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Capital gains arise on the transfer of a capital asset. The gain is the difference between the consideration and the cost of acquisition, after the adjustments the statute requires. Whether the gain is short-term or long-term depends on the nature of the asset and the period for which it was held. The rate then depends on that classification. This article sets out the map that applies to transfers on or after 23 July 2024, as it continues to govern financial year 2025–26. Mutual-fund taxation in detail has already been described in Mutual Fund Mastery. What follows is the household view across securities, gold and immovable property.
Listed equity shares, units of equity-oriented mutual funds and similar specified securities, where securities transaction tax has been paid, are long-term if held for more than twelve months. Immovable property, gold, unlisted shares and most other capital assets are long-term if held for more than twenty-four months. A holding that does not meet the period is short-term. Each systematic investment plan instalment is a separate acquisition for this purpose. A folio that is three years old may still contain units that are short-term.
Short-term gains on such securities are charged at 20 per cent under section 111A. Long-term gains are charged at 12.5 per cent under section 112A on the amount by which the year’s aggregate of such gains exceeds ₹1.25 lakh. The exemption is annual and aggregated. It is not available separately for each scheme. Indexation is not applied. The rebate under section 87A does not cancel this tax.
Short-term gains on these assets are added to income and charged at slab rates. Long-term gains are generally charged at 12.5 per cent without indexation. For land or a building acquired before 23 July 2024, a resident individual or Hindu undivided family may, on the facts prescribed, compare that computation with a computation at 20 per cent after indexation, and use the more favourable of the two. Assets acquired on or after that date do not have that choice. Specified debt-oriented mutual funds acquired on or after 1 April 2023 remain chargeable at slab rates regardless of the holding period, as described in the mutual-fund series.
The cost is what was paid to acquire the asset, together with the expenditure on transfer that the statute allows. For an inherited asset the cost of the previous owner is generally substituted, and the holding period includes the previous owner’s period. Improvements that are capital in nature may be added where the law so provides. Informal estimates of “what it must have been worth” are not a substitute for the document of purchase or for the value the statute deems in specified cases.
A switch from one mutual-fund scheme to another is a transfer. It can produce a gain or a loss in the year of the switch even though no money has returned to the bank account.
Lata, who lives in Bhiwani, redeemed units she had accumulated over four years and assumed the entire gain was long-term. The registrar’s statement showed that the instalments of the most recent twelve months were still short-term and were chargeable at 20 per cent. The older units used the 12.5 per cent rate above the annual exemption. The difference was manageable. The assumption was not. She now reads the statement lot by lot before any large redemption.
Capital-gains tax is a tax on a transfer. Planning that begins after the transfer has only the computation left. Planning that begins before the transfer still has the holding period, the year of sale and the exemptions discussed in the next article.
Adding a long-term equity gain to salary and expecting the section 87A rebate to cancel the tax. The rebate does not apply to that gain.