You sold a flat for ₹1 crore that you bought for ₹40 lakh, so the gain is ₹60 lakh. That is how most people think about it, and it is often wrong in both directions. The tax law asks what you sold, how long you held it, which costs the law recognises and which rate and relief apply. This article walks through the structured computation the law expects, the rates after the July 2024 changes, how the Income-tax Act, 2025 fits in, and the errors that commonly appear in returns.
Capital gains equal the sale consideration minus transfer expenses and the cost of acquisition and improvement recognised by law. The holding period decides short-term or long-term, and so the rate. Since 23 July 2024, long-term gains are generally taxed at 12.5% without indexation, but resident individuals and HUFs can opt for 20% with indexation on land or buildings acquired before that date.
Why accounting profit and taxable capital gain differ
A sale-minus-purchase figure ignores the rules that actually drive the tax. Capital gains is a separate head of income with its own computation: the consideration taken for tax purposes may differ from the price in the agreement, the cost may include or exclude items, and the rate depends on the asset class and the holding period.
The difference can work for you or against you. Missing brokerage, stamp duty or improvement cost means you overpay. Using a sale price below the stamp duty value, or treating a short-term gain as long-term, means you under-report and invite a notice later when the department compares your return with registration and depository data.
Short-term or long-term: getting the holding period right
Classification is the first decision and the most common source of error. After the Finance (No. 2) Act, 2024 there are broadly two holding periods for transfers on or after 23 July 2024.
| Asset | Long-term if held for more than | Comment |
|---|---|---|
| Listed equity shares, equity-oriented mutual fund units, units of business trusts | 12 months | Long-term gains taxed under Section 112A (1961 Act) |
| Listed bonds and debentures | 12 months | Taxed under Section 112 when long-term |
| Unlisted shares, land, buildings, gold, jewellery and other assets | 24 months | Taxed under Section 112 when long-term |
| Specified mutual funds (mainly debt funds) acquired on or after 1 April 2023; market-linked debentures; unlisted bonds and debentures transferred on or after 23 July 2024 | Not applicable | Always treated as short-term and taxed at slab rates (Section 50AA) |
The holding period is counted from the date of acquisition to the date of transfer. For inherited or gifted assets, the period for which the previous owner held the asset is included, and the previous owner's cost is generally taken as your cost. For a property bought under construction, the date of allotment or agreement can matter, and courts have taken different views on facts, so documents should be checked carefully.
Debt mutual fund units bought on or after 1 April 2023 do not become long-term however long you hold them. Treating them as long-term in the return is a frequent mismatch that shows up in processing.
Capital gains tax rates after the July 2024 changes
The Finance (No. 2) Act, 2024 rationalised rates for transfers on or after 23 July 2024. Budget 2026 did not change these rates. The rates below are before surcharge and 4% health and education cess.
| Type of gain | Rate | Key condition |
|---|---|---|
| Short-term gain on listed equity, equity fund units (STT paid) | 20% | Section 111A of the 1961 Act |
| Long-term gain on listed equity, equity fund units (STT paid) | 12.5% | First ₹1.25 lakh of such gains in a year is exempt (Section 112A) |
| Other long-term gains (property, unlisted shares, gold) | 12.5% | No indexation, subject to the relief below |
| Other short-term gains | Slab rate | Added to total income |
The indexation relief for older land and buildings
Indexation was withdrawn for transfers on or after 23 July 2024. However, for land or a building acquired before that date, a resident individual or HUF can compute tax both ways: 12.5% without indexation and 20% with indexation, and pay the lower amount. Non-residents, companies, firms and LLPs do not get this comparison. Note that the relief is on the tax amount; a loss created only by indexation is not recognised.
Where the Income-tax Act, 2025 fits
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, and uses the concept of a "tax year". Transfers in tax year 2026-27 are governed by the new Act; the rate on long-term gains under the provision corresponding to Section 112 is reported to be in Section 197 of the new Act, and the rates and the indexation relief have been carried forward. Gains of FY 2025-26, being reported in returns now, remain under the 1961 Act.
Worked example: when the indexation comparison changes the answer
The following two cases show why you must run both computations for older property rather than assume one method is better. Both assume a resident individual selling a residential flat in FY 2025-26 (Cost Inflation Index 376) for ₹1,00,00,000 with brokerage of ₹1,00,000.
Case A: bought in FY 2015-16 for ₹40,00,000 (CII 254). Without indexation: gain ₹59,00,000, tax at 12.5% = ₹7,37,500. With indexation: indexed cost ₹40,00,000 × 376/254 = ₹59,21,260; gain ₹39,78,740; tax at 20% = ₹7,95,748. The 12.5% option is lower, so ₹7,37,500 is payable.
Case B: bought in FY 2005-06 for ₹20,00,000 (CII 117). Without indexation: gain ₹79,00,000, tax at 12.5% = ₹9,87,500. With indexation: indexed cost ₹20,00,000 × 376/117 = ₹64,27,350; gain ₹34,72,650; tax at 20% = ₹6,94,530. Here the indexation option saves ₹2,92,970.
Figures are before surcharge and cess, and ignore any exemption under Sections 54 or 54EC.
The broad pattern: the longer the property has been held and the slower its value has grown relative to inflation, the more likely the 20%-with-indexation route wins. For a property sold in tax year 2026-27, use the index notified for that year.
Common capital gains errors in income tax returns
- Wrong classification. Counting 12 months for unlisted shares or property, or treating post-April 2023 debt fund units as long-term.
- Ignoring stamp duty value. Reporting the agreement price for land or building when the stamp duty value is higher by more than 10%.
- Missing cost items. Omitting stamp duty, registration, brokerage paid on purchase, or documented improvement cost.
- Incorrect cost for old or inherited assets. Not using the previous owner's cost, or not using fair market value as on 1 April 2001 for assets acquired earlier.
- Grandfathering on shares missed. For listed equity acquired before 1 February 2018, the cost can be stepped up using the 31 January 2018 fair market value, subject to the sale price.
- Exemption claimed without meeting conditions. Investment under Sections 54, 54F or 54EC made late, in the wrong asset, or above the caps, or unutilised amounts not deposited in the Capital Gains Account Scheme before the return due date.
- Loss set-off errors. Setting off a long-term capital loss against short-term gains, or losing carry-forward because the return was filed late.
- Not reconciling with AIS. Sale of securities and property is reported to the department; differences between your schedule and the Annual Information Statement often trigger questions.
Exemptions and set-off: where the final number is decided
A correct gain can still be taxed wrongly if reliefs are missed or misapplied. The main ones for individuals are:
- Section 54 (residential house to residential house) and Section 54F (other long-term asset to residential house), with time limits for purchase or construction and an overall cap of ₹10 crore on the exemption.
- Section 54EC: investment of long-term gains from land or building in specified bonds within six months, up to ₹50 lakh in a financial year, with a five-year lock-in.
- Set-off: short-term capital loss can be set off against short-term or long-term gains; long-term capital loss only against long-term gains. Unabsorbed losses can be carried forward for eight years if the return is filed on time.
These provisions continue under the corresponding provisions of the Income-tax Act, 2025. Because exemption conditions are strict and tested at assessment, keep the purchase deed, construction bills, bond allotment letter and Capital Gains Account Scheme passbook together with the sale papers.
A step-by-step capital gains computation checklist
- Identify the asset and the law. Confirm the asset type, the date of transfer, and whether the 1961 Act or the Income-tax Act, 2025 applies.
- Fix the holding period. Use acquisition and transfer dates from documents; include the previous owner's period for inherited or gifted assets.
- Determine consideration. Compare the sale price with stamp duty value for land and buildings.
- Build the cost. Purchase price, acquisition costs, improvement cost with evidence, grandfathered or 2001 values where applicable.
- Deduct transfer expenses. Brokerage, legal and other costs linked to the sale, supported by invoices.
- Apply the right rate. For older land or buildings held by a resident individual or HUF, compute both the 12.5% and 20%-with-indexation tax.
- Apply exemptions and set-off. Check conditions, deadlines and caps.
- Reconcile and report. Match with AIS, broker capital gains statements and registration data, and pay advance tax on the gain to avoid interest.
If you have funded the purchase with family money or loans, keep the source trail as well. Large property transactions often lead to questions on the source of funds, which we cover in our note on capital introduction and source of funds.
Frequently asked questions
Is indexation still available on property sold in 2026?
Indexation is not available in computing the gain for transfers on or after 23 July 2024. However, a resident individual or HUF selling land or a building acquired before that date can compare tax at 12.5% without indexation with tax at 20% with indexation and pay the lower amount.
What is the holding period for long-term capital gains on shares?
Listed equity shares and equity-oriented mutual fund units become long-term after 12 months. Unlisted shares need to be held for more than 24 months.
Can I deduct brokerage from capital gains?
Yes. Brokerage and other expenses incurred wholly and exclusively in connection with the transfer are deductible from the sale consideration. Securities transaction tax is not deductible.
How is capital gain calculated on an inherited property?
The cost to the previous owner is taken as your cost, and the previous owner's holding period is added to yours. If the asset was acquired by the previous owner before 1 April 2001, its fair market value on that date can be used as cost.
Has the Income-tax Act, 2025 changed capital gains rates?
The new Act applies from 1 April 2026 and largely carries forward the existing rates, holding periods and the indexation relief for older land and buildings, under renumbered provisions. Gains of FY 2025-26 continue to be computed under the 1961 Act.
What happens if my capital gains do not match AIS?
The return may be processed with an adjustment or you may receive a communication asking you to explain the difference. Keep broker statements, deeds and cost evidence ready, and correct genuine errors through a revised or updated return within the time allowed.
Conclusion
Capital gains tax is not a subtraction; it is a sequence of legal tests. Get the classification right, build the cost the law recognises, run both computations where the indexation relief is available, and test every exemption against its conditions. A sale that looks straightforward can still produce excess tax or a future notice if any step is skipped. If you are planning a significant sale, it is worth working out the computation before the transaction, while there is still time to plan exemptions and advance tax.
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H K Davra & Co. advises on income tax assessments, notices, appeals and documentation.
Talk to usThis article is for general information only and does not constitute professional advice or solicitation. Examples are illustrative and computed before surcharge and cess. Provisions are summarised as of October 2026. Please refer to the relevant provisions and seek advice on your specific facts.