In today's world, many people invest in assets like property, stocks or gold, hoping to build wealth over time. But when you sell these assets and make a profit, the government wants a share of that profit through taxes. This profit is called a "capital gain." If you've held the asset for a long time, it's classified as a long-term capital gain (LTCG), and there are special rules under Income Tax Act, 1961 where the exemptions and limits can help reduce or even eliminate your tax bill. In this article, we'll break down what long-term capital gains are, how they're taxed, and the exemption limits available as per the latest provisions in the Income-Tax Bill, 2025.
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What Are Capital Gains?
A capital gain is the profit you make when you sell an asset for more than what you paid for it. The asset could be anything valuable like a house, land, shares in a company, mutual funds, jewelry or even bonds. The cost you paid includes not just the purchase price but also expenses like brokerage fees or improvements made to the asset.
Capital gains are divided into two types based on how long you've held the asset:
Short-Term Capital Gain (STCG): If you sell the asset soon after buying it, the profit is short-term. This is taxed at your regular income tax slab rates, which can be as high as 30% for high earners.
Long-Term Capital Gain (LTCG): If you hold the asset longer, the profit qualifies as long-term. This gets preferential tax treatment, often at lower rates, and comes with exemption options.
The key difference is the holding period, which varies by asset type. For most assets like property, gold, or unlisted shares, you need to hold them for more than 24 months to qualify as long-term. For listed shares, equity-oriented mutual funds or zero-coupon bonds, it's just over 12 months. This distinction is crucial because LTCG offers more tax-saving opportunities.
Read about Transfer of Shares in Companies Act, 2013.
How Is Long-Term Capital Gain Calculated?
Calculating LTCG is straightforward but involves a few steps. Start with the sale price (full value of consideration), subtract the cost of selling (like agent fees), and then deduct the original cost of acquisition. For assets held before 2001, you can use a fair market value as of April 1, 2001, as the base.
To make it fairer, especially for inflation, the Income Tax Act allows "indexation" for many assets. This adjusts your original cost upward based on the Cost Inflation Index (CII) published by the government each year. For example, if you bought a house in 2010 for Rs. 50 lakh and sell it in 2025 for Rs. 1 crore, indexation could bump your adjusted cost to Rs. 80 lakh, reducing your gain to Rs. 20 lakh.
However, recent changes have simplified this. For land or buildings sold after July 23, 2024, the tax is calculated at 12.5% without indexation. But if this results in a higher tax than the old 20% rate with indexation, you only pay the lower amount. This aims to ease the burden on taxpayers while streamlining calculations.
What is the Exemption Limit?
One of the most attractive features of LTCG taxation is the exemption limit. For equity-oriented investments, any long-term gain up to Rs. 1.25 lakh per financial year is completely tax-free. This means if your total LTCG from stocks or equity funds is Rs. 1 lakh, you pay zero tax. Only the amount above this is taxed at 12.5%.
This limit doesn't apply to non-equity assets like property. However, there are other ways to claim exemptions by reinvesting your gains, which we'll cover next. The Rs. 1.25 lakh threshold is a straightforward relief, especially for small investors. For instance, if you sell shares you've held for over a year and profit Rs. 1.5 lakh, you only pay tax on Rs. 25,000 (Rs. 3,125 at 12.5%).
Keep in mind, this exemption is per year and per taxpayer. If you're filing jointly or have multiple sources, then plan accordingly to maximize it.
Tax Rates on Long-Term Capital Gains
Under the Income-Tax Bill, 2025, LTCG is generally taxed at a flat rate of 12.5%. This applies to most assets, including property, gold, and unlisted shares. It's a big shift from earlier rates, which were 20% with indexation for non-equity assets.
For equity-related assets like listed shares, equity mutual funds, or units of business trusts the rate is also 12.5%, but only on gains exceeding Rs. 1.25 lakh in a financial year. This exemption threshold was raised from Rs. 1 lakh in previous years, giving investors more breathing room. Importantly, for these equity gains to qualify, Securities Transaction Tax (STT) must have been paid on both purchase and sale.
Special rules apply to non-residents and certain funds:
Non-Resident Indians (NRIs) pay 12.5% on LTCG from specified assets like shares or debentures.
Offshore funds or Foreign Institutional Investors (FIIs) also face 12.5% on securities.
These rates are designed to encourage long-term investments while ensuring the government collects revenue fairly.
Read about Dividends under Section 194 of Income Tax Act, 1961.
Exemption Limit for LTCG on Specified Financial Assets (e.g., Equity Shares and Units)
Under Section 112A (LTCG from transfer of listed equity shares, equity-oriented mutual funds, or units of business trusts where Securities Transaction Tax (STT) is paid):
Exemption limit: Up to ₹1.25 lakh per financial year is exempt from tax.
Gains exceeding ₹1.25 lakh are taxable at 12.5% (without indexation benefit).
This limit was increased from ₹1 lakh to ₹1.25 lakh as part of Budget 2024 changes, applicable from AY 2025-26 onward.
Reinvestment-Based Exemptions for Other LTCG
For LTCG from other assets (e.g., property, unlisted shares & debt funds) taxed at 12.5% (without indexation for most assets post-Budget 2024), full or partial exemptions are available if gains are reinvested but they are subject to limits:
Section | Applicable Assets/Gains | Exemption Limit/Conditions | Key Details |
LTCG from residential property | Full exemption if reinvested in one (or up to two, if gains ≤ ₹2 crore) new residential house(s); cap on total cost of new asset(s) at ₹10 crore. | Purchase within 1 year before or 2 years after sale; construction within 3 years. Unutilized amount must be deposited in Capital Gains Account Scheme. | |
Section 54B | LTCG from agricultural land | Full exemption if reinvested in new agricultural land; no specific monetary cap beyond the gain amount. | Land must have been used for agriculture in the last 2 years; new land purchase within 2 years. |
LTCG from any long-term capital asset | Exemption up to ₹50 lakh per financial year (across the year of sale and the next). | Invest in specified bonds (e.g., NHAI, REC) within 6 months; bonds must be held for 5 years. | |
LTCG from any long-term asset (except residential house) | Proportionate exemption if reinvested in one residential house; cap on net sale consideration at ₹10 crore. | Purchase within 1 year before or 2 years after; construction within 3 years. Assessee should not own more than one house at the time of sale. |
These reinvestment exemptions can be claimed only if conditions are met; otherwise, gains are taxable.
For non-residents or specific assets (e.g., bonds/GDRs in foreign currency), similar rules apply under Sections 115AB, 115AC, etc., but with no basic exemption threshold like Section 112A.
Summary
Long term capital gains taxation under the Income Tax Act, 1961 is not that tough and with a basic exemption of Rs. 1.25 lakh for equities and reinvestment options up to Rs. 50 lakh (bonds) or Rs. 10 crore (property), one can significantly reduce their tax liability. The rules also encourage saving and investing in productive assets like homes or infrastructure. But taxes are personal: your age, residency, and asset type matter. As of 2025, the Income-Tax Bill, 2025, sets these standards, but stays updated via the official Income Tax website. Consult a chartered accountant to tailor these exemptions to your needs. By understanding and using them wisely, you can keep more of your hard-earned profits.
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Long-Term Capital Gain Exemption: FAQs
Q1. Under which section is LTCG up to 1 lakh exempt?
The LTCG exemption up to Rs. 1.25 lakh (not Rs. 1 lakh) for equity shares and equity-oriented mutual funds is covered under Clause 79 of the Income-Tax Bill, 2025.
Q2. How can I avoid long-term capital gains tax?
You can avoid LTCG tax by reinvesting gains in specified assets like residential property (Clause 82/86) or bonds (Clause 85), or by using the Rs. 1.25 lakh exemption for equity gains.
Q3. What is the 54F capital gain exemption?
Clause 86 (similar to Section 54F) exempts LTCG from any asset (except a house) if you invest the sale proceeds in a residential property, provided you don’t own more than one house.
Q4. What is the new rule of long-term capital gains tax?
The Income-Tax Bill, 2025, sets a uniform 12.5% tax rate on LTCG, removes indexation for property sales after July 23, 2024, and raises the equity exemption to Rs. 1.25 lakh.
