What Is Capital Gains Tax?
Capital gains tax is levied on the profit earned from transferring a capital asset. When you sell shares in an Indian company, transfer property, or dispose of any asset for more than its cost, the profit is a "capital gain" and is taxable. The tax rate depends on how long you held the asset — short-term or long-term.
For foreigners and NRIs investing in Indian companies, capital gains tax is the most important consideration at exit. Whether you sell your stake to another investor, list the company on a stock exchange, or transfer assets — capital gains tax applies.
Legal Framework
- Section 67 of the Income-tax Act, 2025 (section 45 of the Income-tax Act, 1961) — Capital gains are chargeable to tax in the year of transfer
- Section 2(22) of the Income-tax Act, 2025 (section 2(14) of the Income-tax Act, 1961) — Definition of capital asset (excludes stock-in-trade, personal effects below INR 50,000, agricultural land in rural India)
- Sections 72 to 90 of the Income-tax Act, 2025 (sections 48 to 55 of the Income-tax Act, 1961) — Computation of capital gains (indexed cost, fair market value, acquisition cost)
- Section 2(101) of the Income-tax Act, 2025 (section 2(42A) of the Income-tax Act, 1961) — Holding period for classification as short-term or long-term
- Section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961) — Tax on long-term capital gains (general)
- Section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961) — Tax on LTCG from listed equity shares and equity mutual funds
- Section 196 of the Income-tax Act, 2025 (section 111A of the Income-tax Act, 1961) — Tax on STCG from listed equity shares and equity mutual funds
- Section 210 of the Income-tax Act, 2025 (section 115AD of the Income-tax Act, 1961) — Capital gains for FPIs (Foreign Portfolio Investors)
Holding Period Classification
| Asset Type | Short-Term (STCG) If Held For | Long-Term (LTCG) If Held For |
|---|---|---|
| Listed equity shares, equity mutual funds | 12 months or less | More than 12 months |
| Unlisted shares | 24 months or less | More than 24 months |
| Immovable property (land, building) | 24 months or less | More than 24 months |
| Debt mutual funds, bonds | 36 months or less | More than 36 months |
| Other assets (jewellery, art) | 36 months or less | More than 36 months |
Tax Rates on Capital Gains
| Type of Gain | Resident Companies | Non-Resident / Foreign Investors |
|---|---|---|
| STCG on listed equity (Section 196) | 20% + surcharge + cess | 20% + surcharge + cess |
| STCG on other assets | Normal corporate tax rate (22% / 25% / 30%) | 35% for foreign companies; normal rates for domestic companies with foreign ownership |
| LTCG on listed equity (Section 198) | 12.5% above INR 1.25 lakh (no indexation) | 10% above INR 1 lakh |
| LTCG on unlisted shares (for non-residents) | N/A | 12.5% without indexation (Section 197; section 112(1)(c) of the Income-tax Act, 1961) |
| LTCG on other assets | 20% with indexation | 20% with indexation (or 10% without, per DTAA) |
The INR 1.25 lakh exemption on LTCG under section 198 applies per taxpayer per year (for transfers on or after July 23, 2024). Gains up to INR 1 lakh from listed equity are tax-free.
Capital Gains for Foreign-Owned Companies and NRI Shareholders
This is where it gets specific for foreign investors:
- Selling shares of an Indian private company — When a foreign shareholder sells unlisted shares held for more than 24 months, LTCG is taxed at 10% without indexation (section 197 of the Income-tax Act, 2025; section 112(1)(c) of the Income-tax Act, 1961, for non-residents). If held for 24 months or less, STCG is taxed at the applicable slab rate or corporate rate.
- DTAA benefits on capital gains — Many DTAAs allocate taxing rights on capital gains differently. The India-Singapore DTAA (post-April 2017) allows India to tax capital gains on shares, but grandfathers investments made before April 1, 2017. The India-Mauritius DTAA follows the same structure. See the India-Australia DTAA rules on capital gains for another example.
- FEMA compliance on share transfers — When a non-resident sells shares to a resident, the transaction must comply with FEMA pricing guidelines. For unlisted shares, the price must not exceed the fair market value determined by a CA using the Discounted Cash Flow (DCF) method. For transfers between non-residents, pricing is more flexible.
- Withholding under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) on payments to non-residents — The buyer of shares from a non-resident must deduct TDS at the rates in force. Without a Tax Residency Certificate from the seller, domestic rates (without DTAA benefit) apply.
- Capital gains on property — NRIs who own property in India pay LTCG at 20% with indexation on sale of property held for more than 24 months. TDS at 20% is deducted by the buyer. The NRI can apply for a lower withholding certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) if the actual tax liability is lower.
Indexation Benefit
For long-term gains on assets other than listed equity, the cost of acquisition is adjusted for inflation using the Cost Inflation Index (CII) published by CBDT each year. This reduces the taxable gain.
Indexed cost = Original cost x (CII of year of transfer / CII of year of acquisition)
For FY 2025-26, the CII is 376 (base year 2001-02 = 100). If you bought property in 2015-16 (CII = 254) for INR 50 lakhs and sold it in 2025-26 for INR 1.2 crores, indexed cost = 50 x (376/254) = INR 74.02 lakhs. LTCG = 1.2 crores minus 74.02 lakhs = INR 45.98 lakhs. Tax at 20% = INR 9.20 lakhs.
Note: Indexation is not available for unlisted shares sold by non-residents (they pay 10% without indexation under section 197; section 112(1)(c) of the Income-tax Act, 1961).
Exemptions on Capital Gains
- Section 82 of the Income-tax Act, 2025 (section 54 of the Income-tax Act, 1961) — LTCG on residential house property is exempt if reinvested in another residential property within 2 years (or 3 years for construction)
- Section 85 of the Income-tax Act, 2025 (section 54EC of the Income-tax Act, 1961) — LTCG on any asset is exempt if invested in specified bonds (NHAI, REC, IRFC) within 6 months — maximum INR 50 lakhs
- Section 86 of the Income-tax Act, 2025 (section 54F of the Income-tax Act, 1961) — LTCG on any asset (other than residential house) is exempt if the net consideration is invested in a residential house
These exemptions are generally available to NRIs but not to companies. A company selling property cannot claim section 82 — that is limited to individuals and HUFs.
Common Mistakes
- Not accounting for FEMA pricing rules — Even if buyer and seller agree on a price, the transaction must comply with FEMA valuation norms. An NRI selling shares above fair value to a resident faces FEMA penalties, even if the capital gains tax is correctly paid.
- Applying indexation where it is not available — Non-residents selling unlisted shares get 10% without indexation. Attempting to use indexation to reduce the gain leads to reassessment.
- Missing TDS obligations — The buyer must deduct TDS under section 393(2) when purchasing shares from a non-resident. If the buyer is an Indian company and forgets TDS, the expense gets disallowed under section 35(b)(ii) of the Income-tax Act, 2025 (section 40(a)(i) of the Income-tax Act, 1961).
- Not filing Forms 145 and 146 (formerly Forms 15CA and 15CB) for remittance — After paying capital gains tax, the non-resident seller wants to repatriate the proceeds. Forms 145 and 146 must be filed with the bank before remittance is allowed.
- Ignoring the grandfathering provisions — For listed shares held before January 31, 2018, the cost of acquisition for LTCG under section 198 is the higher of actual cost or the fair market value as on January 31, 2018. Missing this results in overpaying tax.
Practical Example
A US citizen holds 40% of an Indian private company. She invested INR 20 lakhs in 2021 for unlisted shares. In 2026, she sells her stake to an Indian buyer for INR 80 lakhs. Holding period: 5 years (long-term). LTCG = INR 80 lakhs minus INR 20 lakhs = INR 60 lakhs. Tax at 10% (section 197; section 112(1)(c) of the Income-tax Act, 1961 — no indexation for a non-resident on unlisted shares) = INR 6 lakhs + surcharge + cess. The Indian buyer deducts TDS of approximately INR 6.24 lakhs before making the payment. The US citizen claims credit for Indian tax paid against her US tax liability under the India-US DTAA. She files Forms 145 and 146 to repatriate INR 73.76 lakhs (sale proceeds minus TDS) to her US bank account.
Related Terms
- Corporate Tax — STCG on non-equity assets is taxed at corporate rates
- Withholding Tax — TDS on payments to non-resident sellers
- Tax Residency Certificate — Required to claim DTAA rates on gains
- Forms 145 and 146 — For repatriation of sale proceeds
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