Long-Term Capital Gains and the Evolving Tax Landscape in India

Long-Term Capital Gains and the Evolving Tax Landscape in India

Long-term capital gains (LTCG) taxation in India has seen several changes in recent years, making it essential for investors to stay updated. Whether you invest in equity, real estate, mutual funds, or gold, LTCG can impact your returns significantly.

Understanding how these gains are taxed, the exemptions available, and the strategic ways to reduce your tax liability can lead to smarter financial planning. With the Budget 2025 introducing new revisions, the LTCG framework continues to evolve. This blog explores the basics, latest updates, and actionable strategies to help you navigate the shifting capital gains tax regime in India.

What is Long-Term Capital Gain?

Long-term capital gains is the profit earned from the sale of a capital asset held for a specified period beyond the minimum holding threshold. This applies to assets such as equity shares, mutual funds, real estate, bonds, and gold. Depending on the asset type, the duration of holding to qualify as long-term varies. These gains are taxed differently from short-term gains and may qualify for tax exemptions under specific sections of the Income Tax Act.

Types of Assets Attracting Long Term Capital Gains

1. Equity Shares          
Listed shares held for more than 12 months qualify as long-term. LTCG above ₹1 lakh is taxed at 10% without indexation.

2. Equity-Oriented Mutual Funds          
Similar to shares, these mutual funds attract LTCG tax of 10% on gains above ₹1 lakh after a one-year holding period.

3. Debt Mutual Funds          
Gains from debt funds held over 36 months are taxed as LTCG at 20% with indexation.

4. Real Estate          
Properties held for more than 24 months qualify for LTCG, taxed at 20% with indexation benefits.

5. Gold and Bonds          
Physical gold, ETFs, and non-equity bonds held for more than 36 months are considered long-term and taxed at 20% with indexation.

Holding Period Criteria for Long Term Capital Gains

Each asset class has a different threshold to be classified as long-term. Staying aware of these periods helps in timing your investments and exits more efficiently for favorable tax treatment.

How to Calculate Long Term Capital Gains

To calculate LTCG, subtract the indexed cost of acquisition (adjusted for inflation) from the sale value of the asset.

Formula:

LTCG = Sale Price - Indexed Cost of Acquisition - Expenses (if any) Indexation helps reduce tax liability by adjusting the purchase price to account for inflation. For listed equity, indexation is not allowed and a flat 10% LTCG tax applies beyond ₹1 lakh of gains. For real estate and debt funds, indexation provides a significant tax advantage. Always retain transaction records and bills to ensure accurate calculations and support tax claims.

Long Term Capital Gains Tax Rates in India (2025-26)

Exemptions and Deductions on Long Term Capital Gains

1. Section 54    
Available on sale of residential property, if reinvested in another residential property within specified time limits.

2. Section 54F    
Applicable when entire sale proceeds (not just gains) from non-residential assets are invested in residential property.

3. Section 54EC    
Allows exemption if capital gains are invested in specified bonds like REC/NHAI within 6 months.

4. Capital Loss    
Set-Off Long-term capital losses can be set off against LTCG and carried forward for 8 years.

5. Agricultural Land    
Rural agricultural land is not treated as a capital asset and hence is exempt from LTCG.

Understanding these exemptions helps significantly in planning tax-efficient exits and maximising post-tax returns.

Impact of Budget 2025 on Long Term Capital Gains Taxation

The Union Budget 2025 introduced key changes to simplify the LTCG structure and broaden the tax base. Firstly, the flat exemption limit of ₹1 lakh for equity-related LTCG remains unchanged, but reporting requirements have become stricter with mandatory demat-based disclosures. Secondly, ULIPs with high premiums are now fully taxed like equity MFs if the annual premium exceeds ₹2.5 lakh. The budget also removed indexation benefits on certain debt fund categories launched after April 1, 2024. Additionally, the holding period for real estate was proposed to be uniform at 36 months, streamlining classification but slightly increasing tax exposure. While the changes aim to bring uniformity, they place greater importance on careful financial planning. Investors now need to review asset allocations more frequently to optimise tax outcomes.

Strategies to Save Taxes on Long Term Capital Gains

1. Utilise Exemptions  
Take advantage of Sections 54, 54F, and 54EC by reinvesting your gains smartly.

2. Time Your Exits  
Hold assets just beyond the long-term threshold to benefit from lower tax rates.

3. Split Gains Across Financial Years  
If your gains are nearing the exemption cap, consider staggering the sale across two years.

4. Offset Capital Losses  
Use previous or current long-term capital losses to offset gains and reduce your tax liability.

5. Invest in Tax-Saving Bonds  
Use gains to invest in REC or NHAI bonds and claim exemption under Section 54EC.

6. Consider Gift Transfers  
Transferring assets to family members in lower tax brackets can help optimise taxation legally.

7. Stay Updated on Rule Changes  
Budget updates like those in 2025 can impact planning. Track them to avoid surprises.

Being proactive about tax planning ensures better post-tax returns and strengthens long-term wealth creation.

AN Sep 12/25