Capital Gains Tax in India A Complete Guide to Mutual Funds, Securities & Real Estate with Smart Tax-Saving Strategies

 

Disclaimer: Nothing mentioned in this article constitutes tax advice. Tax laws are subject to frequent amendments. Please consult a Chartered Accountant or tax professional for personalised guidance.

 

Understanding capital gains tax is crucial for every Indian investor. Whether you're booking profits from mutual funds, selling shares, or disposing of property, the taxman takes a cut. However, with strategic planning, you can significantly reduce your tax outgo. Here's your comprehensive guide to capital gains tax in India and proven tricks to keep more money in your pocket.

 

Capital Gains Tax on Mutual Funds

 

Equity Mutual Funds (Equity exposure >65%)

Short-Term Capital Gains (STCG): If you sell within 12 months, gains are taxed at 20% (as per the latest 2024 Budget changes). This applies to both equity-oriented mutual funds and direct stock investments.

 

Long-Term Capital Gains (LTCG): For holdings exceeding 12 months, the first ₹1.25 lakh of gains in a financial year is completely tax-free. Beyond this threshold, LTCG is taxed at 12.5% without indexation benefits. This is a significant change from the earlier regime where indexation was available for some equity instruments.

 

Debt Mutual Funds

The landscape changed dramatically after April 2023. Now, gains from debt funds are taxed at your applicable income tax slab rate, regardless of holding period. There is no LTCG benefit or indexation advantage for debt mutual funds anymore.

 

However, if you held units purchased before April 2023, those still enjoy indexation benefits if held for over 24 months, taxed at 12.5%. For new investments, consider Arbitrage Funds (taxed as equity funds) or Banking & PSU Debt Funds for better post-tax returns.

 

Capital Gains on Direct Securities

 

Stocks and Equity Shares

Similar to equity mutual funds:

STCG (1 year): ₹1.25 lakh exemption, then 12.5%

 

Bonds and Debentures

Interest income is taxed at slab rates. Capital gains on sale follow debt fund taxation—slab rates apply without indexation for instruments acquired recently.

 

Capital Gains on Real Estate

 

Real estate attracts different rules:

 

Short-Term Capital Gains (STCG): If you sell within 24 months of purchase, gains are added to your total income and taxed as per your slab rate (up to 30% plus cess).

 

Long-Term Capital Gains (LTCG): For property held over 24 months, gains are taxed at 12.5% without indexation (changed from the earlier 20% with indexation benefit). While this rate seems lower, the removal of indexation (which adjusted the purchase price for inflation) often results in higher tax liability for properties held long-term.

 

Smart Tax-Saving Tricks

 

1. Tax Loss Harvesting

This is the most underutilized strategy. If you have stocks or mutual funds sitting at a loss, sell them to realize the loss and offset it against gains.

 

How it works: Suppose you made ₹2 lakh profit on Stock A but lost ₹80,000 on Stock B. Sell Stock B to realize the loss. Your net taxable gain becomes ₹1.2 lakh (within the ₹1.25 lakh exemption). You can buy back Stock B after a few days if you believe in its long-term potential.

 

Note: Avoid "wash sales"—buying the same security immediately after selling—to ensure the loss is recognized by tax authorities.

 

2. Spread Gains Across Financial Years

The ₹1.25 lakh LTCG exemption is per financial year (April-March). If you're nearing the threshold in March, defer selling some holdings to April (next financial year) to get a fresh exemption limit.

 

3. Section 54EC Bonds (For Property Only)

If you sell property and earn LTCG, invest the gains in 54EC bonds (NHAI, REC, PFC, IRFC) within 6 months. These bonds lock your money for 5 years but provide complete exemption from capital gains tax. Maximum investment: ₹50 lakh per financial year.

 

4. Section 54F (Property Reinvestment)

Don't want to lock money in bonds? Buy another residential property within 2 years (or construct within 3 years) and claim exemption under Section 54F. You must not own more than one residential house at the time of purchase.

 

5. Indexation for Pre-2023 Debt Fund Investors

If you hold debt fund units purchased before April 1, 2023, continue holding them for 24+ months to claim indexation benefits. The indexed cost of acquisition significantly reduces taxable gains.

 

6. Gift and Re-purchase Strategy (For Family Members)

Transfer appreciated securities to family members in lower tax brackets (parents, spouse, or adult children) before selling. However, clubbing provisions apply for spouses and minor children, so structure carefully. For parents above 60 with no other income, the basic exemption limit is ₹3 lakh (₹5 lakh for those above 80), plus Section 87A rebate benefits.

 

7. Systematic Withdrawal Plan (SWP) for Regular Income

Instead of selling lump-sum mutual fund units, set up an SWP. Each withdrawal consists of principal (tax-free return of capital) and gains (taxable). This spreads tax liability over years and keeps you within lower brackets.

 

8. Invest in Residential Property (Section 54)

For LTCG from property sale, buying another residential house within 2 years or constructing within 3 years exempts the gains. You can also invest in the Capital Gains Account Scheme (CGAS) if you need time to identify property.

 

9. Set-Off Against Other Losses

Capital losses can be set off against capital gains:

Short-term capital losses can offset both STCG and LTCG

Long-term capital losses can only offset LTCG

Unadjusted losses can be carried forward for 8 assessment years

 

If you have brought-forward losses from previous years, prioritize booking gains to absorb these losses.

 

10. Timing is Everything

For equity investments held over a year, sell in tranches. If you have ₹3 lakh gains, sell half in March and half in April to utilize two years' exemptions (₹1.25 lakh + ₹1.25 lakh = ₹2.5 lakh covered).

 

Recent Changes to Note

 

The 2024 Budget brought significant changes:

LTCG on both property and securities now attracts 12.5% tax without indexation (previously 20% with indexation for property)

STCG on listed securities increased to 20%

The ₹1.25 lakh basic exemption for equity LTCG remains

 

While the rate decreased from 20% to 12.5%, the removal of indexation often means higher taxes for long-held assets. Calculate both scenarios before deciding to sell old investments.

 

Bottom Line

 

Tax planning is not tax evasion—it's smart financial management. By harvesting losses, timing your sales strategically, utilising exemptions fully, and reinvesting gains in permitted avenues, you can legally minimise your capital gains tax burden.

 

Keep detailed records of purchase dates, costs (including brokerage, stamp duty, and improvement costs for property), and sale proceeds. Use these strategies in consultation with a tax professional to ensure compliance while maximising your post-tax wealth.

 

Disclaimer: Nothing mentioned in this article constitutes tax advice. Tax laws are subject to frequent amendments. Please consult a Chartered Accountant or tax professional for personalised guidance.