Capital Gains Tax: Long Term & Short Term Gains

Taxation in India varies based on the category of income reported. In this regard, taxpayers often face confusion regarding what capital gains are. If you are wondering the same thing, you have come to the right page!

Here is an in-depth look at what capital gains represent, and it also answers your question ‘what is capital gains tax?’

Explaining Capital Gains: Which income fall under this category

Capital gains refer to any income that you earn by selling any capital assets. Now the question arises as to what capital assets are. Simply speaking, capital assets include the following –

Jewellery
Lease rights
Trademarks and patents
Building
Land
Machinery
House property
Rights in any Indian company

Now that you know what capital gains are in income tax, also make it a point to assess the exclusions. Here are some incomes, which do not come under capital gains –

Agricultural land owned in the rural parts of India
Furniture and clothes owned for personal use
Consumable items or stocks held for professional or business-related use
National defense bonds, 6.5% gold bonds, and 7% gold bonds. All of which must be issued by the government
Special bearer bonds

Some basic exemptions on long-term capital gain are discussed below for 2021-2022:

NRI having ₹ 2.5 lakh as annual income
Hindu-Undivided-Family having ₹ 2.5 lakh as annual income
Resident Indians having ₹ 5 lakh as annual income, who are aged 80 years or more
Resident Indians having ₹ 3 lakh as annual income, who are aged 60 years or more
Resident Indians having ₹ 2.5 lakh as annual income, who are aged less than 60 years

Now that you have a clear idea of what a capital gain is in income tax, you must start understanding the intricacies of taxes on such gains.

What does Capital Gains Tax mean?

Capital gains tax or CGT is a tax specifically levied on the profit generated after the sale of a capital asset. For this to hold true, you would need to sell the particular capital asset at a price higher than what you paid to buy it.

Therefore, property or capital assets inherited do not qualify for this taxation. In such cases, no transaction occurs, but only a change of hands from one person to another.

Types of Capital Gain

Capital gains are divided primarily into two parts, namely –

Short-term capital gains
Long-term capital gains

Before assessing what is a long-term capital gain and short-term gain, you must understand that the difference is mainly in the amount of time one holds the capital assets before deciding to sell them.

What is a Long-term Capital Gains Tax?

In most instances, any capital asset owned for more than 36 months is known as long-term capital gains. Taxes on these earnings are known as long-term capital gains tax.

However, a few assets are considered long-term, even if they are held for 12 months or more. These include:

Quoted or unquoted Unit Trust of India bonds.
Securities, such as debentures, bonds, and government securities, which are listed on a recognised Indian stock exchange.
Equity mutual funds.
Zero-coupon bonds.
Equities or preference shares of a company listed on a recognised Indian stock exchange.

Calculation of long-term capital gains would require you to follow a few simple steps:

Step 1: Start off with the total amount received after capital asset sale.
Step 2: Deduct the indexed cost of transfer + indexed cost of acquisition + indexed cost of improvement.

Now, to ensure proper calculation, you must know what each of these terms represents. Read on –

Indexed cost of transfer = Expenses incurred for advertising, deals, and legal expenses.
Indexed cost of acquisition = Cost of inflation index for the concerned acquisition year X acquisition cost/transfer year cost of inflation index.
Indexed cost of improvement = Improvement expenses X inflation index cost of the improvement year /transfer year cost of inflation index.

What is Short-term Capital Gains Tax?

Profits earned from capital assets that are held for 36 months or less are known as short-term capital gains. However, there are some exceptions to this segregation. For example, in the case of land, building, or house property, this span has been reduced to 24 months only. Thus, if you sell such assets after owning them for more than 24 months, it would be classified as a long-term capital gain.

The formula for short-term capital gains calculation is the same as that for long-term capital gains. It is as follows –

Short-term capital gain = Full value of consideration – (cost of improvement + cost of acquisition + cost of transfer)

What are the Capital Gain Tax Rates?

What is the long-term capital gain tax rate? Let us learn in detail

Condition	Tax Rate
Gains from the sale of equity funds or shares	15% on any amount exceeding Rs.1 lakh
Gains from the sale of assets other than equity funds or shares	15%

What is the short-term capital gain tax rate?

Condition	Tax Rate
In the case of securities, the transaction is applicable	15%
In the case of securities, the transaction is not applicable	Short-term capital gain tax is added to the individual’s income tax return. The person’s income slab determines final taxation

Exemptions of Long-term Capital Gain Tax Payment

If you are wondering ‘what are the rules regarding exemption of capital gain,’ the following situations would permit a complete exemption from having to bear long-term capital gains taxes –

Individuals aged 80 years or above with an annual income of less than Rs.5 lakhs. Thus, this answers the question, ‘what is the limit for LTCG to be tax-free?’
Individuals aged between 60 and 80 years with an annual income less than Rs.3 lakhs in 2021 will be exempted from paying this tax.

However, keep in mind that exemptions under Section 80U and Section 80C do not apply to long-term capital gain taxes.

You must know about these aspects of capital gains before investing to maximise the scope of gains.

Frequently Asked Questions

All

I have sold a house that I purchased 5 years ago. Which type of capital gain tax would be applicable on such a transaction?

Such a transaction would be treated as long-term capital gain, since you held the property in question for more than 24 months. Thus, the taxes applicable would be calculated accordingly.

What is the rate of tax on long-term capital gains for NRI selling property in India?

20% long-term capital gain tax would be applicable in such cases. However, this tax would be calculated on the profits from such a transfer and not on the whole amount received.