The profit earned from selling an asset at a higher price than its purchase price. In India, capital gains are categorised as short-term or long-term based on holding period.
A capital gain is the positive difference between the selling price and purchase price of an asset. If you bought shares of TCS at Rs 3,200 and sold at Rs 4,000, your capital gain is Rs 800 per share. Capital gains are one of the primary ways investors build wealth through equity investing.
In India, capital gains taxation depends on the holding period and asset class. For listed equity shares and equity mutual funds: Short-Term Capital Gains (STCG, held under 12 months) are taxed at 20%, and Long-Term Capital Gains (LTCG, held 12 months or more) exceeding Rs 1.25 lakh per financial year are taxed at 12.5%. These rates were revised in the Union Budget 2024 — previously STCG was 15% and LTCG was 10% above Rs 1 lakh.
The concept of "grandfathering" is important for Indian investors. For shares acquired before 31 January 2018, the cost of acquisition for LTCG calculation is the higher of: (a) actual purchase price, or (b) the fair market value as on 31 January 2018 (the highest traded price on that date). This grandfathering provision was introduced when LTCG tax on equities was reintroduced in Budget 2018.
Capital gains are also relevant in non-equity assets. For debt mutual funds (purchased after 1 April 2023), gains are always taxed at slab rates regardless of holding period — SEBI's reclassification removed the indexation benefit that made debt funds tax-efficient. For real estate, LTCG (held over 2 years) is now taxed at 12.5% without indexation, or at 20% with indexation for properties acquired before 23 July 2024.
Tax-loss harvesting is a common strategy to manage Capital Gains Tax liability. Before the financial year ends, investors book losses on underperforming holdings to offset gains from profitable sales. For example, if you have Rs 3 lakh LTCG from selling Reliance, selling a loss-making position showing Rs 1.5 lakh loss reduces your taxable LTCG to Rs 1.5 lakh. After accounting for the Rs 1.25 lakh exemption, only Rs 25,000 is taxable.
India Context
STCG on equity: 20% (held <12 months). LTCG on equity: 12.5% above Rs 1.25 lakh (held >12 months). Grandfathering from 31 Jan 2018. Debt fund gains always at slab rates post April 2023.