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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 198) |
| 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 | ₹4,00,000 |
| Other income (salary, interest) | ₹1,50,000 | ₹1,50,000 |
| Unused exemption available for CG | ₹1,00,000 | ₹2,50,000 |
| 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 (₹4L against ₹2.5L, Section 202) gives it a ₹1,50,000 edge in absorbing capital gains for low-income investors.
Mechanism 2: The Section 156 Rebate (Old 87A) — The ₹12 Lakh Factor
The rebate under Section 156 (old 87A) makes tax nil for total income up to ₹12 lakh under the new regime, but it can never exceed the tax on your slab-rate income (Section 156(3)) — so tax on special-rate income like LTCG on equity is always payable. Capital gains still count toward the ₹12 lakh total, and above it marginal relief (Section 156(2)(b)) limits the slab tax to the excess over ₹12 lakh.
| Scenario | Total Income | New Regime Tax | Old Regime Tax |
|---|---|---|---|
| Salary ₹8L + LTCG ₹3L (post ₹1.25L exemption = ₹1.75L) | ₹9.0L (₹7.25L after the ₹75,000 standard deduction + ₹1.75L) | Slab tax on ₹7.25L (₹16,250) is fully rebated; 12.5% on ₹1.75L LTCG = ₹21,875 payable | Deductions reduce tax; varies |
| Salary ₹12L + LTCG ₹3L (taxable ₹1.75L) | ₹13.0L (₹11.25L after the standard deduction + ₹1.75L) | Well above ₹12L, so no relief: slab tax on ₹11.25L (₹52,500) + 12.5% on ₹1.75L (₹21,875) = ₹74,375 | With deductions ₹3.5L: taxable ₹8.0L → ₹72,500 + ₹21,875 = ₹94,375 |
Watch the ₹12 lakh line: capital gains count toward total income. Once total income passes ₹12L, marginal relief under Section 156(2)(b) limits the tax on your slab income to the amount by which total income exceeds ₹12L — so the rebate tapers off instead of vanishing at once, but each extra rupee is taxed at up to 100% until the relief runs out (about ₹12.7L of slab income). The tax on the capital gains themselves is never rebated. Model this 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 86 | Net consideration invested in new house; no more than one other residential house; ₹10 crore cap | Both |
| LTCG invested in 54EC bonds (NHAI, REC etc.) | Section 85 | ₹50L cap in total; bonds held 5 years; must invest within 6 months | Both |
| LTCG on equity: ₹1.25L annual exemption | Section 198 | 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 (₹50,000 in the old regime): ₹13,50,000
- Debt MF: ₹50,000
- Less: 80C ₹1,50,000 + 80D ₹25,000 + HLI ₹1,80,000 = ₹3,55,000
- Taxable other income: ₹10,45,000
- Tax on ₹10.45L (old slabs): ₹1,26,000
- LTCG: (₹3L – ₹1.25L) = ₹1.75L × 12.5% = ₹21,875
- STCG: ₹1L × 20% = ₹20,000
- Total: ₹1,67,875 + 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): ₹86,250 (no rebate — total income is ₹16.5L)
- LTCG: ₹1.75L × 12.5% = ₹21,875
- STCG: ₹1L × 20% = ₹20,000
- Total: ₹1,28,125 + cess
Verdict
New regime saves ~₹39,750 (before cess) 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.
Crossing the ₹12 Lakh Line — 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 (slab tax of ₹52,500 fully rebated) |
| B: Marginal gain | ₹11,25,000 | ₹75,000 | ₹12,00,000 | ₹9,375 (slab tax fully rebated; 12.5% LTCG tax still payable) |
| C: Just over | ₹11,25,000 | ₹1,00,000 | ₹12,25,000 | ₹25,000 (marginal relief limits the tax to the ₹25,000 by which income exceeds ₹12L; the LTCG tax alone would be ₹12,500) |
| D: Well over | ₹11,25,000 | ₹2,50,000 | ₹13,75,000 | No relief: slab tax ₹52,500 + 12.5% on ₹2.5L (₹31,250) = ₹83,750 |
Scenario C shows the effect: realising ₹25,000 more than scenario B moves total income just past ₹12L and lifts the tax from ₹9,375 to ₹25,000 — the marginal relief in Section 156(2)(b) softens what would otherwise be a cliff, but it does not remove it. By scenario D the rebate is gone. Plan gains so that total income stays within ₹12L, or take enough gains to justify crossing it.
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 the return is filed on or before the due date (31 July for salaried taxpayers, 31 August for non-audit business income). 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 or 86 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 rebate (nil tax up to ₹12L, Section 156) tapers off through marginal relief once total income including CG exceeds ₹12L, and is gone about ₹70,000 above it
- Debt MF gains (post-Apr 2023) are taxed at slab rate — old regime deductions help here
- Capital gains exemptions (Sections 82, 86 and 85) 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 198 of the Income-tax Act 2025 (old Section 112A) taxes LTCG on listed equity shares and equity-oriented mutual funds at 12.5% only on the part above ₹1,25,000 a year. This exemption applies regardless of whether you are in the old or new regime.
Can I set off LTCG against the Section 87A rebate?+
Not against the tax on the gains themselves. Under Section 156(3) the rebate cannot exceed the tax on your slab-rate income, so tax on STCG and LTCG at special rates is always payable. Capital gains do count toward the ₹12 lakh total: above it, marginal relief under Section 156(2)(b) limits the slab tax to the amount by which total income exceeds ₹12 lakh, and beyond about ₹12.7 lakh of slab income the rebate is gone.
My only income is LTCG on equity — which regime?+
If LTCG is your only income and it does not exceed ₹2.5L (old) or ₹4L (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 (₹4L vs ₹2.5L) gives an 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 82, 86 and 85 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.