How to calculate tax if capital gains are your sole income in FY25

Tax rates on long-term capital gains (LTCG)—investments held for more than a year before being sold—from equity are taxed at 12.5% if sold after 23 July 2024 and 10% for those sold before this date.

Further, an exemption of ₹1 lakh and ₹1.25 lakh is allowed on equity sold before and after 23 July 2024, respectively. For gains made FY26 onwards, a flat rate of 12.5% and exemption of ₹1.25 lakh would be applicable.

Deducting the permissible exemptions is crucial to calculating net taxable income. Apart from the ₹1.25 lakh exemption allowed on equity capital gains, under the old tax regime, individuals are eligible for a basic exemption limit of ₹2.5 lakh. Under the new tax regime, this limit is ₹3 lakh. These deductions are used to compute the net capital gains that are subject to tax.

“Assuming an assessee has made LTCG on equity mutual funds that were sold after 23 July 2024, the net gains will be computed after first allowing ₹1.25 lakh as an enhanced exemption, followed by a reduction of the basic exemption limit applicable under both the regimes. The remaining amount, if any, will be taxable at the applicable rate of 12.5%,” explained Vishwas Panjiar, partner, Nangia Andersen LLP.

For example, Mr A earned ₹5 lakh LTCG. First, after deducting the ₹1.25 lakh exemption under Section 112A of the Income Tax Act, the gains stand at ₹3.75 lakh. Since this is above the basic exemption limit (under both tax regimes), the gains are taxable. However, next, Mr A can deduct the basic exemption amount of the tax regime he picks. Since the new tax regime has a higher exemption limit of ₹3 lakh, Mr A’s net capital gains stand at ₹75,000 and his tax liability at ₹9,375 (12.5% rate).

If, after the deduction under 112A ( ₹1.25 lakh or ₹1 lakh), the total capital gains are below the applicable exemption limit, no income tax is to be paid. Moreover, the individual may not even be required to file an ITR in such a case.

“The obligation to file ITR will also depend on that he is a resident individual, without any foreign asset or signing authority in a foreign bank account, does not fulfil other prescribed conditions where filing of tax return is mandatory or where the individual does not have any refund of tax or carried forward loss to claim,” said Sonu Iyer, partner and national leader, people advisory services-tax, EY India.

“If these criteria are met and net capital gains are below the basic exemption limit, an ITR need not be filed,” she added.

FY26 onwards, the standard LTCG tax rate of 12.5% is applicable on equity assets.

Why rebate benefit not allowed

Both the tax regimes offer a rebate up to a certain income limit under Section 87A, meaning incomes up to the rebate limit are tax-free. The old regime allows a tax rebate on incomes up to ₹5 lakh. In the new regime, the rebate limit until 2024-25 was ₹7 lakh, which has been increased to ₹12 lakh from FY26 onwards.

However, equity capital gains do not qualify for this rebate.

“Rebate of income tax is not available on LTCG and STCG (short-term capital gains) made on equity assets. This means if a taxpayer only has capital gains income in 2024-25 and it is below the rebate limit of ₹7 lakh, they would still pay tax on it at 12.5% tax rate, after deducting the applicable exemptions,” said Manohar Goenka, a chartered accountant (CA) and chief manager, REC Ltd.

In contrast, Panjiar said the rebate under Section 87A is available for all other cases of capital gains, provided the total income remains within the threshold.

Advance tax obligation

When the total tax liability in a fiscal year exceeds ₹10,000, the taxpayer is obliged to pay advance tax. If capital gains are your only income, the advance tax still needs to be paid.

Advance tax is paid in four specified instalments throughout the year on or before the prescribed due dates. Defaulting on due dates attracts penal interest. Considering the nature of capital gains that are often non-recurring and sudden, the law provides certain relief on advance tax payments, said Panjiar.

“If the capital gains have arisen after one of the specified instalment dates, the taxpayer can pay the amount of advance tax in the subsequent instalments, and the taxpayer is not liable to pay interest on the missed instalments.”

While computing advance tax on capital gains, taxpayers should consider both the exemption of ₹1.25 lakh as well as the basic slab exemption applicable under the respective tax regime. “Additionally, it is important to consider TDS/TCS while computing your net tax liability,” said Panjiar.