Capital gains refer to the profit or loss realized when a capital asset, such as property, shares or bonds, is sold or transferred at a price higher or lower than its acquisition cost. These gains are taxable under the head "Capital Gains" as per Section 45 of the Act. However, to encourage reinvestment and economic growth, the Act provides several capital gains exemptions under Sections 54 to 54GB, which allows taxpayers to reduce or eliminate their tax liability on these gains, but they are subject to specific conditions. These capital gains exemptions are particularly relevant for individuals, Hindu Undivided Families (HUFs) and other assessees engaged in property transactions, agricultural activities or industrial shifts. The provisions aim to promote housing, agriculture, infrastructure and entrepreneurship by requiring the reinvestment of gains into specified assets within defined timelines. With recent amendments and no significant changes in Budget 2025, the framework remains stable, focusing on simplified tax rates and removed indexation benefits for most long-term assets sold after July 23, 2024.
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What are Capital Gains as per Income Tax Act, 1961?
Capital gains are the profits you make when you sell or transfer something valuable, like property, shares or gold, which is called a "capital asset" under the Income Tax Act, 1961. For example, if you buy a house for Rs. 50 lakh and sell it for Rs. 80 lakh, the Rs. 30 lakh profit is your capital gain. These gains are taxed under a special category called "Capital Gains" in the year you sell the asset.
A capital asset can be almost anything you own, like land, buildings, shares, or jewelry, but it doesn’t include things like your personal clothes or furniture (unless it’s something special like art or antiques). It also excludes stock you sell in a business or rural agricultural land in India.
Capital gains are divided into two types based on how long you held the asset:
Short-Term Capital Gains (STCG): If you sell the asset quickly (e.g., shares held less than 1 year or property less than 2 years), the profit is short-term. It’s taxed like your regular income (at your income tax slab rate).
Long-Term Capital Gains (LTCG): If you hold the asset longer (e.g., shares for over 1 year or property for over 2 years), the profit is long-term. It’s taxed at a flat rate, usually 12.5% as of 2025 though gains from listed shares above Rs. 1.25 lakh per year are taxed at this rate.
To calculate the gain, you subtract the cost of buying the asset (plus any improvement costs and selling expenses) from the sale price. For some older assets sold before July 23, 2024, you could adjust the cost for inflation (called indexation) but this has been mostly removed now.
The holding periods and tax rates were revised effective from July 23, 2024, streamlining them across asset classes
Asset Type | Holding Period for STCG | STCG Tax Rate | Holding Period for LTCG | LTCG Tax Rate |
Listed Equity Shares or Equity-Oriented Mutual Funds | Less than 1 year | 15% | More than 1 year | 12.5% (on gains exceeding Rs. 1.25 lakh) |
Land, Building, Unlisted Equity Shares | Less than 2 years | Slab rates | More than 2 years | 12.5% (without indexation, except for pre-July 23, 2024 purchases where choice between 12.5% without or 20% with indexation applies) |
Other Capital Assets (e.g., Debt Mutual Funds with <35% equity) | Varies, but often less than 2 years | Slab rates | More than 2 years | 12.5% (without indexation) |
For LTCG on listed equities, an exemption threshold of Rs. 1.25 lakh applies annually. Indexation, which adjusted the cost of acquisition for inflation, is eliminated for assets sold post-July 23, 2024, except in specified cases for real estate. STCG is generally taxed at normal slab rates, making capital gains exemptions more valuable for LTCG.
Budget 2025 introduced minor clarifications, such as treating securities held by investment funds under Section 115UB as capital assets and extending capital gains exemptions for aircraft and ship leasing units under Sections 10(4H) and 10(34B), but no broad changes to rates or capital gains exemptions.
Read about Capital Gain Ventures
Meaning of Capital Gains Exemptions
Capital gains exemptions under the Act require the taxpayer to reinvest the capital gains (or net consideration in some cases) into eligible assets. Non-compliance such as selling the new asset prematurely or failing to utilize deposited amounts, triggers revocation of the exemption, taxing the gains retrospectively.
Key mechanisms include the Capital Gains Account Scheme (CGAS), where unutilized gains must be deposited in a specified bank account by the income tax return filing due date which is usually July 31st. Failure to use these funds within the timeline results in taxation as capital gains. Common consequences of non-compliance include the reduction of exempted amount from the cost of acquisition of the new asset if sold within 3-5 years or deeming loans against the new asset as taxable gains. The primary exemption sections are:
Section 54: Residential property.
Section 54B: Agricultural land.
Section 54D: Industrial land/buildings via compulsory acquisition.
Section 54EC: Specified bonds.
Section 54EE: Specified funds (though less common post-2018).
Section 54F: Residential house from non-residential assets.
Section 54G/54GA: Industrial shifts to rural/SEZ areas.
Section 54GB: Residential property gains invested in startups (details limited in references, but generally for eligible companies).
Each section has eligibility criteria, time limits and conditions, as detailed below
Section 54: Exemption on Sale of Residential Property
Section 54 exempts LTCG from the sale of a residential house if reinvested in another residential property. Eligible assessees are individuals or HUFs.
Asset Transferred: Long-term residential house
New Asset: One or two residential houses (if gains < Rs. 2 crore, once in lifetime, effective AY 2021-22)
Time Limit: Purchase: 1 year before or 2 years after transfer; Construction: 3 years after
Exemption Amount: Lower of LTCG or cost of new asset
CGAS Applicable: Yes
One of the conditions is that you can't sell the new home within three years. If you do, the exemption is taken away and added to the cost of the new asset. If your gain is less than Rs. 2 crore, you can invest in two houses but you can only do this once in your lifetime. This part of the law helps make housing more affordable which is a main policy goal.
Example: If Mr. A sells a house for Rs. 1 crore (cost Rs. 60 lakh, LTCG Rs. 40 lakh) and buys a new house for Rs. 50 lakh, exemption is Rs. 40 lakh (full LTCG).
Section 54B: Exemption for Agricultural Land
Targeted at farmers, Section 54B exempts gains from agricultural land transfer if reinvested in another agricultural land. The new land must be used for agriculture. If sold within 3 years, exemption revocation applies. This encourages continuity in farming amid urbanization pressures.
Eligible Assessee: Individual/HUF
Asset Transferred: Agricultural land used for farming by the assessee or parent for 2 years prior (STCG or LTCG)
New Asset: Agricultural land
Time Limit: 2 years after transfer
Exemption Amount: Lower of gains or new land cost
CGAS Applicable: Yes
Section 54D: Compulsory Acquisition of Industrial Assets
Section 54D gives people who are being forced to buy things by the government some relief. Conditions are the same as others, with a 3-year lock-in and use of CGAS. It's important for businesses that deal with eminent domain.
Eligible Assessee: Any taxpayer.
Asset Transferred: Industrial land/building used for 2 years prior (LTCG).
New Asset: Land/building for re-establishing the undertaking.
Time Limit: 3 years after transfer.
Exemption Amount: Lower of LTCG or new asset cost.
CGAS Applicable: Yes.
Section 54EC: Investment in Specified Bonds
A popular option for infrastructure funding, Section 54EC allows exemption by investing in bonds. Here lock-in is 5 years and breach via sale or loan triggers taxation. This channels funds to national highways and rural electrification.
Eligible Assessee: Any.
Asset Transferred: Long-term land/building.
New Asset: NHAI or REC bonds (redeemable after 5 years).
Time Limit: 6 months after transfer.
Exemption Amount: Proportional to investment (max Rs. 50 lakh per FY and next FY).
CGAS Applicable: No.
Section 54EE: Investment in Specified Funds
Similar to 54EC but for government-notified funds (introduced in 2016 for startups, but phased out). Here 5-year lock-in applies. Usage is limited due to fewer notifications post-2018.
Eligible Assessee: Any.
Asset Transferred: Any LTCA.
New Asset: Units of specified funds.
Time Limit: 6 months.
Exemption Amount: Proportional (max Rs. 50 lakh).
CGAS Applicable: No.
Section 54F: Exemption for Non-Residential Assets
Section 54F extends housing capital gains exemptions to gains from non-house assets. The key condition is that the assessee should not own more than one house besides the new one. 3-year lock-in; additional house purchase revokes exemption. From AY 2024-25, maximum exemption capped at Rs. 10 crore.
Eligible Assessee: Individual/HUF.
Asset Transferred: Any LTCA except residential house.
New Asset: Residential house.
Time Limit: Purchase: 1 year before/2 years after; Construction: 3 years.
Exemption Amount: (New asset cost / Net consideration) x Gains (full if full reinvestment).
CGAS Applicable: Yes.
Sections 54G and 54GA: Industrial Shifts
Section 54G and 54 GA promote decentralization with 3-year lock-in. These aid in reducing urban congestion and boosting SEZs.
Section 54G (Rural Areas): Exemption for shifting industrial undertaking from urban to rural areas.
Section 54GA (SEZ): Similar, but to SEZs.
Eligible Assessee: Any.
Asset Transferred: Plant, machinery, land/building in urban industrial unit (STCG/LTCG).
New Asset: New plant/machinery, land/building, shifting expenses.
Time Limit: 1 year before/3 years after.
Exemption Amount: Lower of gains or new investment.
CGAS Applicable: Yes.
Section 54GB: Exemption for Startup Investments
Section 54GB exempts LTCG from residential property if invested in eligible startups. It has a Lock-in for 5 years for shares. This fosters entrepreneurship. (Note: Details are standard; specific page reference limited.)
Eligible Assessee: Individual/HUF.
Asset Transferred: Residential property (LTCA).
New Asset: Shares in eligible Indian companies (startup criteria under DPIIT).
Time Limit: By return filing date; company must invest in assets within timelines.
Exemption Amount: Proportional to investment.
CGAS Applicable: No.
Summary
The Income Tax Act of 1961's capital gains exemptions offer significant relief, balancing tax revenue with social and economic goals. Taxpayers can delay or avoid paying taxes by putting the money back into housing, farming or infrastructure but they must be very careful to follow the rules or face penalties. Lawyers should tell their clients about deadlines, paperwork and risks especially after the changes in 2024 that will remove indexation for most assets. The framework is getting simpler as time goes on and the proposed Income Tax Bill, 2025, keeps these parts. Knowing these can help you plan your taxes better while still following the law.
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Capital Gains Exemption: FAQs
Q1. What is the exemption from capital gains?
A capital gains exemption lets you avoid tax on profits from selling assets like property or shares by reinvesting the money in specific assets, like a house or bonds, as per rules in the Income Tax Act, 1961.
Q2. How much capital gain is tax free?
The tax-free amount depends on the exemption (e.g., up to Rs. 50 lakh for bonds under Section 54EC, or full profit if reinvested in a house under Section 54), but for shares, LTCG up to Rs. 1.25 lakh per year is tax-free.
Q3. How can we avoid capital gains tax?
You can avoid capital gains tax by reinvesting the profit in assets like a residential house (Section 54/54F), agricultural land (Section 54B), or specific bonds (Section 54EC) within set time limits.
Q4. Is capital gain exempt from tax?
Capital gains are not automatically exempt but can be tax-free if you reinvest the profit in eligible assets under Sections 54 to 54GB, following strict conditions and timelines.
