Tax on Long-Term Capital Gains: Rates and Special Cases (Income Tax Act 2025)

Under the Income Tax Act 2025, long-term capital gains are taxed at 12.5% (section 197(1)(b)). For listed equity shares and units of equity oriented funds or business trusts on which securities transaction tax (STT) was paid, the first Rs 1,25,000 of long-term gain in the tax year is left out and only the excess is taxed at 12.5% (section 198(2)). Resident individuals and HUFs who sold land or a building acquired before 23 July 2024 get a protection that can cap the tax at the older 20%-with-indexation figure (section 197(3)).

This guide explains which section applies to which asset, how the basic exemption limit interacts with the gain, and walks through four worked examples. All figures come from the Act as amended by the Finance Act 2026 (tax year 2026-27). Cess and surcharge are not covered here and are not included in any example.

When is a capital gain "long-term" under the Income Tax Act 2025?

Section 2(101) defines a short-term capital asset as one held for not more than 24 months before the transfer. Section 2(67) says a long-term capital asset is any capital asset that is not short-term. So the default test is more than 24 months.

Section 2(101)(b) shortens the period to 12 months for a security listed on a recognised stock exchange in India, a unit of the Unit Trust of India, a unit of an equity-oriented fund and a zero-coupon bond. A listed share held for 13 months is therefore long-term; a flat held for 13 months is not.

Asset	Long-term if held for more than	Source
Listed securities in India, UTI units, equity-oriented fund units, zero-coupon bonds	12 months	Section 2(101)(b)
Everything else (land, building, unlisted shares and so on)	24 months	Section 2(101)(a)

Which section taxes long-term capital gains: 197 or 198?

Section 197 is the general rule. Section 198 is the special rule for equity shares, equity oriented fund units and business trust units, and it overrides section 197 when its conditions are met (section 198(1): "irrespective of anything contained in section 197"). The conditions in section 198(1) are:

• the long-term asset is an equity share in a company, a unit of an equity oriented fund, or a unit of a business trust; and
• STT has been paid. For an equity share, STT must have been paid on both acquisition and transfer. For a fund unit or business trust unit, STT on transfer is enough.

What is the long-term capital gains tax rate under section 197?

Section 197(1) splits your tax into two parts: (a) tax on the rest of your total income, as if the long-term gain were not there, and (b) tax on the long-term gain at 12.5%. The gain is not stacked on top of your slab income, so a large gain does not push your other income into a higher slab.

The gain itself is computed under section 72(1): sale value, less expenses wholly and exclusively connected with the transfer, less cost of acquisition and cost of any improvement. Section 72(3) does not allow the interest you claimed as a deduction, or STT paid, to be deducted.

What is the long-term capital gains tax on listed shares and equity funds?

Under section 198(2), when the section 198(1) conditions are met, tax is the total of:

1. 12.5% on long-term gains exceeding Rs 1,25,000; and
2. tax on the rest of the total income (total income reduced by these gains).

The Rs 1,25,000 is a single limit for all such gains of the tax year, not one limit per share.

What counts as an "equity oriented fund"?

Section 198(8) defines it as a mutual fund scheme specified in Schedule VII (Table Sl. No. 20 or 21), or a unit linked insurance scheme to which the exemption in Schedule II (Table Sl. No. 2) does not apply, and that meets an equity test:

• a fund that invests in another exchange-traded fund: at least 90% of its proceeds in that fund, which in turn must hold at least 90% in listed domestic equity shares; or
• any other fund: at least 65% of its proceeds in equity shares of domestic companies listed on a recognised stock exchange.

The percentage is measured on the annual average of the monthly averages of opening and closing figures. For a unit linked insurance scheme, the 90% or 65% minimum must hold throughout the policy term (section 198(8)(II)).

Is there a relief for land and buildings bought before 23 July 2024?

Yes, for resident individuals and HUFs only. Section 197(3) applies when the transferred long-term asset is land or building (or both) acquired before 23 July 2024. The tax computed at 12.5% is compared with an alternative tax: 20% on the gain computed with indexed cost of acquisition and indexed cost of improvement. If the 12.5% figure (A) is higher than the indexed alternative (B), the excess (E = A minus B) is ignored. In practice the tax you pay is the lower of the two.

Indexed cost is defined in section 72(8): cost multiplied by the Cost Inflation Index of the year of transfer, divided by the index of the first year you held the asset (or the year beginning 1 April 2001, whichever is later). The index values are notified by the Central Government, so check the current notification before computing.

What if my other income is below the basic exemption limit?

Section 197(2) and section 198(3) help a resident individual or HUF whose total income, excluding the long-term gain, is below the maximum amount not chargeable to tax. The gain is reduced by the shortfall, and tax is charged on the balance at the relevant rate. Under the default rates in section 202(1) the first Rs 4,00,000 is nil; the other regime has its own limit, so use the limit that applies to you.

Can I claim deductions against long-term capital gains?

No. Section 197(5) and section 198(6) reduce gross total income by the long-term gain before Chapter VIII deductions are allowed, so those deductions cannot be set against the gain. Section 198(7) similarly says the rebate under section 156 is computed on the tax on income other than the gain.

Worked examples (tax year 2026-27)

Example 1: listed shares, section 198

Assumptions: resident individual, equity shares bought and sold on a recognised exchange with STT paid on both, held for more than 12 months, total long-term gain Rs 3,00,000, no other long-term gains.

Step	Amount (Rs)
Long-term gain	3,00,000
Less: limit in section 198(2)(a)	1,25,000
Gain taxed at 12.5%	1,75,000
Tax (1,75,000 x 12.5%)	21,875

Tax on the rest of the income is added separately. Cess and any rebate are not included.

Example 2: unlisted shares and shortfall, section 197(2)

Assumptions: resident individual, default rates under section 202(1), income other than the gain Rs 3,00,000, long-term gain on unlisted shares held for 3 years Rs 2,00,000. Section 198 does not apply because the shares are unlisted.

Step	Amount (Rs)
Maximum amount not chargeable (section 202(1))	4,00,000
Other income	3,00,000
Shortfall (4,00,000 less 3,00,000)	1,00,000
Gain after reducing by shortfall (2,00,000 less 1,00,000)	1,00,000
Tax at 12.5%	12,500
Tax on other income (3,00,000, within the nil band)	Nil

Rebate under section 156 and cess are not considered here.

Example 3: land bought before 23 July 2024, section 197(3)

Assumptions: resident individual sells a plot bought in 2007 for Rs 20,00,000 (no improvements) for Rs 80,00,000 in tax year 2026-27, with no transfer expenses. Assume, purely for illustration, that the Cost Inflation Index of the transfer year divided by that of the purchase year is 3.0. Use the notified index values for your own case.

Step	Amount (Rs)
Gain without indexation (80,00,000 less 20,00,000)	60,00,000
A: 12.5% of 60,00,000	7,50,000
Indexed cost (20,00,000 x 3.0)	60,00,000
Indexed gain (80,00,000 less 60,00,000)	20,00,000
B: 20% of 20,00,000	4,00,000
E = A minus B (ignored)	3,50,000
Tax payable (A minus E)	4,00,000

If the index ratio had been low enough that B came out higher than A, there would be no excess to ignore and tax would stay at A.

Example 4: land bought after 23 July 2024

Assumptions: resident individual buys a plot for Rs 30,00,000 on 1 January 2025 and sells it on 15 March 2027 for Rs 45,00,000 (held about 26 months, so long-term). Section 197(3) does not apply because the plot was not acquired before 23 July 2024.

Step	Amount (Rs)
Long-term gain (45,00,000 less 30,00,000)	15,00,000
Tax at 12.5%	1,87,500

A sale on 15 March 2027 falls in tax year 2026-27. Cess is excluded.

Real-life situations

Ravi buys shares through an off-market transfer. His broker did not charge STT when the shares were transferred to his account, and he sells them on the exchange after 18 months. Section 198(1)(c)(i) needs STT on acquisition as well as on transfer, so unless a notification under section 198(5) covers that kind of acquisition, section 197 applies and the full gain is taxed at 12.5% with no Rs 1,25,000 limit.

Meena sells a flat she bought in 2015. She is a resident individual and the flat was acquired before 23 July 2024, so she computes the tax under section 197(1)(b) and also the indexed alternative under section 197(3). She pays the lower figure.

Arjun, a non-resident, sells unlisted shares. Section 197(4) says his gain is computed without the foreign-currency conversion method of section 72(6). The special 197(3) land relief is for residents, so it does not help him.

How can long-term capital gains be exempted by reinvesting?

Three sections of the Act say that a long-term gain is not charged under section 67 if you reinvest in the prescribed way. The time limits and caps below are as written in the Act.

Section	Who and what is sold	What you must buy	Time limit	Key limits
82	Individual or HUF; a residential house (building or land appurtenant to it) whose income is house property income	One residential house in India (two if the gain is up to Rs 2 crore, once in a lifetime option under 82(5)-(6))	1 year before or 2 years after transfer to purchase; 3 years after to construct	Only the capital gain needs to be invested. Cost above Rs 10 crore is ignored (82(7))
86	Individual or HUF; a long-term asset that is not a residential house (for example shares or land)	One residential house in India	Same: 1 year before, 2 years after, or construction within 3 years	The net consideration (sale price less transfer expenses) must be invested, not just the gain. Amounts above Rs 10 crore are ignored (86(8)-(9))
85	Any assessee; long-term gain on land or building	Long-term specified asset: NHAI or REC bonds redeemable after 5 years, issued on or after 1 April 2018, or other notified bonds	Within 6 months of the transfer	Investment cap Rs 50 lakh (85(2)). Bonds transferred or loaned against within 5 years make the gain taxable (85(3)-(4))

If the money is not spent before you file the return, sections 82(2) and 86(2) require the unutilised amount to be deposited in a specified bank or institution under a notified scheme. The deposit must be made by the return due date under section 263 and proof of deposit filed with the return. If it is still unused three years after the transfer, the unutilised part becomes taxable in that year (sections 82(4) and 86(4)).

Section 86 does not apply if you own more than one other residential house on the transfer date, or buy or build another house producing house property income within the stated windows (86(5)-(6)). Selling the new house within three years gives back the exempted gain as long-term gain (86(7)). Under section 85(5), an investment counted here cannot also be claimed as a deduction under section 123.

Example (tax year 2026-27). Meena sells a plot held for 5 years for a net consideration of Rs 50,00,000, with a long-term gain of Rs 20,00,000, and buys a house for Rs 30,00,000 within 2 years. Under section 86(1)(i) the exempted part is gain x cost of new asset / net consideration = 20,00,000 x 30,00,000 / 50,00,000 = Rs 12,00,000. The remaining Rs 8,00,000 is charged as long-term gain. The remainder is taxed under section 197 at 12.5%, which is Rs 1,00,000.

Can a long-term capital loss be set off or carried forward?

Yes, with limits. Under section 108(2)(b) a long-term capital loss is set off only against income from other long-term capital assets in the same year. Section 109(2) bars setting a capital gains loss against any other head, such as salary. If the loss is not fully absorbed, section 111(1)(a)(ii) carries it forward to be set off only against long-term capital gains of later years, for up to eight tax years after the year the loss arose (section 111(2)).

Common mistakes

• Applying the Rs 1,25,000 limit to unlisted shares or property. It exists only in section 198.
• Assuming section 198 applies without checking STT on acquisition for equity shares.
• Treating the limit as per share. It covers all section 198 gains in the tax year.
• Using 12 months as the holding period for a flat or unlisted shares. The 12-month period is only for listed securities, UTI units, equity-oriented fund units and zero-coupon bonds.
• Forgetting that the land relief in section 197(3) is limited to resident individuals and HUFs and to assets acquired before 23 July 2024.
• Claiming Chapter VIII deductions against the gain.
• Reinvesting only the gain in a house when selling a non-house asset. Section 86 looks at the net consideration.
• Trying to set a long-term capital loss against salary or short-term gains. It goes only against long-term gains.

Quick reference

Item	Rule	Section
General LTCG rate	12.5%	197(1)(b)
Listed equity with STT: gain not taxed	First Rs 1,25,000 in the tax year	198(2)(a)
Pre-23 July 2024 land or building (resident individual or HUF)	Excess over 20% indexed tax ignored	197(3)
Shortfall below basic exemption (resident individual or HUF)	Gain reduced by shortfall	197(2), 198(3)
IFSC exchange, foreign currency consideration	STT condition does not apply	198(4)
Equity oriented fund test	65% or 90% equity	198(8)

Where this is in the Act

• Section 2(67), 2(68), 2(101): long-term and short-term definitions
• Section 72: computation of capital gains, indexed cost
• Section 197: tax on long-term capital gains
• Section 198: tax on long-term capital gains in certain cases
• Sections 82, 85, 86: gains not charged on reinvestment in a house or specified bonds
• Sections 108, 109, 111: set off and carry forward of capital losses
• Section 156: rebate for resident individuals
• Section 202(1): default tax rates for individuals and HUFs

For the short-term side, see our guide to capital gains under the 2025 Act.

For a CA firm, the hard part is usually collecting purchase dates, contract notes and STT proof from each client before the return is filed. Finexo's practice management software lets you track those document requests and filing deadlines across your client list. It does not compute capital gains for you.

This article is general information based on the Act and not tax advice. Check the notified Cost Inflation Index and any section 198(5) notification for your own case.