cost of improvement" has been largely removed for transfers made on or after July 23, 2024.
• Transitional Provision: For long-term capital assets being land or building (or both) acquired before July 23, 2024, Section 197(3) provides a special calculation. The assessee's tax liability on such gains will be the lower of:
• Tax at 12.5% on gains computed without indexation.
• Tax at 20% on gains computed with indexation.
• Cost of Acquisition for Old Assets: For assets acquired before April 1, 2001, the CoA can be the actual cost or the Fair Market Value (FMV) as on April 1, 2001, at the assessee's option. However, for land or buildings, this FMV cannot exceed the stamp duty value as on that date (Section 90(10)).

B. Under the Income-tax Act, 1961 (Applicable up to FY 2025-26)

The computation under Section 48 is similar, but with a significant difference for long-term assets transferred before July 23, 2024.

• For Long-Term Capital Gains: The cost of acquisition and improvement are replaced by "indexed cost of acquisition" and "indexed cost of improvement" to account for inflation.
• Indexed CoA = CoA × (Cost Inflation Index for the year of transfer / Cost Inflation Index for the year of acquisition or 2001-02, whichever is later).

3. Avenues for Saving Tax on Capital Gains

The Income Tax law provides several exemptions, allowing taxpayers to reduce their tax liability by reinvesting the gains or sale proceeds into specified assets within a stipulated timeframe.

A. Under the Income-tax Act, 2025

The primary exemptions are related to investment in residential property.

1. Section 82: Profit on Sale of a Residential House This exemption is available to an individual or a HUF on long-term capital gains arising from the sale of a residential house.

• Condition: The assessee must purchase one new residential house in India within 1 year before or 2 years after the date of transfer, or construct one within 3 years after that date.
• Quantum of Exemption:
• If the capital gain is less than or equal to the cost of the new house, the entire gain is exempt.
• If the capital gain is more than the cost of the new house, the excess is chargeable to tax.
• Special Provisions:
• Option for Two Houses: If the capital gain is up to ₹2 crore, the assessee has a once-in-a-lifetime option to invest in two residential houses in India.
• Lock-in Period: The new house cannot be sold within 3 years of its purchase or construction. If sold, the exempted capital gain is taxed in the year of sale.
• Investment Cap: The cost of the new asset for exemption purposes is capped at ₹10 crore.

2. Section 86: Capital Gains on Transfer of Any Long-Term Asset (Other than a Residential House) This exemption is available to an individual or a HUF on long-term capital gains from any asset, provided the net consideration is invested in a residential house.

• Condition: The assessee must purchase one new residential house in India within 1 year before or 2 years after the date of transfer, or construct one within 3 years after that date.
• Quantum of Exemption: The exemption is granted proportionately: Exempt Gain = (Capital Gain × Amount Invested in New House) / Net Consideration
• Additional Conditions:
• The assessee must not own more than one residential house (other than the new one) on the date of transfer.
• The assessee must not purchase another residential house within 1 year or construct one within 3 years.
• Lock-in Period: The new house cannot be sold within 3 years.
• Investment Cap: The cost of the new asset for exemption purposes is capped at ₹10 crore.

Capital Gains Account Scheme (CGAS) If the amount is not utilized for purchasing or constructing the new house before the due date of filing the income tax return, it must be deposited in a specified bank under the CGAS to claim the exemption. The amount must then be withdrawn from this account for the specified purpose within the prescribed time limit.

B. Under the Income-tax Act, 1961

The corresponding provisions are:

• Section 54: Corresponds to Section 82 of the 2025 Act.
• Section 54F: Corresponds to Section 86 of the 2025 Act.
• Section 54EC: Allows exemption for LTCG from land or building by investing in specified bonds (e.g., NHAI, REC) within 6 months from the date of transfer. The investment is capped at ₹50 lakh.

4. Carry Forward and Set-off of Capital Losses

If a taxpayer incurs a loss under the head "Capital Gains," it can be set off and carried forward as per the provisions of Section 111 of the Income-tax Act, 2025.

• Intra-head Set-off:
• Long-Term Capital Loss (LTCL) can only be set off against Long-Term Capital Gain (LTCG).
• Short-Term Capital Loss (STCL) can be set off against both Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG).
• Carry Forward: Unabsorbed capital losses can be carried forward for up to 8 assessment years immediately succeeding the year in which the loss was incurred. In subsequent years, the set-off rules remain the same.

This comprehensive framework allows for the taxation of gains while providing legitimate avenues for taxpayers to mitigate their tax outgo through planned investments.