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The Capital Gains Regime Puzzle: Capital gains are taxed at flat rates — 12.5% LTCG, 20% STCG on equity — and these rates are the same in both the old and new regimes. The regime choice matters only for your other income (salary, interest, rent). But the interaction between capital gains and your total income affects your overall tax through the basic exemption limit, 87A rebate eligibility, and surcharge computation.
Capital Gains Tax Rates Under Income-tax Act 2025
The rates below apply in both old and new regimes — regime choice does not change these rates.
| Asset | Holding Period | Type | Rate | Exemption Limit |
|---|---|---|---|---|
| Listed equity shares / equity MF | >12 months | LTCG | 12.5% | ₹1,25,000/year (Section 55(2)) |
| Listed equity shares / equity MF | ≤12 months | STCG | 20% | Nil |
| Debt mutual funds (post-Apr 2023 purchase) | Any | Slab rate | Slab rate | — |
| Debt MF (pre-Apr 2023 purchase) | >36 months | LTCG | 12.5% (no indexation) | Nil |
| Property (land/building) | >24 months | LTCG | 12.5% (no indexation) | Section 82 exemption if reinvested |
| Property | ≤24 months | STCG | Slab rate | — |
| Gold / physical assets | >24 months | LTCG | 12.5% | Nil |
| Gold ETF / SGBs | >12 months | LTCG | 12.5% | Nil |
| Unlisted shares | >24 months | LTCG | 12.5% | Nil |
Indexation Removed: Budget 2024 removed the indexation benefit on property LTCG (from 23 July 2024). The rate was also reduced from 20% with indexation to 12.5% without indexation. For property purchased before 23 July 2024, the taxpayer can choose the more beneficial of (a) 20% with indexation or (b) 12.5% without indexation for gains on assets held before this date.
How Regime Choice Affects Investors: The Four Mechanisms
Mechanism 1: Basic Exemption Limit — The "Filling Up" Rule
Capital gains are computed after filling up the basic exemption limit with other income. If your other income is below the basic exemption, the "unused" exemption can be applied against capital gains first — reducing taxable gains.
| Parameter | Old Regime | New Regime |
|---|---|---|
| Basic exemption limit (below 60 years) | ₹2,50,000 | ₹3,00,000 |
| Other income (salary, interest) | ₹1,50,000 | ₹1,50,000 |
| Unused exemption available for CG | ₹1,00,000 | ₹1,50,000 |
| LTCG on equity (after ₹1.25L exemption) | ₹50,000 | ₹50,000 |
| LTCG applied against unused exemption | ₹50,000 covered | ₹50,000 covered |
| Net LTCG taxable | NIL | NIL |
In this case, both regimes give the same result. But the new regime's higher basic exemption (₹3L vs ₹2.5L) gives it a ₹50,000 edge in absorbing capital gains for low-income investors.
Mechanism 2: Section 87A Rebate — The ₹12 Lakh Factor
The 87A rebate (nil tax on income up to ₹12 lakh) under the new regime does NOT apply to special-rate income like LTCG on equity. This creates an important threshold effect.
| Scenario | Total Income | New Regime Tax | Old Regime Tax |
|---|---|---|---|
| Salary ₹8L + LTCG ₹3L (post ₹1.25L exemption = ₹1.75L) | ₹9.75L | Tax on ₹8L salary = NIL (87A rebate) + 12.5% on ₹1.75L LTCG = ₹21,875 | Deductions reduce tax; varies |
| Salary ₹11L + LTCG ₹3L (taxable ₹1.75L) | ₹12.75L | 87A lost (total >₹12L); full tax on ₹11L + 12.5% on ₹1.75L | With deductions ₹3.5L: taxable ₹7.5L → lower tax |
Critical Trap: If your salary alone is under ₹12L and you qualify for 87A rebate in new regime, adding LTCG or STCG pushes total income above ₹12L — causing the 87A rebate to be lost. You then pay tax on the entire salary income PLUS flat-rate tax on capital gains. Model this carefully before taking large gains in a year.
Mechanism 3: STCG and Slab-Rate Gains Interaction
STCG on property and debt fund gains are taxed at slab rates. Here, the regime matters directly:
| Asset Sale | STCG/Slab Gain | Old Regime | New Regime |
|---|---|---|---|
| Property sold within 24 months | ₹5,00,000 STCG | Added to income; 80C/80D reduce other income; effective tax lower | Added to income; no deductions; taxed at slab rate in new regime |
| Debt MF (post-Apr 2023) | ₹2,00,000 | Slab rate; deductions reduce overall taxable income | Slab rate; no deductions |
Mechanism 4: Capital Gains Exemptions — Both Regimes
All major capital gains exemptions are available in BOTH regimes:
| Exemption | New Act Section | Condition | Old/New Regime |
|---|---|---|---|
| LTCG on residential property reinvested in new house | Section 82 | New house bought 1 yr before / 2 yrs after; constructed within 3 yrs; cost cap ₹10 crore | Both |
| LTCG on any asset invested in residential property | Section 58(2) | Net proceeds used for new house; net worth condition; ₹10 crore cap | Both |
| LTCG invested in 54EC bonds (NHAI, REC etc.) | Section 58(3) | ₹50L cap; bonds held 5 years; must invest within 6 months | Both |
| LTCG on equity: ₹1.25L annual exemption | Section 55(2) | Automatic; listed equity and equity MF units | Both |
Case Study: Priya Menon — Salaried + Active Investor
Profile
- Salary: ₹14,00,000
- LTCG equity MF: ₹3,00,000
- STCG equity: ₹1,00,000
- Debt MF (slab rate): ₹50,000
- 80C investments: ₹1,50,000
- 80D premium: ₹25,000
- Home loan interest: ₹1,80,000
Old Regime
- Salary after standard deduction: ₹13,25,000
- Debt MF: ₹50,000
- Less: 80C ₹1,50,000 + 80D ₹25,000 + HLI ₹1,80,000 = ₹3,55,000
- Taxable other income: ₹10,20,000
- Tax on ₹10.2L (old slabs): ~₹1,72,680
- LTCG: (₹3L – ₹1.25L) = ₹1.75L × 12.5% = ₹21,875
- STCG: ₹1L × 20% = ₹20,000
- Total: ~₹2,14,555 + cess
New Regime
- Salary after standard deduction ₹75K: ₹13,25,000
- Debt MF: ₹50,000
- No deductions
- Other income: ₹13,75,000
- Tax on ₹13.75L (new slabs): ~₹1,50,000
- LTCG: ₹1.75L × 12.5% = ₹21,875
- STCG: ₹1L × 20% = ₹20,000
- Total: ~₹1,91,875 + cess
Verdict
New regime saves ~₹22,680 for Priya at this income level. The new regime's lower slab rates on salary income outweigh the old-regime deduction advantage (₹3.55L in deductions). The flat-rate CG portion is identical in both regimes.
The ₹12 Lakh 87A Rebate Trap — Detailed Analysis
This is the most commonly missed tax planning point for investors in the new regime:
| Scenario | Salary (after SD) | LTCG (taxable after ₹1.25L) | Total Income | New Regime Tax |
|---|---|---|---|---|
| A: Safe | ₹11,25,000 | ₹0 | ₹11,25,000 | ₹0 (87A rebate) |
| B: Marginal gain | ₹11,25,000 | ₹75,000 | ₹12,00,000 | ₹0 (87A rebate still applies) |
| C: Trap zone | ₹11,25,000 | ₹1,00,000 | ₹12,25,000 | Tax on ₹11.25L slab + 12.5% on ₹1L = ~₹90,000 + ₹12,500 = ₹1,02,500 |
| D: Safe again | ₹11,25,000 | ₹2,50,000 | ₹13,75,000 | Tax on ₹11.25L + 12.5% on ₹2.5L = ~₹90,000 + ₹31,250 = ₹1,21,250 |
Scenario C is the trap: by realising just ₹1L extra in LTCG, the investor loses the entire 87A rebate and ends up paying ₹1,02,500 in tax instead of zero. The smart move: either stay within ₹12L total or take enough gains to justify crossing the threshold.
Loss Harvesting: Capital Loss Set-Off Rules
| Loss Type | Can Set Off Against | Carry Forward |
|---|---|---|
| Short-term capital loss | Any capital gain (STCG or LTCG) | 8 years |
| Long-term capital loss | Only LTCG (not STCG) | 8 years |
| Speculative business loss | Only speculative income | 4 years |
| Business loss (non-speculative) | Any income except salary | 8 years |
Loss Harvesting Tip: Both old and new regime allow carry forward of capital losses, but only if ITR is filed on or before the due date (31 August). Missing the deadline forfeits the right to carry forward capital losses — a costly error for active traders and investors.
Regime Choice by Investor Profile
| Investor Profile | Recommended Regime | Reason |
|---|---|---|
| Salaried + LTCG equity only | New Regime | LTCG taxed at flat 12.5% in both; new regime gives lower slab on salary |
| Salaried + STCG (property) | Compare — old regime likely better | STCG on property is slab-rate; old regime deductions reduce slab income |
| High salary (>₹20L) + CG | New Regime | At high incomes, new regime's lower slabs outweigh deduction benefit |
| Salary ₹8–14L + active equity trader | Compute both | 87A rebate interaction critical; model the ₹12L threshold carefully |
| Retirement (low other income) + CG | New Regime (often) | Higher basic exemption; CG fills up exemption efficiently |
| Large one-time property sale | Evaluate reinvestment | Section 82/(2) exemption available in both; focus on reinvestment planning |
✅ Key Takeaways for Investors
- LTCG/STCG flat rates are identical in both regimes — regime affects only your other income tax
- ₹1.25 lakh annual LTCG exemption on equity applies in both regimes
- The 87A rebate (nil tax up to ₹12L) is lost when total income including CG exceeds ₹12L
- Debt MF gains (post-Apr 2023) are taxed at slab rate — old regime deductions help here
- Capital gains exemptions (Sections 58(1), 58(2), 58(3)) work in both regimes
- Capital losses must be reported in ITR filed by due date; otherwise carry forward is lost
- For most salaried investors with equity LTCG only, the new regime is typically better
Frequently Asked Questions
Does the ₹1.25 lakh LTCG exemption apply in both regimes?+
Yes. Section 55(2) of Income-tax Act 2025 (corresponding to old Section 112A) provides an annual exemption of ₹1,25,000 on LTCG from listed equity shares and equity-oriented mutual funds. This exemption applies regardless of whether you are in the old or new regime.
Can I set off LTCG against the Section 87A rebate?+
No. The 87A rebate works as follows: first compute tax on total income (including CG at flat rates), then reduce it by the rebate (up to ₹60,000). The rebate is not available against flat-rate CG tax directly — the Supreme Court clarified in 2025 that STCG (and by extension LTCG at flat rate) is not eligible for 87A rebate. If total income exceeds ₹12 lakh in new regime, 87A does not apply.
My only income is LTCG on equity — which regime?+
If LTCG is your only income and it does not exceed ₹2.5L (old) or ₹3L (new) plus the ₹1.25L exemption, your tax liability is zero in both regimes. For higher LTCG-only income, the new regime's higher basic exemption (₹3L vs ₹2.5L) gives a marginal advantage, but you won't qualify for 87A rebate since LTCG is not covered. The difference is small — focus on the reinvestment exemptions under Sections 58(1)/(2)/(3) to reduce the CG base.
Property LTCG — indexation or 12.5% without indexation?+
For property purchased before 23 July 2024: you can choose between 20% with indexation OR 12.5% without indexation, whichever is lower. For property purchased on or after 23 July 2024: only 12.5% without indexation applies. This choice is made at the time of filing ITR and is property-specific. This option is available in both old and new regimes.