ALL ABOUT CAPITAL GAINS AND THEIR DEDUCTIONS

ALL ABOUT CAPITAL GAINS AND THEIR DEDUCTIONS

For FY 2026-27 (AY 2027-28), capital gains in India are governed by a simplified two-rate framework: listed equity and equity mutual funds attract 20% short-term tax under Section 111A or 12.5% long-term tax under Section 112A beyond Rs. 1.25 lakh, while most other long-term assets—including immovable property—are taxed at 12.5% without indexation. Exemptions under Sections 54, 54F, and 54EC can legally reduce this liability to zero, but only if holding-period tests, reinvestment timelines, and ITR reporting are handled precisely.

The Holding Period Test: When Does Short-Term Become Long-Term?

The character of a gain—short-term or long-term—determines both the tax rate and whether any exemption section is available. Get this wrong and a legitimate exemption claim unravels.

Assets with a 12-month threshold (Section 2(42A) Proviso):

• Listed equity shares recognised on a stock exchange
• Units of equity-oriented mutual funds (65% equity minimum)
• Units of UTI and zero-coupon bonds

If held for more than 12 months, these become long-term capital assets (LTCAs). Exactly 12 months means short-term.

Assets with a 24-month threshold:

• Immovable property (land, building, apartment)
• Unlisted equity shares
• Gold, jewellery, and other capital assets

Held for more than 24 months = LTCA. Held exactly 24 months = still short-term. The threshold is more than, not at least.

One-day error, one lakh rupees lost. A property purchased on 1 April 2024 becomes a long-term capital asset on 2 April 2026, not 1 April 2026. Selling on 1 April 2026 means short-term gains taxed at your slab rate. Selling on 2 April 2026 means long-term gains at 12.5%. On a Rs. 50 lakh gain, that one-day difference costs roughly Rs. 2.5 lakh extra for a taxpayer in the 30% slab.

Inherited and Gifted Assets

For inherited or gifted assets, your holding period includes the holding period of the previous owner. The cost of acquisition in such cases is the cost in the hands of the original owner (or the fair market value as at 1 February 2001, whichever is higher, for assets acquired before that date).

Capital Gains Tax Rates for FY 2026-27 (AY 2027-28)

Union Budget 2026 has carried forward the structure established by the Finance (No. 2) Act 2024. The rates below apply unless a specific notification amends them.

Listed Equity and Equity-Oriented Mutual Funds

The Rs. 1.25 lakh annual exemption under Section 112A applies to each taxpayer, not per scrip. Gains up to Rs. 1.25 lakh in the financial year are entirely tax-free. Note that surcharge on Section 112A gains is capped at 15%, making the effective maximum rate 14.95% (including 4% health and education cess) even for individuals with income above Rs. 5 crore.

Immovable Property, Unlisted Shares, Gold and Other Assets

For property acquired before 23 July 2024, always run both calculations before choosing. See the worked example below for guidance on when each option wins.

Debt Mutual Funds: The Slab-Rate Change You Cannot Ignore

From 1 April 2023 (Finance Act 2023), any debt mutual fund unit purchased on or after that date is taxed at slab rates regardless of the holding period. There is no long-term benefit. Units purchased before 1 April 2023 and sold after 23 July 2024 attract LTCG at 12.5% without indexation if held beyond 24 months. The era of 20% indexed returns after three years is over for all practical purposes.

If you hold legacy pre-2023 units showing a notional gain, do not assume the old 20% indexed rate will apply when you sell them in FY 2026-27. Run the numbers under the current 12.5% no-indexation framework.

Section 54: Rolling Over Gains from One Residential House into Another

Section 54 of the Income-tax Act 1961 is the most widely used capital gains exemption for homeowners. Its mechanics are precise, and procedural slips are a primary audit trigger.

What Qualifies

• Who can claim: Individual or HUF only (not companies, firms, or LLPs)
• Asset transferred: A long-term residential house (not a plot, not commercial property)
• Investment required: One or two residential houses situated in India (overseas property does not qualify)

The option to invest in two houses is available only once in a lifetime and only if the LTCG from the sale does not exceed Rs. 2 crore.

Reinvestment Timelines

Date of transfer for a registered property sale is the registration date, not the agreement date.

The Rs. 10 Crore Cap

Finance Act 2023 introduced a cap: the Section 54 exemption applies only to LTCG up to Rs. 10 crore. Any gain above Rs. 10 crore remains taxable even if fully reinvested. This cap applies equally to Section 54F.

The Capital Gains Account Scheme (CGAS) Safety Net

If you have not purchased or completed construction of the new house by the time you file your ITR under Section 139(1), you must deposit the unutilised reinvestment amount in a Capital Gains Account Scheme (CGAS) account at a designated bank (SBI, Bank of India, Punjab National Bank, Canara Bank, and 24 others are authorised). Deposit must happen before your ITR filing deadline — 31 July 2027 for non-audit cases in AY 2027-28.

Funds in CGAS must be withdrawn and applied within the original time limits (2 years for purchase, 3 years for construction). Any amount not utilised by the deadline is taxed as LTCG in the assessment year following the expiry. Do not let the amount sit in CGAS indefinitely.

Section 54F: When You Are Selling Any Other Long-Term Asset

Section 54F is available when you sell any long-term capital asset other than a residential house — land, commercial property, gold, unlisted shares, jewellery — and reinvest into a residential house.

Key Conditions

1. The seller must be an individual or HUF.
2. You must not own more than one residential house on the date of transfer (other than the new house being bought).
3. You must not purchase any other residential house within one year after the transfer (other than the target purchase).
4. You must not construct any other residential house within three years after the transfer.
5. The new house must not be sold within three years of purchase/completion.

If you already own two houses and sell a plot of land hoping to claim Section 54F — that exemption is barred at the threshold eligibility test.

The Full Consideration Requirement and Proportional Exemption

Unlike Section 54 (which asks you to invest the LTCG amount), Section 54F requires investing the entire net sale consideration. If you invest only a part:

> Exempt LTCG = LTCG × (Amount Invested ÷ Net Consideration)

Illustration: You sell gold worth Rs. 40,00,000, original cost Rs. 10,00,000. LTCG = Rs. 30,00,000. You invest Rs. 30,00,000 (only the gain) in a new flat.

• Exempt LTCG = Rs. 30,00,000 × (30,00,000 ÷ 40,00,000) = Rs. 22,50,000
• Taxable LTCG = Rs. 7,50,000

To claim full exemption, you needed to invest the entire Rs. 40,00,000 consideration, not just the Rs. 30,00,000 gain. This is the single most common error under Section 54F.

Section 54EC: Locking Gains into Notified Bonds

Section 54EC allows you to defer or eliminate LTCG tax by investing gains in specified bonds — without needing to buy a residential property.

Which Assets and Which Bonds

Eligible asset transferred: Land, building, or both (Finance Act 2018 restricted the section — gains from gold, unlisted shares, or equity cannot use this route).

Eligible bonds (as currently notified):

• NHAI (National Highways Authority of India)
• REC Ltd (Rural Electrification Corporation)
• PFC (Power Finance Corporation)
• IRFC (Indian Railway Finance Corporation)

Interest earned on these bonds is fully taxable as income from other sources. The tax saving is only on capital gains, not income from the bonds themselves.

The Six-Month Clock and the Rs. 50 Lakh Cap

Investment must be made within six months from the date of transfer. The maximum eligible investment is Rs. 50 lakh per financial year.

If your transfer falls in October through November, the six-month window straddles two financial years — allowing up to Rs. 50 lakh in FY 2026-27 and up to Rs. 50 lakh in FY 2027-28, effectively shielding Rs. 1 crore. For a transfer in April, the entire six-month window falls in the same FY and the cap is Rs. 50 lakh.

Lock-in period is five years. If bonds are sold, converted, or used as security before five years, the exempted LTCG is brought back to tax in the year of such event.

Set-Off and Carry-Forward: Using Your Losses Intelligently

Capital losses cannot be set off against any other income — they must be absorbed within capital gains only. The rules on which losses can absorb which gains matter significantly for investors running active portfolios.

The asymmetry is important: A short-term capital loss is more flexible — it can mop up long-term gains. A long-term capital loss cannot absorb short-term gains. If you have both unrealised STCL and unrealised LTCL in your portfolio, harvest the LTCL before year-end specifically to cover LTCG from property or fund redemptions.

Carry-forward for up to 8 assessment years. Unabsorbed capital losses can be carried forward to AY 2027-28 through AY 2034-35. However, carry-forward is only allowed if the return for the loss year is filed within the due date under Section 139(1). A belated return filed under Section 139(4) cannot carry forward capital losses. There is no exception to this rule.

Worked Example: Property Sale with Section 54 and Section 54EC Combined

Facts: Priya (individual, age 42) sells her apartment in December 2026.

• Purchase date: April 2016 (FY 2016-17), cost: Rs. 45,00,000
• Sale price: Rs. 1,50,00,000 (Rs. 1.5 crore)
• Holding period: over 10 years → Long-Term ✓
• Property acquired before 23 July 2024 → grandfathering option available

Step 1: Choose the Better Rate

Option A — 12.5% without indexation

• LTCG = Rs. 1,50,00,000 − Rs. 45,00,000 = Rs. 1,05,00,000
• Tax = Rs. 1,05,00,000 × 12.5% = Rs. 13,12,500 (before surcharge and cess)

Option B — 20% with indexation

• CII FY 2016-17 (purchase year): 264
• CII FY 2026-27: as notified by CBDT (assume 395 for illustration)
• Indexed cost = Rs. 45,00,000 × (395 ÷ 264) = Rs. 67,33,523
• LTCG = Rs. 1,50,00,000 − Rs. 67,33,523 = Rs. 82,66,477
• Tax = Rs. 82,66,477 × 20% = Rs. 16,53,295

→ Option A saves Rs. 3,40,795. At this level of appreciation (3.3× the purchase price), the flat 12.5% rate outperforms indexed gains. Option B starts winning only when appreciation is modest and the CII multiple is high — plug your actual numbers before filing.

Step 2: Apply Section 54 and Section 54EC Together

Priya buys a new flat in Pune for Rs. 80,00,000 in September 2028 (within two years). She also invests Rs. 25,00,000 in NHAI bonds in May 2027 (within six months of transfer).

Step 3: Protect the Claim via CGAS

Priya's ITR due date is 31 July 2027. She has not yet bought the flat (she'll buy it by September 2028). She must deposit Rs. 80,00,000 in a CGAS account at a designated bank before 31 July 2027. She then withdraws and pays the developer before September 2028. The CGAS deposit and proposed utilisation are declared in Schedule CG of her ITR-2.

Common Mistakes That Generate Notices

1. Miscounting the holding period by one day. Selling a property exactly on the 24-month anniversary — not the day after — means short-term gains. Always verify the registration dates and count precisely.

2. Choosing indexed gains without running the Option A vs. Option B comparison. Many taxpayers assume indexation is always better. For properties that have appreciated 2.5× or more, the 12.5% flat rate almost always wins.

3. Investing only the LTCG under Section 54F instead of the entire net consideration. This is the most expensive misreading of the section. The section requires the full sale proceeds to be reinvested — not just the gain.

4. Letting CGAS deposits lapse. Priya's deposit must be withdrawn and applied within two years. Taxpayers who deposit funds in CGAS and forget about the deadline face the entire gain becoming taxable — with interest under Section 234A/234B stacked on top.

5. Filing a belated return and expecting to carry forward losses. A belated return filed on 10 August 2027 (after the 31 July deadline) means capital losses from AY 2027-28 cannot be carried forward. File on time or lose eight years of offset potential.

6. Assuming debt mutual fund units bought after April 2023 have LTCG treatment. They do not. Any holding period, any redemption — slab rate applies. Switching to arbitrage funds or equity-oriented balanced advantage funds may restore the 12.5% LTCG benefit after a 12-month hold, but the portfolio character changes.

7. Not reconciling AIS/TIS data with actual records. The Annual Information Statement (AIS) on the income-tax e-filing portal (incometax.gov.in) aggregates data from registrars (Section 194-IA TDS), brokers (SFT filings), and mutual fund RTAs. Bonus share allotments, stock splits, and corporate actions are frequently missing or mis-stated. Errors in AIS that flow into the pre-filled ITR, left uncorrected, either over-state gains (higher tax) or under-state them (scrutiny notice). Use the Feedback button in AIS to flag discrepancies before you file.

8. Ignoring advance tax on large capital gains. If a capital gain arises in Q3 (October–December 2026), 100% of the resultant advance tax is due by 15 March 2027. Shortfall attracts interest under Section 234C at 1% per month. On a Rs. 50 lakh gain, the tax could be Rs. 6.25 lakh; a missed advance tax payment accrues Rs. 6,250 per month in interest.

Reporting Capital Gains in Your ITR for AY 2027-28

Which ITR Form Applies

• ITR-2: Individuals and HUFs with salary, house property, or capital gains income but no business or professional income.
• ITR-3: Individuals and HUFs with business or professional income in addition to capital gains.
• ITR-5: Partnership firms and LLPs.
• ITR-6: Companies.

If you are a salaried individual who sold a flat or redeemed mutual funds in FY 2026-27, you need ITR-2 — the simple ITR-1 does not have a capital gains schedule.

Schedule CG: What Goes Where

Schedule CG is divided into:

• Part A (Short-Term): Section 111A gains (listed equity STCG at 20%), Section 115AD(1)(b)(i) for FIIs, and residual STCG taxable at slab.
• Part B (Long-Term): Section 112A gains (listed equity LTCG), Section 112 gains (property, gold, unlisted shares at 12.5%).

For listed securities, the utility/portal expects scrip-wise details — ISIN, acquisition date, sale date, purchase cost, sale price, and STT paid. For property, each transaction requires the buyer's PAN/Aadhaar, registration number, and date.

Exemptions under Sections 54, 54F, and 54EC are claimed in Part E of Schedule CG. CGAS deposits are separately disclosed in Part F.

Reconciling AIS/TIS with Your Records

Open your AIS on the income-tax portal and download the full statement. Compare:

• MF redemptions: Match with your Consolidated Account Statement (CAS) from CAMS or KFintech.
• Property sales: Match with the registered sale deed and Form 26QB (TDS certificate from buyer).
• Equity transactions: Match with broker contract notes, accounting for corporate actions (splits, bonuses, mergers) that change cost basis.

Where AIS data is incorrect, submit feedback directly in the portal (mark as "Information is incorrect" or "Amount is incorrect"). Document your own calculation and reflect it in the return. A brief note in Schedule CG's remarks field about the variance protects you in any future scrutiny.

Key Takeaways

• One day decides the rate. An asset sold on its 24th month anniversary (listed shares: 12th month) is still short-term. Short-term for property can mean 30% slab vs. 12.5% LTCG — verify registration and acquisition dates exactly.
• Always compare indexation vs. flat rate for pre-July 2024 property. The 12.5% no-indexation option typically wins at appreciation ratios above 2.5×; the 20% indexed route can win for modestly appreciated properties. Run both calculations before finalising your return.
• Section 54 covers only residential house gains; Section 54F covers everything else. Match the right section to the asset you sold before claiming — they are not interchangeable.
• Section 54F demands reinvestment of the entire net consideration, not just the capital gain. Investing less triggers proportional exemption and a partially taxable gain.
• Deposit unutilised reinvestment proceeds in CGAS before your ITR due date (31 July 2027 for non-audit). Missing this window does not lose the eventual exemption but exposes you to the scrutiny of an incorrect return.
• Debt mutual fund units bought from 1 April 2023 onward are always slab-rate income. The three-year indexation benefit is gone. Re-evaluate whether direct bonds, arbitrage funds, or other instruments better serve your post-tax yield target.
• File your return by the Section 139(1) due date if you have capital losses to carry forward. A belated return under Section 139(4) forfeits eight years of potential offset against future capital gains — there is no remedy once the deadline passes.