Managing capital gains taxes effectively is a crucial part of financial planning for any investor or trader in India. Whether you’re dealing in equities, mutual funds, or other capital assets, understanding how short-term and long-term gains interact can help you reduce your tax liability significantly.
Let’s explore how capital gains are taxed in India, what recent regulatory changes mean for you, and how you can use strategies like tax-loss harvesting to your advantage.
Current Tax Rules for Capital Gains (FY 2025-26)
Capital gains in India are categorized based on the holding period of the asset:
- Short-Term Capital Gains (STCG):
Gains from the sale of assets held for less than 12 months.
For listed securities subject to Securities Transaction Tax (STT), STCG is taxed at 20%. - Long-Term Capital Gains (LTCG):
Gains from assets held for more than 12 months.- Gains up to ₹1.25 lakh in a financial year are exempt.
- Gains above ₹1.25 lakh are taxed at a flat 12.5%, without indexation benefits.
Can You Adjust One Type of Gain Against the Other?
Yes, under certain conditions set by the Income Tax Act, 1961, capital losses can be adjusted against capital gains to reduce your tax burden:
- Short-Term Capital Loss (STCL):
- Can be set off against STCG.
- If not fully adjusted, can be carried forward for up to 8 years.
- Long-Term Capital Loss (LTCL):
- Can only be set off against LTCG, not against STCG.
- Can also be carried forward for up to 8 years.
Note: Capital gains or loss set-off is only allowed when the income tax return is filed within the due date.
Strategic Tax Planning: The Role of Tax-Loss Harvesting
With rising market volatility, global inflation pressures, and shifting geopolitical risks, investors are increasingly using tax-loss harvesting to manage their tax outgo.
Here’s how it works:
- Sell Losing Assets Intentionally:
Sell underperforming stocks or mutual funds to realize a short-term capital loss (STCL). - Offset the Losses Against Gains:
Use the incurred STCL to offset taxable long-term gains (LTCG) from other investments, reducing the overall capital gains tax.
This approach is especially effective during market downturns, allowing investors to rebalance their portfolios while saving on taxes.
Key Regulatory Updates (Effective July 23, 2024)
Recent changes introduced in the Union Budget have streamlined and simplified capital gains taxation:
- LTCG Exemption Limit Increased:
Raised from ₹1 lakh to ₹1.25 lakh per financial year for equities. - Uniform LTCG Tax Rate:
A flat 12.5% tax rate introduced across all asset classes, removing previous inconsistencies. - Indexation Benefit Abolished:
The indexation benefit for LTCG is no longer available, simplifying the calculation process.
Final Thoughts: Stay Informed, Plan Smart
The evolving nature of India’s tax laws makes it essential to stay informed and proactive. Leveraging capital loss set-off provisions and strategic tax-loss harvesting can be powerful tools to minimise your tax liability.
However, since capital gains taxation can be complex, it is advisable to consult a certified financial planner or tax advisor to get personalised advice aligned with your financial goals.
Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. Please consult a qualified tax professional for specific guidance based on your individual financial situation.
