Capital Gains under the Income-tax Act, 2025 (Finance Act 2026): Key Provisions and Structural Changes from the Income-tax Act, 1961
Introduction
Capital gains taxation governs the taxation of profits arising from the transfer of capital assets such as property, shares, securities, mutual funds and other investment assets.
For decades, these provisions were governed by the Income-tax Act, 1961. Over time, numerous amendments made the legislation complex and difficult to interpret. To simplify and modernise the law, the Government introduced the Income Tax Act, 2025, which reorganises and consolidates the income-tax provisions while retaining the core principles of taxation.
The Finance Bill 2026 prescribes the applicable tax rates and thresholds under this framework.
This article provides a concise overview of capital gains taxation under the Income-tax Act, 2025 read with the Finance Act, 2026, along with key structural differences from the earlier legislation.
Charge of Capital Gains
The charging provision for capital gains is contained in Section 67 of the Income-tax Act, 2025.
Section 67 provides that any profits or gains arising from the transfer of a capital asset during a tax year shall be chargeable to income-tax under the head “Capital Gains” and shall be deemed to be the income of the tax year in which the transfer takes place.
However, the section also clarifies that this provision operates subject to exemptions contained in Sections 82 to 89 of the Act.
Meaning of Capital Asset
The term capital asset is defined in Section 2(22) of the Income-tax Act, 2025.
It broadly refers to property of any kind held by an assessee, whether or not connected with business or profession.
Common examples include:
- Land and building
- Shares and securities
- Mutual fund units
- Gold and jewellery
- Intellectual property rights
- Other investment assets
Certain items are excluded from the definition of capital asset, such as stock-in-trade, raw materials, consumable stores and personal effects (excluding jewellery and specified valuable articles).
Meaning of Transfer
Capital gains arise only when there is a transfer of a capital asset.
The term transfer is defined under Section 2(109) and includes sale of an asset, exchange of property, relinquishment of rights, extinguishment of rights in an asset, compulsory acquisition under law and certain transactions involving immovable property.
This wide definition ensures that various forms of disposal of assets fall within the scope of capital gains taxation.
Short-Term and Long-Term Capital Assets
Capital gains are classified based on the period of holding of the asset before its transfer.
Short-Term Capital Asset
Under Section 2(101), a capital asset held for not more than 24 months immediately preceding the transfer is generally treated as a short-term capital asset.
However, for certain financial assets such as listed shares, equity mutual funds, units of Unit Trust of India and zero-coupon bonds, the period of holding considered is 12 months.
Long-Term Capital Asset
A capital asset that does not qualify as a short-term capital asset is treated as a long-term capital asset.
The definition of long-term capital asset is provided under Section 2(67) of the Income-tax Act, 2025.
Computation of Capital Gains
Capital gains are calculated using the following formula:
Capital Gain = Sale Consideration – Cost of Acquisition – Cost of Improvement – Transfer Expenses
Transfer expenses may include brokerage, legal charges, commission and other expenses incurred wholly and exclusively in connection with the transfer of the asset.
Capital Gains Tax Rates (Finance Act 2026)
While the Income-tax Act provides the legal framework, the Finance Act determines the applicable tax rates for each tax year.
Listed Shares and Equity Mutual Funds
Short-Term Capital Gains (holding period up to 12 months) are taxed at 20%.
Long-Term Capital Gains (holding period exceeding 12 months) are taxed at 12.5%.
An exemption is available for long-term capital gains up to ₹1,25,000 in a financial year.
Immovable Property (Land or Building)
Short-term capital gains arising from property held for up to 24 months are taxed according to the normal income-tax slab rates.
Long-term capital gains arising from property held for more than 24 months are taxed at 12.5%.
Debt Mutual Funds and Certain Financial Assets
Short-term capital gains are taxed at normal slab rates.
Long-term capital gains are taxed at 12.5%.
Indexation benefits available under earlier provisions have been largely rationalised under the revised framework.
Reinvestment Exemptions for Capital Gains
The Income-tax Act, 2025 continues to provide exemptions where capital gains are reinvested into specified assets. These provisions are contained primarily in Sections 85 to 88 of the Act.
Section 85 – Investment in Specified Bonds
Where long-term capital gains arise from the transfer of land or building, exemption may be available if the gains are invested in long-term specified infrastructure bonds within six months of the transfer.
Key conditions include:
- Maximum investment: ₹50,00,000
- Lock-in period: 5 years
These bonds are generally issued by notified institutions such as NHAI or REC.
Section 86 – Investment in Residential House
Where an individual or Hindu Undivided Family transfers a long-term capital asset other than a residential house, exemption may be available if the net consideration is invested in one residential house in India.
The residential house must be:
- purchased within 1 year before or 2 years after the transfer, or
- constructed within 3 years after the transfer.
Section 87 – Shifting Industrial Undertaking
Capital gains arising from the transfer of assets of an industrial undertaking may be exempt where the undertaking is shifted from an urban area to another area and the gains are reinvested in business assets.
Section 88 – Shifting Industrial Undertaking to SEZ
Exemption may also be available where an industrial undertaking is shifted to a Special Economic Zone, provided the capital gains are reinvested in specified assets used for business in the SEZ.
Key Structural Changes from the Income-tax Act, 1961
The Income-tax Act, 2025 introduces several structural improvements while retaining the core capital gains framework.
Simplified Structure
The new legislation reorganises provisions into a clearer and more logical format.
Revised Capital Gains Rates
Under the earlier regime:
- STCG on equity → 15%
- LTCG on equity → 10%
- LTCG exemption → ₹1,00,000
Under the Finance Act 2026 framework:
- STCG on equity → 20%
- LTCG on equity → 12.5%
- LTCG exemption → ₹1,25,000
Updated Definitions
The new Act incorporates updated definitions to reflect modern financial instruments and evolving investment structures.
Practical Takeaways
Long-term investments continue to receive preferential tax treatment.
The period of holding plays a crucial role in determining the applicable tax rate.
Reinvestment provisions under Sections 85–88 remain important tools for capital gains tax planning.
Conclusion
The Income-tax Act, 2025 represents a significant modernization of India’s tax legislation. While the fundamental principles of capital gains taxation remain largely unchanged, the Act introduces a more structured framework and revised tax rates through the Finance Act, 2026.
For taxpayers, investors and professionals, understanding these updated provisions is essential for effective compliance, tax planning and informed investment decisions.
Author Bio
have you read section 76, debt funds are always considered short term and never taxed as long term at 12.5%. always added to total income .