Selling assets at a profit is rewarding — but the financial outcome depends on how much tax you must pay on those gains. Whether you are disposing of listed equity, mutual funds or a residential house, understanding the updated rules on capital gains tax 2026 is essential to plan effectively and protect your returns.
Put simply, a capital gain arises when you sell an asset for more than its cost of acquisition (plus allowable transfer expenses). The taxable amount — whether calculated as the raw gain or as an indexed cost of acquisition for long-term assets — determines the tax levied on profits earned on sale. For immovable property and investment funds, be sure to treat terminology correctly: use “cost of acquisition” or “indexed cost of acquisition” rather than the non‑Indian term “adjusted cost base”.
Smart planning and accurate records let you lawfully reduce capital gains and make full use of exemptions and set-off rules. In particular, paying attention to holding periods,
Sold shares at a profit? Redeemed mutual funds recently? Or planning to sell property?
Before celebrating the gains, one important question arises:
How much tax will you actually pay?
Capital Gains Tax rules have changed in recent years, and in 2026, it is extremely important to understand holding periods, tax rates, and exemptions properly. A small mistake can cost thousands — but smart planning can legally reduce your tax burden.
Key Takeaways
- Identify holding periods for each asset class (equity, mutual funds, property) — this decides whether gains are short-term or long-term.
- Organise purchase deeds, fund statements and invoices early to prove the cost of acquisition and improvements.
- Recognise how indexation (where available) affects the final computation of capital gains.
- Utilise legal exemptions (Sections 54/54F/54EC and others) to reduce or defer tax on qualifying gains.
- Note the tax-rate changes notified with effect from 23 July 2024 and apply the correct rates when filing 2026 returns .
1. Understanding Capital Gains and Their Taxation: The Fundamentals
Investors in India must understand capital gains to manage their property. Simply put, a capital gain arises when you sell a capital asset for more than its cost of acquisition (after allowing permitted deductions).
Under Income-tax Act, 1961, capital gains arise when:
Sale Price – Cost of Acquisition – Permitted Expenses = Capital Gain
Section 45 is the charging section for capital gains under the Income Tax Act 1961. But now, under the Income Tax Act 2025, the charging section for capital gain is Section 67.
Capital gains are divided into:
- Short-Term Capital Gain (STCG)
- Long-Term Capital Gain (LTCG)
The difference depends on the holding period.
What Qualifies as a Capital Asset?
A capital asset is almost any kind of property held by an individual, whether or not it is connected to their business or profession.
Under Income-tax Act, 1961, Section 2(14), a Capital Asset means:
📈 Financial Assets
- Shares
- Mutual Funds
- Bonds & Debentures
- ETFs
- Government Securities
🏠 Immovable Property
- Residential house
- Commercial property
- Land (urban)
- Flats & apartments
💰 Other Assets
- Jewellery
- Gold & Silver
- Paintings, artwork
- Patent rights
- Goodwill (in some cases)
If you sell these and make profit → Capital Gains Tax may apply.
What is NOT a Capital Asset?
Some items are specifically excluded.
1) Personal Effects
Personal-use movable items such as:
- Clothes
- Furniture
- Car (for personal use)
But important:
Jewellery is NOT treated as personal effect.
So jewellery is taxable.
2) Rural Agricultural Land
Agricultural land located in rural area (as defined under tax law) is not treated as capital asset.
Urban agricultural land → is a capital asset.
3)Stock-in-Trade
If property is held as trading stock (e.g., builder’s inventory), then profit is business income, not capital gain.
Important Concept: Holding Matters
The same asset can be:
- Capital Asset (if held for investment)
- Business Asset (if held for trading)
Example:
If you frequently trade shares → could be business income.
If you invest and hold → capital gain.
Capital Asset vs Business Asset – Comparison Table (2026)
Under Income-tax Act, 1961, the taxation depends on whether an asset is treated as a Capital Asset or Business Asset (Stock-in-Trade).
Comparison Table
Particulars Capital Asset Business Asset (Stock-in-Trade) Purpose of Holding Held for investment Held for trading or resale Income Type Capital Gains Business Income Tax Sections Section 45 onwards Section 28 Holding Period Relevant? Yes (STCG vs LTCG) Not relevant Indexation Benefit Available (for certain LTCG like property purchased before 23 rd July 2024) Not available Set-off Rules As per capital loss rules As per business loss rules Frequency of Transactions Occasional / Investment nature Frequent / Organized activity Example Long-term shares, property, gold Share trader’s stock, builder’s inventory Practical Example
If you:
- Buy shares and hold for long term → Capital Gains
- Buy and sell daily as trader → Business Income
Intent and conduct matter.
Courts have repeatedly held that treatment depends on facts and pattern of activity.
How Capital Gains Are Calculated
The basic formula is:
Capital gain = Full value of consideration received on sale − (Cost of acquisition + Cost of improvements + Transfer expenses)
Key terms clarified in one line each:
- Cost of acquisition — the price you originally paid for the asset (plus any acquisition costs).
- Cost of improvements — documented expenses that have materially improved the asset (for property, receipts for renovations; for shares, certain corporate actions where allowed).
- Transfer expenses — costs directly tied to the sale, such as brokerage, stamp duty on transfer and legal fees.
Example — shares: you buy 100 shares at ₹100 each (total cost ₹10,000). You sell them for ₹15,000 and pay a brokerage of ₹200. Capital gain = ₹15,000 − (₹10,000 + ₹200) = ₹4,800.
Example — property (simplified): you bought a flat for ₹20,00,000, sold it for ₹50,00,000 and can document ₹2,00,000 of eligible improvement costs and ₹50,000 transfer expenses. Capital gain = ₹50,00,000 − (₹20,00,000 + ₹2,00,000 + ₹50,000) = ₹27,50,000. Depending on whether the gain qualifies as long‑term, you may apply indexation or a prescribed flat rate (see later sections).
The Difference Between Income and Capital Gains
Income (for example, salary, business profits, rental income or interest) is ordinarily recurring and taxed under ordinary slab rates. Capital gains arise only on the transfer of a capital asset and are taxed under specific provisions with separate rates for short‑term and long‑term gains.
“Understanding the distinction between income and capital gains is vital for tax planning and compliance.”
Whether a gain is short‑term or long‑term depends on the holding period. That classification directly affects the tax rates that apply
2. Short-Term vs Long-Term Capital Gains: Key Distinctions
Distinguishing between short‑term and long‑term capital gains is fundamental to tax planning: the holding period determines which tax rates apply and therefore directly affects your post‑tax return. This section summarises the holding‑period rules across asset classes and explains why timing matters for investors in 2026.
Holding Period Requirements Across Asset Classes
The statutory holding period varies by asset type. Use the table below as a quick reference and then review the examples that follow.
- Listed equity shares and equity‑oriented mutual funds — long‑term if held for more than 12 months.
- Unlisted shares, immovable property and most other capital assets — long‑term if held for more than the statutory period applicable to that asset (see note below and Section 5 for property specifics).
Note: The article contains different holding‑period figures in places; you must verify and apply the current statutory threshold consistently when preparing filings. Where legislation or notifications amended thresholds, reflect those changes uniformly across your computations.
Holding Period Rules (2026 Updated)
Holding period determines whether gain is Short-Term or Long-Term.
Holding Period Table
| Asset Type | Short-Term If Held | Long-Term If Held |
|---|---|---|
| Listed Equity Shares | Up to 12 months | More than 12 months |
| Equity Mutual Funds | Up to 12 months | More than 12 months |
| Unlisted Shares | Up to 24 months | More than 24 months |
| Immovable Property (Land/Building) | Up to 24 months | More than 24 months |
| Debt Mutual Funds (New Regime) | No LTC distinction (Slab Rate) | No LTC distinction |
| Gold / Jewellery | Up to 24 months | More than 24 months |
Important Notes for Blog
✔ Holding period starts from date of acquisition
✔ In property cases, date of allotment may be relevant
✔ Indexation applies only for long-term capital assets (where permitted)
✔ Debt mutual funds (new investments) do not enjoy separate LTCG benefits
3. Capital Gains Tax on Shares and Equity Investments
Capital gains on shares and other equity investments follow specific rules that materially affect after‑tax returns. For listed equity, the distinction between short‑term and long‑term gains (determined by the holding period) drives which tax rates apply.
STCG on Listed Equity Shares: 2026 Tax Rates
Short‑Term Capital Gains (STCG) on listed equity shares are taxed at the applicable STCG rate for equity transactions. This rate applies where the shares are sold within the short‑term window and where Securities Transaction Tax (STT) has been paid at the exchange. Always apply the current statutory STCG rate when computing tax for the year —
Short-Term Capital Gain (STCG)
✔ When Applicable
- Listed equity shares
- Held for 12 months or less
- STT paid at time of purchase/sale
✔ Tax Rate
20% (under Section 111A)
✔ Example
Sale Value: ₹2,50,000
Purchase Cost: ₹2,00,000
Capital Gain: ₹50,000
Tax @ 20% = ₹10,000 + cess
👉 STCG is taxed at flat rate, not as per slab.
LTCG on Equity: Is It Taxable in 2026?
Long‑Term Capital Gains (LTCG) on listed equity shares are taxable when the gain is realised after the long‑term holding period. LTCG rules commonly include a specified concessional rate with an annual exemption threshold; the exact LTCG rate and the exemption limit are set by statute or notification.
Long-Term Capital Gain (LTCG)
✔ When Applicable
- Held for more than 12 months
- STT paid
✔ Tax Rate
12.5%
✔ Exemption
First ₹1,25,000 of LTCG in a financial year is exempt
(Under Section 112A)
✔ No Indexation Benefit
✔ Example
Sale Value: ₹5,00,000
Purchase Cost: ₹3,00,000
Capital Gain: ₹2,00,000
Less exemption: ₹1,25,000
Taxable Gain: ₹75,000
Tax @ 12.5% = ₹9,375 + cess
Important Conditions
✔ STT must be paid
✔ Listed shares traded through recognized stock exchange
✔ ₹1.25 lakh exemption available per financial year
✔ Capital losses can be set off as per rules
Securities Transaction Tax (STT) and Its Impact
The Securities Transaction Tax (STT) is levied on certain buy/sell transactions executed on recognised stock exchanges. Payment of STT affects the tax treatment of equity gains — in many cases, entitlement to the preferential LTCG/STCG treatment is conditional on STT having been paid.
Securities Transaction Tax (STT) is a tax levied by the Government of India on the purchase and sale of securities through a recognised stock exchange. STT is governed by the Finance Act, 2004, and is collected by the stock exchange at the time of the transaction.
It was introduced to bring transparency and simplify taxation of share transactions.
When is STT Applicable?
STT is applicable on:
✔ Purchase and sale of listed equity shares
✔ Equity mutual funds
✔ Derivatives (at specified rates)
It is automatically deducted by the broker.
For Short-Term Capital Gains (STCG)
To get the concessional 20% tax rate under Section 111A,
STT must be paid.
If STT is not paid → normal tax provisions may apply.
For Long-Term Capital Gains (LTCG)
To get:
✔ 12.5% tax rate
✔ ₹1.25 lakh exemption (Section 112A)
STT must be paid at the time of sale (and generally at purchase for shares).
If STT is not paid, the LTCG exemption of 1,25 lakh will not be available.
Example
Case 1: STT Paid
Long-term gain = ₹2,00,000
Exemption = ₹1,25,000
Taxable = ₹75,000
Tax @ 12.5%
Case 2: STT Not Paid (Off-market transaction)
The concessional LTCG rate may not apply.
Tax treatment could change depending on nature of transaction.
Can STT Be Claimed as Deduction?
STT cannot be claimed as a business expense for capital gains.
✔ However, it can be included in cost of acquisition in certain business income cases.
STT Rates (Indicative)
| Transaction Type | STT Applicability |
|---|---|
| Delivery-based equity | On buy & sell |
| Intraday equity | On sell side |
| Equity mutual fund | On sale |
| Futures & options | On sell |
Rates are small but impact tax eligibility significantly.
Important Points for Investors
✔ Always trade through recognized exchange
✔ Ensure STT is reflected in contract note
✔ Off-market transfers may lose concessional benefit
✔ STT simplifies tax reporting
Unlisted Shares: Special Taxation Rules
Unlisted shares are treated differently from listed shares. Typically, the long‑term holding period for unlisted equity is longer, and gains on sale of unlisted shares may be taxed at specified long‑term rates .
Unlisted shares are shares of a company that are not traded on a recognized stock exchange.
Examples:
- Private limited company shares
- Startup equity
- Pre-IPO investments
- Closely held company shares
Holding Period for Unlisted Shares
Under the Income-tax Act, 1961, the holding period rules are:
| Type | Holding Period |
|---|---|
| Short-Term | Up to 24 months |
| Long-Term | More than 24 months |
👉 Unlike listed shares (12 months), unlisted shares require 24 months for long-term classification.
Tax on Short-Term Capital Gain (STCG)
If held for 24 months or less:
✔ Taxed as per normal slab rate
✔ No special concessional rate
Example:
If gain = ₹5 lakh
Taxed as per your income slab (could be 30%).
Tax on Long-Term Capital Gain (LTCG)
If held for more than 24 months:
✔ Tax Rate: 12.5%
✔ Indexation benefit not available
Key Differences – Listed vs Unlisted Shares
| Particulars | Listed Shares | Unlisted Shares |
|---|---|---|
| LTC Holding Period | 12 months | 24 months |
| LTC Tax Rate | 12.5% | 12.5% |
| Indexation | Not allowed | Not Allowed |
| STCG Rate | 20% | Slab rate |
| STT Required | Yes | Not applicable |
4. Capital Gains Tax on Mutual Funds in 2026
Understanding how mutual funds are taxed is essential to assessing net returns. Tax treatment depends on the fund type — primarily whether it is treated as an equity‑oriented fund or as a debt fund — and on the holding period. Apply the correct classification (equity exposure ≥65% = equity‑oriented) when computing the capital gains tax.
Equity‑Oriented Mutual Funds: Taxation Framework
Equity‑oriented mutual funds (those with at least 65% equity exposure) follow the tax treatment broadly similar to listed equity. Long‑term capital gains (LTCG) arise once the units are held beyond the long‑term holding period and may be taxed at a concessional rate after applying the annual exemption. Short‑term capital gains (STCG) f
Equity Mutual Funds
(Where at least 65% of portfolio is invested in equity)
| Type | Holding Period |
|---|---|
| Short-Term | Up to 12 months |
| Long-Term | More than 12 months |
Short-Term Capital Gain (STCG)
✔ Holding up to 12 months
✔ Tax Rate: 20%
✔ Covered under Section 111A
Example:
Gain = ₹1,00,000
Tax @ 20% = ₹20,000 + cess
Long-Term Capital Gain (LTCG)
✔ Holding more than 12 months
✔ Tax Rate: 12.5%
✔ Exemption: ₹1,25,000 per financial year
✔ Covered under Section 112A
✔ No indexation benefit
Example:
Gain = ₹2,50,000
Less exemption = ₹1,25,000
Taxable = ₹1,25,000
Tax @ 12.5%
Debt Mutual Funds: Recent Changes
Taxation of debt mutual funds differs from that of equity funds. Historically, long‑term gains on debt funds benefited from indexation; recent legislative changes (see notifications effective 23 July 2024) altered the tax treatment of certain debt‑oriented gains.
Debt funds include:
- Liquid funds
- Short-term debt funds
- Corporate bond funds
- Gilt funds
- Target maturity funds
Major Rule Change
For investments made under the new regime:
✔ No separate long-term capital gains benefit
✔ No indexation benefit
✔ Gains taxed as per individual slab rate
This applies irrespective of holding period.
Holding Period
| Type | Tax Treatment |
|---|---|
| Any holding period | Taxed as per slab rate |
Even if held for 3–5 years → Slab rate applies.
Example (Debt Fund)
Gain = ₹2,00,000
If you are in 30% slab →
Tax = ₹60,000 + cess
Quick Comparison – Equity vs Debt Mutual Funds (2026)
| Particulars | Equity MF | Debt MF |
|---|---|---|
| STCG Rate | 20% | Slab rate |
| LTCG Rate | 12.5% (> ₹1.25L exempt) | Slab rate |
| LTC Holding Period | 12 months | Not relevant |
| Indexation | Not allowed | Not allowed (new regime) |
| Tax Efficiency | Higher for long term | Lower for high slab investors |
Hybrid Funds: Understanding the Tax Treatment
The taxation of hybrid funds depends on their equity allocation. If a hybrid fund is classified as equity‑oriented (equity exposure ≥65%), it inherits equity-tax treatment; otherwise, it follows debt-fund rules.
5. Capital Gains on Property: Comprehensive Analysis
The tax treatment of immovable property is one of the most important areas for individual taxpayers and investors. Selling a house property can trigger significant capital gains, so understanding holding periods, indexation choices, available exemptions, and the correct method to calculate the cost of acquisition is essential to minimise tax and to remain compliant with the Income Tax Act.
Holding Period for Property: What Qualifies as Long‑Term?
The holding period for property determines whether a gain is short‑term or long‑term and, therefore, which tax rates or reliefs apply.
For land or building (including residential or commercial property):
| Type | Holding Period |
|---|---|
| Short-Term Capital Gain (STCG) | Held up to 24 months |
| Long-Term Capital Gain (LTCG) | Held for more than 24 months |
👉 Important: The cutoff is 24 months.
Short-Term Capital Gain (STCG) on Property
If property is sold within 24 months:
✔ Gain is treated as Short-Term
✔ Taxed as per your income tax slab rate
✔ No indexation benefit
Example
Purchase Price: ₹50,00,000
Sale Price (after 18 months): ₹60,00,000
Gain = ₹10,00,000
If you are in 30% slab →
Tax = ₹3,00,000 + cess
Long-Term Capital Gain (LTCG) on Property
If property is held for more than 24 months:
✔ Gain is treated as Long-Term
✔ Tax Rate: 12.5% without indexation and 20% with indexation
✔ Indexation benefit available(On property purchased before 23rd July 2024)
Indexation Benefits on Property Sales
Indexation adjusts the cost of acquisition to account for inflation — by applying the official cost inflation index — thereby reducing the taxable gain on long‑term property sales. This often produces a materially lower tax liability than applying a flat rate without indexation. For example (illustrative): if you purchased a property in 2010 for ₹10,00,000 and sold it in 2026 for ₹30,00,000, applying indexation to the 2010 cost .
Example (With Indexation)
Purchase Price (2015): ₹40,00,000
Sale Price (2026): ₹80,00,000
Indexed Cost = ₹40,00,000 × (CII of Sale Year / CII of Purchase Year)
Taxable Gain = Sale Price – Indexed Cost
Tax @ 20%
Indexation can significantly reduce tax.
Residential vs Commercial Property: Tax Differences
While both residential and commercial property sales can attract capital gains tax, certain exemptions relate specifically to residential property:
- Section 54 permits an exemption on LTCG arising from the sale of a residential house if the net consideration is reinvested in another residential house within prescribed time limits.
- Section 54F provides relief where gains from the sale of any long‑term capital asset (other than a residential house) are invested in a residential property.
- Commercial property does not qualify for Sections 54/54F .
Inheritance and Gifted Property: Cost of Acquisition Rules
Special rules apply when property is inherited or received as a gift:
- For inherited property, the cost of acquisition is generally the cost to the previous owner; the holding period of the previous owner is also typically included when determining whether the asset qualifies as long‑term.
- For gifted property, the donee’s cost of acquisition is generally the same as that of the donor (that is, the donor’s original cost), though the fair market value at the time of gift or inheritance may be relevant in certain situations — check the precise statutory provision that applies to your case.
- Where the asset was acquired long ago or documentation is sparse, the tax authority may accept the fair market value at the time of transfer (valuation provided by a registered valuer); however, you should obtain and retain supporting records wherever possible.
Documents and Records You Must Keep
Keep clear evidence to substantiate the cost of acquisition and improvements — this will reduce disputes and ensure correct computation of gains. Essential documents include:
- Sale deeds and purchase agreements
- Stamp duty and registration receipts
- Receipts/invoices for capital improvements or renovations
- Property tax receipts and municipal records, where relevant
- Previous owner’s purchase records (for inherited property) or gift deeds
Worked Example — Indexation vs Flat Rate (Illustrative)
Purchase price (2010): ₹10,00,000. Sale price (2026): ₹30,00,000. Documented improvements: ₹1,00,000. Transfer expenses: ₹50,000.
Unindexed long‑term gain = ₹30,00,000 − (₹10,00,000 + ₹1,00,000 + ₹50,000) = ₹18,50,000.
If indexation is available, the 2010 cost would be multiplied by the relevant cost inflation index factor to compute an indexed cost of acquisition, which lowers the taxable gain. Alternatively, if a prescribed flat rate without indexation applies and is more favourable in your case, you may elect that method where the law permits — always compute both and choose the option that lawfully minimises tax.
Checklist for Sellers of a House Property
- Confirm the long‑term holding period applicable and dates to determine STCG vs LTCG.
- Gather purchase deed, sale deed, stamp duty receipts and records of improvements.
- Compute gains both with indexation (if available) and under any alternative flat‑rate option to identify the lower tax outcome.
- If claiming exemption under Section 54/54F, document reinvestment (bookings, allotment letters, bank transfers) within the statutory window.
- Retain all records for at least eight assessment years in case of scrutiny.
Property taxation is complex and fact‑sensitive: verify the holding‑period threshold and indexation rules that apply to your transaction (especially where transitional grandfathering or pre‑23 July 2024 acquisition treatment may be relevant), and consult a tax professional before finalising the computation for your income tax return.
Important Points for Property Holding
✔ Holding period starts from date of acquisition
✔ In case of allotment by builder, allotment date may be considered
✔ Inherited property → holding period of previous owner is included
✔ Gifted property → cost and holding period of original owner apply
Exemptions Available on LTCG Property
After long-term classification, you can claim:
✔ Section 54 (Reinvestment in residential house)
✔ Section 54F
✔ Section 54EC bonds
These exemptions are not available for short-term capital gains.
Quick Summary Table
| Particular | STCG | LTCG |
|---|---|---|
| Holding Period | Up to 24 months | More than 24 months |
| Tax Rate | Slab rate | 20% |
| Indexation | Not allowed | Allowed |
| Exemptions (54/54F) | Not allowed | Allowed |
6. Capital Gains Tax on Shares, Mutual Funds & Property: Comparative Analysis
A concise side‑by‑side comparison helps investors choose the most tax‑efficient strategy when allocating between equity shares, mutual funds and house property. The table below summarises the usual treatment for short‑term and long‑term capital gains and flags where indexation or exemptions commonly apply. Always confirm the precise rates and any transitional rules applicable to assets acquired before 23 July 2024 when you compute tax for 2026.
Tax Rate Comparison Table Across Asset Classes
Holding Period Comparison
| Asset Type | Short-Term If Held | Long-Term If Held |
|---|---|---|
| Listed Equity Shares | Up to 12 months | More than 12 months |
| Equity Mutual Funds | Up to 12 months | More than 12 months |
| Debt Mutual Funds | No LTC distinction (new regime) | No LTC distinction |
| Property (Land/Building) | Up to 24 months | More than 24 months |
Tax Rate Comparison (2026)
| Asset | STCG Tax | LTCG Tax | Indexation | Exemption |
|---|---|---|---|---|
| Listed Shares | 20% | 12.5% | Not allowed | ₹1.25 lakh |
| Equity MF | 20% | 12.5% | Not allowed | ₹1.25 lakh |
| Debt MF | Slab rate | Slab rate | Not allowed (new regime) | No special exemption |
| Property | Slab rate | 20% | Allowed | Section 54 / 54F / 54EC |
Key Differences Explained
A)Shares & Equity Mutual Funds
✔ Lower long-term tax rate (12.5%)
✔ ₹1.25 lakh annual exemption
✔ No indexation benefit
✔ STT required for concessional rates
Best suited for long-term equity investors.
B) Debt Mutual Funds
✔ Taxed at slab rate
✔ No separate LTC benefit
✔ No indexation
✔ Less tax efficient for high slab investors
Often compared with FDs for post-tax return.
C) Property
✔ Long-term tax at 20% with indexation benefit ( if property purchased before 23rd July 2024)
✔ Long term at 12.5% with no Indexation benefit available
✔ Major reinvestment exemptions available
✔ Higher compliance and documentation
Better suited for long holding and reinvestment planning.
Practical Tax Efficiency Comparison
If investor is in 30% slab:
| Asset | Effective Long-Term Tax Impact |
|---|---|
| Shares | 12.5% after ₹1.25L exemption |
| Equity MF | 12.5% |
| Debt MF | 30% |
| Property | 20% (after indexation) if purchased before 23rd July 2024, otherwise 12.5% with no indexation benefit |
Which Is More Tax Efficient?
For long-term investors:
👉 Equity shares & equity mutual funds are most tax-efficient.
👉 Property can be tax-efficient due to indexation & exemptions.
👉 Debt mutual funds are least tax-efficient for high slab investors.
7. Legal Strategies to Reduce Capital Gains Tax in 2026
There are several lawful strategies taxpayers can use in 2026 to reduce or defer capital gains. Each strategy has specific conditions under the Income Tax Act, so apply them carefully and retain documentary evidence. Below are the commonly used options, together with practical how‑to steps and typical pitfalls to avoid.
How to claim the Section 54 exemption (residential property) , under the Income Tax Act 2025. This exemption will be under Section 82
What it does: Section 54 allows an exemption on LTCG arising from the sale of a residential house if you reinvest the net consideration in another residential property within the prescribed period.
- How to claim: reinvest the net sale proceeds in the purchase or construction of a new residential house within the statutory time (check the current time limits and any amendments effective from 23 July 2024).
- Documents required: sale deed, purchase deed or construction contracts, bank transfer receipts, allotment letters.
- Pitfalls: missing the reinvestment deadline, using funds for non‑qualifying expenses, or failing to document the source and timing of reinvestment.
- Section 54 – Sale of Residential House
- When Applicable
- You sell a residential house property
- The gain is long-term (held > 24 months)
- How to Claim Exemption
- You must:
- ✔ Purchase another residential house:
- Within 1 year before sale, or
- Within 2 years after sale
- OR
- ✔ Construct a house within 3 years
- Amount of Exemption
- Exemption = Amount of capital gain invested in new house
- If full capital gain is invested → Full exemption
- If partial amount invested → Proportionate exemption
- Important Rules
- ✔ Only 1 residential house in India (subject to certain conditions)
- ✔ Cannot sell the new house within 3 years
- ✔ If not utilized before ITR due date → Deposit in Capital Gain Account Scheme (CGAS)
How to use Section 54F (invest gains from other assets into residential property)
Under the Income Tax Act 2025,,this exemption will be under Section 86
What it does: Section 54F allows exemption when net consideration from the sale of any long‑term capital asset (other than a residential house) is invested in a residential house.
- How to claim: invest the net sale proceeds in a residential property within the permitted time and report the investment when filing your return.
- Documents required: sale receipts for the original asset, proof of reinvestment, bank records and property documents.
- Pitfalls: partial reinvestments lead to proportionate exemptions; failure to maintain clear records can lead to disallowance.
- When Applicable
- You sell any long-term capital asset (e.g., land, gold, shares)
- You invest in a residential house
- Key Condition
- You must invest the entire sale consideration, not just capital gain.
- Formula for Exemption
- Exemption = Capital Gain × (Amount Invested ÷ Net Sale Consideration)
- If full sale value invested → Full exemption
- If partial invested → Proportionate exemption
- Additional Conditions
- ✔ You must not own more than one residential house (other than new one)
- ✔ New property cannot be sold within 3 years
- ✔ Deposit unutilized amount in CGAS before due date
How to invest in Section 54EC bonds.Under the Income Tax Act 2025 Section
will be 85
What it does: Section 54EC permits exemption on capital gains if you invest them in specified bonds (issued by notified authorities) within six months of the sale — subject to the maximum investment limit set by statute.
- How to claim: purchase qualifying 54EC bonds within the six‑month window and retain purchase receipts.
- Documents required: bond purchase receipts, sale deed showing gains, bank transfer evidence.
- Pitfalls: observe the maximum permissible limit for 54EC investment and do not use the funds for other purposes before maturity; confirm any changes to caps or issuer list effective from 23 July 2024.
- When Applicable
- You have long-term capital gain from sale of land/building
- How to Claim
- Invest capital gain in specified bonds within 6 months of transfer.
- Eligible bonds are issued by:
- National Highways Authority of India
- Rural Electrification Corporation Limited
- Key Features
- ✔ Maximum investment: ₹50 lakh
- ✔ Lock-in period: 5 years
- ✔ Interest taxable
- ✔ No early redemption allowed
Step-by-Step Process to Claim Exemption
a) Calculate Long-Term Capital Gain
b)Decide a suitable exemption section
c) Invest within the prescribed time limit
d)If not utilized → Deposit in CGAS
e) Report exemption in ITR (Schedule CG)
f) Keep all purchase, bond, and valuation documents
Quick Comparison Table
| Section | Asset Sold | Investment Required | Time Limit | Max Limit |
|---|---|---|---|---|
| 54 | Residential House | Capital Gain | 2 yrs (purchase) / 3 yrs (construction) | No fixed cap |
| 54F | Any asset (except house) | Full Sale Consideration | Same as 54 | No fixed cap |
| 54EC | Land/Building | Capital Gain in Bonds | Within 6 months | ₹50 lakh |
Common Mistakes
1) Missing 6-month deadline for 54EC
2) Not depositing in CGAS before the ITR due date
3) Owning more than the allowed number of houses under 54F
4) Selling new property within 3 years
Tax loss harvesting and capital gains harvesting
Tax loss harvesting: sell underperforming investments to realise losses that can be set off against realised gains, reducing net taxable capital gains. Maintain a trading record and ensure compliance with any anti‑avoidance or wash‑sale rules (where they apply).
Capital gains harvesting: time disposals to make the most of annual exemptions or to move gains into a different tax year. Useful for optimising the aggregate annual exemption or avoiding a higher marginal tax impact.
- How to apply: identify positions with unrealised losses or gains, calculate the net tax impact of realising them now vs later, and execute trades only after documenting the tax rationale.
- Pitfalls: transaction costs and market risk can outweigh tax benefits; rules limiting immediate repurchase may apply in some jurisdictions or situations.
- Tax Loss Harvesting
- What is Tax Loss Harvesting?
- It means:
- How It Works
- Example:
- Long-Term Gain (Shares) = ₹3,00,000
- Loss (Other Shares) = ₹1,00,000
- Net Taxable Gain = ₹2,00,000
- Tax saved on ₹1,00,000.
- Set-Off Rules
- ✔ Short-Term Capital Loss (STCL) → Can be set off against STCG and LTCG
- ✔ Long-Term Capital Loss (LTCL) → Can be set off only against LTCG
- Loss can be carried forward for 8 years (if ITR filed on time).
- Time to Do It
- Usually done in March before financial year end.
- Important Points
- ✔ Loss must be genuine (no artificial transactions)
- ✔ Proper documentation required
- ✔ Must report loss in ITR
- Capital Gain Harvesting
- Now this is equally important but less understood.
- What is Capital Gain Harvesting?
- It means:
- How It Works (Equity Example – 2026)
- Long-Term Gain on shares = ₹1,25,000
- Under Section 112A, LTCG up to ₹1,25,000 is exempt.
- So investor:
- ✔ Sells shares
- ✔ Books ₹1.25 lakh tax-free gain
- ✔ Buys back same shares
- Now new purchase price becomes higher (reset cost).
- Future taxable gain reduces.
- Why It Works
- Because LTCG exemption of ₹1.25 lakh is available every financial year.
- If you don’t use it → it lapses.
Tax Loss vs Capital Gain Harvesting – Comparison
| Particular | Tax Loss Harvesting | Capital Gain Harvesting |
|---|---|---|
| Purpose | Reduce taxable gain | Use tax-free exemption |
| Trigger | Loss position | Profit position |
| Tax Impact | Offsets gains | Resets cost base |
| Best For | High gains in same year | Long-term investors |
| Timing | Before March 31 | Every financial year |
Gain in Stock A = ₹2,00,000
Loss in Stock B = ₹50,000
Net Gain = ₹1,50,000
If exemption = ₹1,25,000
Taxable = ₹25,000
With smart planning → almost zero tax.
Caution
✔ Avoid wash trades without substance
✔ Consider brokerage and market risk
✔ Maintain holding period awareness
Joint ownership planning: splitting gains legally
Structuring ownership with a spouse or family members can legitimately split gains among co‑owners, potentially utilising multiple basic exemption limits and lower tax slabs. Ensure true joint ownership (legal title and beneficial interest) and maintain supporting documentation to withstand scrutiny.
- How to apply: hold the asset in joint names and ensure consideration is paid/proportionate where appropriate; compute each owner’s share of gain when filing.
- Pitfalls: artificial transfers solely for tax avoidance can be challenged; gifts and transfers may attract other tax implications.
A)Basic Rule – Tax Follows Ownership
Capital gain is taxed:
✔ In proportion to ownership share
✔ Based on investment contribution
✔ As per registered ownership documents
If property is jointly owned 50:50 → gain is split 50:50.
B) Joint Ownership in Property
✅ Example
Mr. A and Mrs. A jointly purchase a flat.
Purchase deed shows:
- Mr. A – 50%
- Mrs. A – 50%
Sale gain = ₹20,00,000
Each person is taxed on ₹10,00,000.
If spouse is in lower tax slab → overall family tax reduces.
C) Important
✔ Ownership must be reflected in sale deed
✔ Payment contribution should match ownership
✔ Loan EMI sharing strengthens genuineness
D) Joint Holding in Shares / Mutual Funds
Shares & mutual funds can also be held jointly.
However:
👉 Capital gains are taxed in the hands of the first holder, unless contribution evidence supports otherwise.
So documentation is very important.
E) Why This Planning Works
Because:
✔ LTCG exemption (₹1.25 lakh on equity) is available per person
✔ Basic exemption limit applies per person
✔ Capital losses can be managed individually
Example:
If husband and wife both use ₹1.25 lakh LTCG exemption →
Family exemption = ₹2.5 lakh.
F) Clubbing Provisions – Be Careful
Under Section 64 of the Income Tax Act 1961( Read this section as 99 under the IT Act 2025)
If you gift money to spouse and spouse invests →
Income may be clubbed back in your hands.
So:
✔ Use own income for investment
✔ Avoid artificial transfers before sale
✔ Plan ownership at the acquisition stage
G) Tax Efficiency Example (Equity LTCG)
Total LTCG = ₹2,50,000
If owned by one person →
Exemption = ₹1,25,000
Taxable = ₹1,25,000
If jointly owned (50:50) →
Each gain = ₹1,25,000
Each exemption = ₹1,25,000
Taxable = NIL
Legally zero tax.
H) For Property – Additional Benefit
Each co-owner can separately claim:
✔ Section 54 exemption
✔ Section 54F exemption
✔ Section 54EC (₹50 lakh limit applies per assessee)
So exemption planning multiplies.
Common Mistakes
a) Adding spouse’s name at the last moment
b) No contribution proof
c) Ignoring clubbing rules
d) Mismatch in documentation
Final points and CTA
These strategies can reduce tax on a capital gain sale, but outcomes depend on precise facts, statutory thresholds and recent amendments (including those effective from 23 July 2024). Before implementing any plan, consult a qualified tax adviser to confirm applicability, prepare the necessary documentation and ensure compliance with the Income Tax Act. Proper documentation and timely filings are critical to secure exemptions and carry‑forward benefits.
8. Exemptions, Set-Off Rules and Carry Forward Provisions
The Indian tax code provides several exemptions and set‑off/carry‑forward provisions that are central to effective capital gains planning. Knowing which exemptions apply and how to match gains with losses can materially reduce the tax payable on a capital gain sale.
Important Exemptions Available in 2026
Key exemptions relevant to many taxpayers include:
- Section 54 — exemption for long‑term capital gains on sale of a residential house if the net consideration is reinvested in another residential house within the prescribed time limits.
- Section 54F — exemption where the net consideration from sale of a long‑term capital asset (other than a residential house) is invested in a residential house.
- Section 54EC — exemption by investing capital gains in specified bonds (issued by notified authorities) within six months; subject to the statutory investment limit.
These exemptions can significantly reduce tax liability if conditions (timing, amounts and documentation) are strictly met — always verify any amendments or caps introduced with effect from 23 July 2024 prior to relying on a particular exemption.
Set‑Off Rules: Matching Gains with Losses
Set‑off rules let you reduce taxable capital gains by applying capital losses. The basic principles are:
- Short‑term capital losses (STCL) can be set off against both short‑term and long‑term capital gains.
- Long‑term capital losses (LTCL) can be set off only against long‑term capital gains.
Example (simple): if you have an STCG of ₹100,000 and an STCL of ₹30,000 in the same assessment year, you may set off the loss against the gain so the net taxable gain is ₹70,000.
Example (mixed): if you have an STCL of ₹40,000 and an LTG of ₹50,000, you can set off the STCL against the LTG (resulting in a net LTG of ₹10,000), because STCL may be set off against either category.
Can Capital Losses Be Carried Forward?
Yes. If you cannot fully set off capital losses in the year they arise, the unabsorbed loss may be carried forward and set off in subsequent years. Capital losses can be carried forward for 8 Assessment Years.
Time Limits for Carrying Forward Losses
Unabsorbed capital losses can be carried forward for a limited number of assessment years (confirm the exact number in the statute or current notification before filing). To be eligible for carry‑forward, the loss must be declared in the return filed on or before the due date; late filing may forfeit this benefit.
Inter‑Head Adjustment: What’s Allowed and What’s Not
Capital losses generally remain within the “Capital Gains” head — they cannot be set off against income from other heads (such as salary or business income). Inter‑head set‑offs (between capital gains and other heads) are not permitted.
Practical notes and checklist
- File your return on time if you want to carry forward losses — missing the due date can mean losing the right to carry forward.
- Keep supporting documents: sale deeds, purchase bills, improvement invoices, transfer expense receipts and contract notes.
- When matching gains and losses, compute category‑wise (ST vs LT) and then apply set‑off rules in order: (a) set off STCL against STCG/LTCG, (b) set off LTCL against LTCG only.
- When claiming exemptions like Section 54/54F, keep evidence of reinvestment (booking letters, purchase deeds, bank transfers) and note any time limits for completion.
- Watch the basic exemption limit and your total taxable income — large capital gains can push you into higher effective tax outcomes when combined with other income.
Understanding these provisions — and complying strictly with filing deadlines and documentation requirements — is essential to preserve exemptions and to make full use of set‑off and carry‑forward benefits. When in doubt, consult a tax professional to confirm the current rules and their interaction with recent amendments before you finalise your income tax return.
9. Common Mistakes and Critical Considerations
Dealing with capital gains requires care: small errors in documentation, timing or calculation can increase tax bills and attract scrutiny. Below are the common mistakes taxpayers make and practical steps to avoid them when preparing your income tax return.
Documentation Errors That Prove Costly
Failing to keep full supporting records is the single most common and costly error. Ensure you retain:
- Purchase deeds, sale deeds and contract notes (for shares and mutual funds).
- Stamp duty and registration receipts for property transactions.
- Invoices or receipts for capital improvements (renovations, structural work).
- Brokerage/STT receipts, transfer expenses and bank transfer proofs.
Without these documents, you may be unable to substantiate the cost of acquisition or improvement costs, leading to a higher reported gain. Keep originals or certified copies for at least the period required for carry‑forward of losses and possible assessment (typically several assessment years).
Missing Deadlines for Exemption Claims
Many taxpayers miss statutory deadlines and lose entitlement to exemptions (for example the reinvestment windows under Section 54/54F or the six‑month window for Section 54EC bonds). Common pitfalls:
- Assuming an exemption automatically applies — you must satisfy conditions and claim it in your return.
- Missing the reinvestment deadline — partial or late reinvestment can result in only partial exemption or none at all.
Quick timeline reference (illustrative — always verify current law before acting):
- Section 54/54F: reinvest within the prescribed purchase/construction window (check the exact period applicable to your case).
- Section 54EC: invest in qualifying bonds within six months of sale; observe the statutory investment cap.
If you miss a deadline, options may be limited; seek professional advice promptly to explore alternatives such as delayed investment provisions, where available.
Incorrect Cost of Acquisition Calculations
Miscomputing the cost base — for example, omitting documented improvements or applying incorrect indexation factors — inflates the taxable gain. To avoid errors:
- Distinguish clearly between purchase price, capital improvements and routine maintenance (only capital improvements are generally admissible).
- When using indexation, apply the correct cost inflation index value for the relevant years (verify the applicable base and indices for the tax year).
Overlooking Advance Tax Obligations
Large capital gains can create advance tax liabilities. Failing to pay advance tax may attract interest under provisions such as Sections 234B/234C(Under IT Act 2025, Section 424 & 425) (confirm these references remain current for your filing year). Practical steps:
- Estimate taxable income including expected capital gains and pay advance tax instalments on time.
- Retain proof of payment and reconcile with your final tax computation when filing.
Other Important Considerations
- Tax loss harvesting: know the rules for setting off STCL and LTCL — short‑term losses can be set off against both STCG and LTCG; long‑term losses can be set off only against LTCG.
- Basic exemption limit and overall taxable income: a large capital gain can alter your tax position and affect surcharges or slab‑based liabilities for other income.
- Stay updated: tax rules and thresholds can change — always verify the current rules (including any amendments effective 23 July 2024) before finalising calculations.
Checklist & Immediate Actions
Before filing your return:
- Compile all documents listed above and prepare a reconciled schedule of gains and losses by category (ST/LT).
- Calculate gains both with indexation (if applicable) and under any alternative route (e.g., flat‑rate options) to determine the lower tax outcome.
- Ensure advance tax instalments have been paid if required; remedy shortfall promptly.
- File the return on time to preserve carry‑forward rights for losses.
Address issues promptly and consult a tax professional if you encounter missing documents, ambiguous transactions or deadline breaches. Corrective action taken early usually yields better outcomes than later remediation.
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10. Conclusion
A clear grasp of capital gains rules for shares, mutual funds, and property is vital for investors who want to protect returns and plan tax‑efficient exits in 2026. Small choices — the timing of a sale, whether to claim indexation, or how to reinvest proceeds — can have a significant effect on tax payable.
Always calculate post-tax return — not just profit.
A 15% return with smart tax planning can beat a 20% return with poor tax management.
Before March 31 every year:
✔ Review gains and losses
✔ Use ₹1.25 lakh LTCG exemption
✔ Consider tax loss harvesting
✔ Evaluate Section 54 / 54F if property sold
✔ Ensure proper reporting in ITR
Capital gains planning is not last-minute work — it is a year-round discipline.
ax law rewards informed investors.
If you understand holding periods, exemptions, and set-off rules, you can legally reduce your tax burden and increase your real wealth over time.
Smart investing + Smart tax planning = Sustainable wealth creation.
Ultimately, staying informed, keeping accurate records and seeking professional advice will help you minimise tax liabilities and improve long‑term financial outcomes.
FAQ
Note: tax rates, thresholds and indexation provisions referenced below have been updated to reflect legislative changes and notifications effective 23 July 2024. Always cross‑check with the official Income Tax Department notifications before filing your return.
1)What qualifies as a capital asset?
A capital asset is broad and generally includes almost any property held by a taxpayer, whether or not connected with business or profession. Common examples are equity shares, mutual fund units, land, buildings and other securities. Exclusions typically include stock‑in‑trade, consumable stores and personal effects (subject to statutory exceptions).
2)How are capital gains calculated?
Capital gain = Full value received on sale − (Cost of acquisition + Cost of improvements + Transfer expenses). For long‑term assets, where indexation applies, you adjust the cost of acquisition using the official cost inflation index to compute the indexed cost of acquisition. See Section 5 for worked examples applying indexation vs a non‑indexed approach.
3)What is the difference between income and capital gains?
Income (salary, business income, interest, rent) is usually recurring and taxed under slab rates. Capital gains arise only on transfer of a capital asset and are taxed under specific provisions with separate rates for short‑term and long‑term gains depending on the asset class and holding period.
4)What are the holding‑period requirements across asset classes?
Holding periods differ by asset: listed equity and equity‑oriented mutual funds generally require 12 months for long‑term status; unlisted shares and immovable property typically require a longer statutory period (confirm the applicable threshold for your asset and year). See Section 2 for full details and examples.
5)What are the STCG and LTCG tax differences?
Short‑term capital gains (STCG) are usually taxed at higher or ordinary rates depending on the asset; long‑term capital gains (LTCG) attract concessional treatment or allow indexation in some cases.
6)What is the STCG rate on listed equity?
STCG on listed equity sold on recognised exchanges is taxed at 20%
7)Is LTCG on shares taxable in 2026?
Yes — LTCG on listed equity is taxable. Tax rate is 12.5% and the exemption limit is Rs 1.25 Lakh
8)Does payment of Securities Transaction Tax (STT) matter?
Yes. Payment of STT on exchange‑traded transactions affects eligibility for certain preferential tax treatments for gains on listed equity. Keep contract notes and exchange receipts as proof of STT payment when claiming the relevant tax treatment.
9)How are unlisted shares taxed?
Unlisted shares follow different rules: the long‑term holding period is 24 months.LTCg @12.5% and
STCG on slab rates, if unlisted shares are listed on an exchange, they are taxed similarly to listed shares upon sale.
10)How are equity‑oriented mutual funds taxed?
Mutual funds with equity exposure above the statutory threshold are treated similarly to listed equity for STCG and LTCG purposes. LTCG is charged at 12.5%, and the exemption limit is Rs 1.25 Lakh; STCG is charged at 20% with no other exemption.
11)What are the rules for debt mutual funds?
The tax treatment of debt mutual funds has evolved; gains may be taxed at the investor’s slab rates, with no differentiation between long- and short-term.
12)How is capital gains on property calculated under the new rules?
For property, compute gain as sale consideration minus (cost of acquisition + cost of improvements + transfer expenses). Long‑term property gains often permit indexation of cost(if property purchased before 23 rd July 2024, the rate will be 20%); in other cases, a flat rate of 12.5% with no indexation benefit.
13)Are 54EC bonds still a valid way to claim exemption?
Investing capital gains in notified 54EC bonds within the prescribed six‑month window remains a common exemption route. The investment limit is Rs 50 Lakh.
14)What is tax loss harvesting?
Tax loss harvesting is selling securities at a loss to offset realised gains elsewhere, thereby reducing net taxable capital gains. Ensure you understand set‑off rules and any restrictions on immediate repurchase in your situation; always document trades and maintain appropriate records.
Disclaimer
This publication is intended solely for informational and educational purposes and does not constitute professional, legal, tax, or financial advice. The information provided has been compiled from sources believed to be reliable; however, its accuracy, completeness, or current relevance is not guaranteed. The views and opinions expressed herein reflect the author’s understanding at the time of publication and are subject to change without notice.
Readers are strongly advised to seek independent professional advice before making any decision or taking any action based on the information contained in this publication. The author and publisher expressly disclaim any responsibility or liability for any loss, damage, or consequence arising directly or indirectly from reliance on this content or from any action taken or not taken based on it.