Direct Tax Laws & International Taxation · Capital Gains

Capital Gains: Tax Rates, Set-off and Special Provisions

Updated 5 October 2026

Short-term gains on listed equity with STT bear 20% tax. Long-term gains on such equity bear 12.5% above ₹1,25,000 of gains. Other long-term gains bear 12.5% without indexation. Set off losses first (long-term loss only against long-term gain), carry forward unabsorbed loss eight years, and tax depreciable assets block-wise.

Understand Tax Rates, Set-off and Special Provisions

A capital gain is first computed, then classified as short-term or long-term, then taxed. The classification decides the rate. Computation is covered in other topics. This topic is about what happens after the gain figure is ready: which rate applies, which losses reduce it, and which special rules override the normal approach.

Start with the holding period. Securities listed on a recognised stock exchange in India, UTI units, units of equity-oriented funds and zero coupon bonds are long-term if held for more than 12 months. All other assets, such as land, buildings, unlisted shares and jewellery, are long-term if held for more than 24 months. Anything held for less is short-term. Market linked debentures and unlisted bonds and debentures are deemed short-term whatever the holding period. Always check for these.

Then the rate. Listed equity shares and equity-oriented fund units on which securities transaction tax (STT) is paid get a concessional treatment. Short-term gain is taxed at 20%. Long-term gain is taxed at 12.5%, but only the part above ₹1,25,000 in the tax year. For transfers on or after 23 July 2024, other long-term gains are taxed at 12.5% without indexation. For land or building acquired before 23 July 2024, a resident individual or HUF may instead choose 20% with indexation, and the lower tax applies. Note that the two long-term gains carry the same rate but are not one pool: the ₹1,25,000 relief is deducted only from the long-term gain on listed equity with STT, never from other long-term gains. Other short-term gains are added to total income and taxed at normal rates. For a resident individual or HUF, any unused basic exemption limit can be adjusted against the special-rate gains, which lowers the taxable amount. A non-resident cannot use this.

Losses follow strict rules. A short-term capital loss can be set off against any capital gain, short-term or long-term. A long-term capital loss can be set off only against long-term capital gain. Where gains are taxed at different rates, set the short-term loss against the higher-taxed gain first. Short-term gains are taxed at 20% or normal rates, while long-term gains are taxed at 12.5%, so in practice you set a short-term loss against short-term gains first and then against long-term gains. This is the most beneficial approach, as in ICAI illustrations. It is not a statutory election, so show the order you have used in your answer. Capital losses cannot be set off against income under any other head. Unabsorbed capital loss is carried forward for eight tax years, but only if the return was filed on time, and it can be set off only against capital gains in those years. Set-off comes first, and the ₹1,25,000 relief is applied on the net long-term gain on listed equity with STT.

Special rules apply to two groups. For depreciable assets, the gain is not worked out asset by asset. Assets in a block are pooled. A short-term gain arises when the block ceases to exist on transfer. It also arises when assets remain in the block but the sale consideration exceeds the aggregate of the opening WDV and additions. Such a gain is taxed at the normal rate applicable to the assessee. For a company, that is 22%, 25% or 30%, as applicable. For non-residents, the foreign currency conversion method is a computation mechanism, not a rate rule. It is available to non-residents and not to residents, and it applies to shares or debentures of an Indian company bought with foreign currency. Indexation is not available for transfers on or after 23 July 2024, apart from the land or building option for resident individuals and HUFs described above, so it is not a non-resident point. A non-resident cannot adjust the basic exemption.

Key rules to remember

Long-term holding period: Securities listed on a recognised stock exchange in India, UTI units, units of equity-oriented funds and zero coupon bonds: more than 12 months. All other assets (land, building, unlisted shares, jewellery and similar): more than 24 months; Market linked debentures and unlisted bonds and debentures are deemed short-term whatever the holding period. Check the asset type first.
STCG on listed equity with STT: Tax = 20% × STCG; Applies to listed equity shares and units of equity-oriented funds where STT is paid on transfer.
LTCG on listed equity with STT: Tax = 12.5% × (LTCG − ₹1,25,000); The ₹1,25,000 is a single limit for the whole tax year across all such gains. If net LTCG is below it, tax is nil. It is not deducted from other long-term gains.
Other LTCG: Transfer on or after 23 July 2024: Tax = 12.5% × LTCG (no indexation). Option for a resident individual or HUF on land or building acquired before 23 July 2024: 20% × LTCG computed with indexation. Take the lower tax; The option is only for land or building acquired before 23 July 2024 and only for a resident individual or HUF. For every other long-term gain on other assets, use 12.5% without indexation.
Other STCG: Added to total income and taxed at normal slab or flat rates of the assessee; Examples: STCG on unlisted shares or on a block of depreciable assets. For a company, the normal rate is 22%, 25% or 30%, as applicable.
Set-off of capital losses: STCL: against STCG and LTCG. LTCL: against LTCG only; Intra-head set-off only. No set-off against other heads. Where gains are taxed at different rates, set STCL against the higher-taxed gain first, which usually means STCG first and then LTCG. This is the most beneficial approach, as in ICAI illustrations, and not a statutory election. State the order you use.
Carry forward of capital loss: Up to 8 tax years; STCL against any capital gain, LTCL against LTCG only; Available only if the loss is determined in a return filed within the due date.
Gain on block of depreciable assets: STCG = Consideration − Transfer expenses − WDV of block at start of year − Cost of assets acquired in year; Under the block-of-assets provisions, a short-term gain arises in two cases: (1) the block ceases to exist because all its assets are transferred; (2) assets remain in the block but the consideration exceeds the aggregate of the opening WDV and additions, so the WDV would turn negative. In the second case the excess is the short-term gain. Otherwise no capital gain arises: the sale consideration reduces the block's WDV, and transfer expenses are not deducted for this purpose.
Basic exemption adjustment: Resident individual/HUF: shortfall in basic exemption can be adjusted against special-rate capital gains; Not available to non-residents.

How to solve Tax Rates, Set-off and Special Provisions questions

Use this order for any question mixing several gains, losses and assessee types. It keeps rates, set-off and exemption in the correct sequence.

1Identify the assessee: resident individual or HUF, other resident, or non-resident. This decides basic exemption adjustment and whether the foreign currency conversion method can apply.
2For each transfer, find the asset type, holding period and whether STT was paid. Label it STCG or LTCG, and note whether it is listed equity with STT, other long-term, or other short-term.
3Work out each gain or loss using the correct computation method. For depreciable assets, use the block method instead of asset-wise computation.
4Set off losses within the capital gains head. A short-term loss goes against short-term gain first, then long-term gain, because short-term gain is taxed at the higher rate. A long-term loss goes only against long-term gain. This is the most beneficial approach and not a statutory election, so state the order you use. Keep listed-equity long-term gain and other long-term gain separate, since only the former gets the ₹1,25,000 relief.
5Apply brought-forward capital losses of earlier tax years in the same way, only if the loss was validly carried forward.
6From the net long-term gain on listed equity with STT only, deduct the ₹1,25,000 limit. Then apply the basic exemption shortfall if the assessee is a resident individual or HUF.
7Apply each rate to its own bucket: 20%, 12.5% (listed equity and other long-term, each in its own bucket), and normal rates for other short-term gains. Add the gains taxable at normal rates to other income.
8State the loss to be carried forward, if any, and the condition of timely return filing.

Quickest way: Four-bucket table method

When to use it: Use it in written questions with five or more transactions and in MCQs asking for tax or the carried forward loss.

Draw four buckets: STCG on listed equity with STT (20%), LTCG on listed equity with STT (12.5% after ₹1,25,000), other LTCG (12.5%), and other STCG (normal rates). Place each net figure in its bucket immediately.
Apply losses within the statutory limits: a short-term loss can reduce any bucket, a long-term loss only the two long-term buckets. Set a short-term loss against the higher-taxed short-term gains first, then against long-term gains. This is the most beneficial approach and not a statutory election, so write the order down and use it throughout.
Subtract ₹1,25,000 once, from the listed equity long-term bucket only.
Multiply each bucket by its rate, and then add the normal-rate bucket to the other income.
Whatever loss remains unabsorbed is the carry forward figure. Write the eight-year and filing conditions in one line.

Common mistakes in Tax Rates, Set-off and Special Provisions

Setting off a long-term capital loss against short-term capital gain.
Students remember that capital losses can be set off within the head and ignore the one-way restriction.
Fix: Repeat the rule: a short-term loss can go anywhere within capital gains, but a long-term loss goes only against a long-term gain.
Applying the ₹1,25,000 limit before setting off losses, or applying it separately to each share.
Students treat it like an exemption per transaction.
Fix: First net all gains and losses, then deduct ₹1,25,000 once from the net long-term gain on listed equity with STT.
Using indexation for long-term gains.
Older study habits from the earlier rules persist.
Fix: For transfers on or after 23 July 2024, LTCG on other assets is taxed at 12.5% without indexation. The only exception is land or building acquired before that date, where a resident individual or HUF may choose 20% with indexation and the lower tax applies.
Computing gain on each machine separately for a block of assets.
Students treat plant like any other capital asset.
Fix: Use the block formula. A gain arises when the block ceases to exist, or when the consideration exceeds the aggregate of the opening WDV and additions even though assets remain. Otherwise reduce the block's WDV by the sale consideration.
Allowing basic exemption adjustment to a non-resident, or ignoring it for a resident individual.
The adjustment is a small proviso and is easily missed.
Fix: Check residence first. Residents who are individuals or HUFs with a basic exemption shortfall adjust it against the special-rate gains, while non-residents cannot.
Carrying forward a capital loss when the return was filed late.
Students focus on the eight-year limit and forget the filing condition.
Fix: State that the loss is carried forward only if it was determined in a return filed within the due date.

Worked examples

Example 1

Ravi, a resident individual with high income from salary, has the following capital transactions in the tax year 2026-27. (a) STCG on listed equity shares with STT paid, held for 8 months: ₹4,00,000. (b) LTCG on listed equity shares with STT paid, held for 18 months: ₹3,25,000. (c) Loss on sale of unlisted shares held for 10 months: ₹1,00,000. (d) Loss on sale of land held for 30 months: ₹60,000. Set off the short-term loss against the higher-taxed gain first. Compute the tax on capital gains, ignoring surcharge and cess, and state any carried forward loss.

Show the solution

Classify using holding periods: (a) listed equity held 8 months (12 months or less) is STCG taxed at 20%; (b) listed equity held 18 months (more than 12 months) is LTCG taxed at 12.5% above ₹1,25,000; (c) unlisted shares held 10 months (24 months or less) give a short-term capital loss (STCL); (d) land held 30 months (more than 24 months) gives a long-term capital loss (LTCL).
Set the short-term loss against the higher-taxed gain first. STCG is taxed at 20% and LTCG at 12.5%, so set off the STCL of ₹1,00,000 against the STCG of ₹4,00,000. Net STCG = ₹3,00,000.
Set off the LTCL of ₹60,000 against LTCG of ₹3,25,000, the only long-term gain. Net LTCG = ₹2,65,000.
Deduct the ₹1,25,000 limit from net LTCG on listed equity: ₹2,65,000 − ₹1,25,000 = ₹1,40,000.
Tax on STCG = 20% × ₹3,00,000 = ₹60,000.
Tax on LTCG = 12.5% × ₹1,40,000 = ₹17,500.
Total tax = ₹60,000 + ₹17,500 = ₹77,500. All losses are fully absorbed, so no carry forward arises.
Check the other order. If the STCL were set off against the LTCG instead, the LTCL of ₹60,000 would also be set off against the LTCG. Net LTCG = ₹3,25,000 − ₹1,00,000 − ₹60,000 = ₹1,65,000, taxable LTCG = ₹1,65,000 − ₹1,25,000 = ₹40,000, and tax = 12.5% × ₹40,000 = ₹5,000. The STCG of ₹4,00,000 would then have no loss against it, so tax = 20% × ₹4,00,000 = ₹80,000. Total = ₹85,000. This is ₹7,500 higher. Setting the STCL against STCG first saves tax because STCG is taxed at 20% against 12.5% on LTCG. This is the most beneficial approach and not a statutory election, so state the order you have used.

Answer: Tax on capital gains is ₹77,500 before surcharge and cess, with the short-term loss set off against the higher-taxed STCG first. No loss is carried forward.

Example 2

Meera Ltd. has a block of machinery with WDV of ₹12,00,000 at the start of the tax year. During the year it buys machinery costing ₹3,00,000. It then sells all machinery in the block for ₹20,00,000 and incurs ₹20,000 as transfer expenses. No asset remains in the block. Compute the capital gain and state its nature. Also state the position if the company had sold only one machine for ₹5,00,000 and the block continued.

Show the solution

Because the block ceases to exist, a short-term capital gain arises.
Start with consideration of ₹20,00,000.
Deduct transfer expenses of ₹20,000. Balance = ₹19,80,000.
Deduct WDV of the block at the start of the year, ₹12,00,000. Balance = ₹7,80,000.
Deduct cost of machinery acquired during the year, ₹3,00,000. STCG = ₹4,80,000.
This gain is not eligible for the concessional 20% rate. It is added to the company's income and taxed at the normal rate applicable to the company (22%, 25% or 30%, as applicable).
In the alternative case, the block continues and the consideration of ₹5,00,000 is less than the opening WDV plus additions (₹12,00,000 + ₹3,00,000 = ₹15,00,000). So no capital gain arises. The block's WDV is reduced by the sale consideration of ₹5,00,000 to ₹10,00,000. Transfer expenses are not deducted for this purpose. Depreciation is then calculated on the reduced WDV.

Answer: STCG = ₹4,80,000, taxed at the normal rate applicable to the company (22%, 25% or 30%, as applicable). If the block continues and the consideration is below the opening WDV plus additions, there is no capital gain and the WDV of the block is reduced by the sale consideration of ₹5,00,000.

Exam tips

Read the first line for the assessee's residence and the asset type. Most marks in cases are lost by using the wrong rate or wrongly allowing basic exemption adjustment.
Show set-off in a small table with columns for STCG, LTCG and the remaining loss. The examiner can then award marks stage by stage.
When a question gives STT details, say whether STT was paid on both acquisition and transfer where the study material requires it, and name the asset class before applying 20% or 12.5%.
Write carry forward as a one-line conclusion: eight tax years, set off only against capital gains, and only if the return was filed on time.
In MCQs on blocks of assets, check first if the block ceased to exist. If it did, use the block gain formula. If it did not, compare the consideration with the opening WDV plus additions: nil gain if it is lower, otherwise the excess is a short-term gain.

Practice questions from Capital Gains

Tax Rates, Set-off and Special Provisions: frequently asked questions

What is the LTCG tax rate on listed shares for CA Final?

For listed equity shares on which STT is paid, long-term gain is taxed at 12.5% on the amount above ₹1,25,000 in the tax year. Gains up to that limit are not taxed. Short-term gain on the same shares is taxed at 20%.

Can I set off long-term capital loss against short-term capital gain?

No. A long-term capital loss can be set off only against long-term capital gain. A short-term capital loss, however, can be set off against both short-term and long-term capital gains.

How long can a capital loss be carried forward?

Unabsorbed capital loss can be carried forward for eight tax years following the year of loss. It can be set off only against capital gains, and the loss must have been determined in a return filed on or before the due date.

How is short-term capital gain on depreciable assets computed?

Depreciable assets in the same block are pooled. A short-term capital gain arises when the block ceases to exist because of a transfer, using the formula of consideration less transfer expenses, opening WDV and cost of additions. It also arises if assets remain but the consideration exceeds the aggregate of the opening WDV and additions. Otherwise there is no capital gain and the consideration reduces the block's WDV.

Does a non-resident get the basic exemption adjustment or any special computation on capital gains?

A non-resident cannot adjust unused basic exemption against capital gains. Indexation is not available for transfers on or after 23 July 2024, apart from the land or building option for resident individuals and HUFs, so it is not a separate non-resident point. For shares or debentures of an Indian company bought with foreign currency, a non-resident can use the foreign currency conversion method. The gain is computed in that foreign currency and converted back. This is a computation mechanism, not a different rate, and residents cannot use it.