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What is Capital Gains Tax: Short Term & Long Term Capital Gains Explained

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 are and how to calculate capital gain taxation.

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Capital Gains Tax Meaning
Assets Included and Excluded
Types of Capital Gains
Capital Gain Tax Rates
Frequently Asked Questions

What is the Meaning of Capital Gains Tax?

Capital gains tax or CGT is a tax specifically levied on the profit generated after the transfer of a capital asset. For this to hold true, you would need to transfer 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. But when the inheritor transfers the asset, it will attract capital gains.

So, capital gains refer to income that you earn by selling capital assets. Now the question arises as to what capital assets are. As per Section 2(14) of the Income Tax Act, 1961 capital asset includes:

Any property held by an assessee, irrespective of it being connected with the business or profession of the assessee
Any securities held by a Foreign Institutional Investor (FII) as an investment as per the regulations under SEBI Act,1992

Assets Included and Excluded from Capital Gains Tax

Capital gains arise when the following conditions are fulfilled:

There must be a capital asset
It must be transferred in the previous year
There must be profit or gains as a result of the transfer

Capital assets can 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 assets are as per Income Tax Act,1961, also make it a point to assess the exclusions.

Here are the capital assets which do not come under capital gains:

Agricultural land situated in India, owned in rural India as per the provisions.
Furniture and clothes owned for personal use.
Consumable items or stocks held for professional or business-related use.
Special bearer bonds and Specified Gold Bonds.
Deposit certificates issued under the Gold Monetisation Scheme, 2015.

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

Types of Capital Gains

Capital gains are divided primarily into two, namely:

Short-term capital gains
Long-term capital gains

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

What is Long-term Capital Gains Tax?

As per the new capital gains tax rules proposed by Budget 2024, the profits on the transfer of any capital asset owned for more than 24 months is known as long-term capital gains, and the tax on these earnings is called long-term capital gains tax. Earlier this holding period was 36 months.

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.

Unlisted shares and immovable property including land and buildings held for more than 24 months will be considered long-term capital assets.

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

Step 1: Start with the total amount received after capital asset sale.
Step 2: Deduct the 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.

Cost of transfer = Expenses incurred for advertising, deals, and legal expenses incurred and wholly and exclusively for the transfer.
Indexed cost of acquisition = Cost of inflation index (CII) for the year of transfer X acquisition cost/ (CII) for the year of acquisition or FY 2001-02, whichever is later.
Indexed cost of improvement = Improvement expenses X(CII) for the year of transfer / (CII) for the year of asset improvement.

What is Short-term Capital Gains Tax?

Profits earned from capital assets that are held for 24 months or for some assets 12 months, are known as short-term capital gains, after the proposed changes by Budget 2024. Thus, if you sell such assets after owning them for more than 12 or 24 months depending on the asset, 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 Long-term Capital Gain Tax Rates?

What is the long-term capital gain tax rate? Let us see in this table.

Asset	Condition	Tax Rate
Equity shares, units of equity-oriented funds, units of a business trust	LTCG above ₹1.5 lakh	12.5%
	Others	12.5%
Listed Securities, units or zero-coupon bonds	Lower of the two	12.5%
Other Assets	-	12.5%

What is the Short-term Capital Gains Tax Rate?

Here are the short-term capital gains tax rate starting from FY 2024-25:

Asset	Condition	Tax Rate
Equity shares, units of equity-oriented funds, units of a business trust.	In the case of securities, the transaction is applicable.	20%
	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 the final tax.
Other Assets.	-	Short-term capital gain tax is added to the individual’s income tax return. The person’s income slab determines the final tax.

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

FAQs about Capital Gains Tax

All

What is the capital gains tax rate?

The capital gains tax rate in India depends on the type of asset, the holding period, and your income level. Long-term capital gains are usually taxed at a lower rate than short-term gains. Short-term capital gains are mostly taxed as per your income tax slab, while for some assets at 20%. Long-term capital gains tax has been regularized to 12.5% by the 2024 budget.

What is the difference between long-term and short-term capital gains?

The main difference between long-term and short-term capital gains lies in the holding period of the asset. Long-term capital gains are realized from the sale of assets held for more than 24 months or in some cases 12 months. While short-term capital gains are realized from the sale of assets held for less than this period.

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

Such a transaction would be treated as a 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 (asset held for more than 2 years) or tax at normal slab rates for short-term capital gains (asset held for less than 2 years) would be applicable. However, this tax would be calculated on the profits from such a transfer and not on the whole amount received.

What is the new rule for indexation benefit in LTCG from FY 2024-25?

As per Budget 2024, the indexation benefit is removed on LTCG from selling an asset (listed or unlisted securities), which are now taxable at 12.5% from July 23, 2024. However, capital gains on debt mutual funds will continue to be taxed at the income tax slab rate applicable.

How are capital gains calculated?

Capital gains are calculated by subtracting the original purchase price (or cost basis) of an asset from the selling price of the asset. You can also calculate capital gains tax using an online capital gains tax calculator.

Are capital gains subject to income tax?

Yes, capital gains are subject to income tax. However, the tax rate may vary depending on the type of gain (long-term or short-term) and the taxpayer's income bracket.

Are capital gains taxed differently based on income?

Yes, the tax rate for long-term capital gains varies depending on your taxable income. Higher income levels typically result in higher capital gains tax rates.

Are there any capital gains tax exemptions?

Yes, certain exemptions apply, such as Capital gains from the sale of certain agricultural land, certain government securities or long-term capital gains from the sale of residential property under certain conditions.

Can I offset capital gains with losses?

Yes, you can offset capital gains with capital losses to reduce your taxable income. If your losses exceed your gains, you can often carry forward the excess to future tax years.

When do I have to pay Capital Gains Tax?

You have to pay capital gains tax when filing your annual income tax return. You are required to report and pay taxes on capital gains in the tax year in which the sale of the asset occurred.

I stay in a rented house and use deduction on home loan, can I still use HRA to reduce my tax?

You can use an HRA exemption calculator to understand your exemptions and claim House Rent Allowance (HRA) if you are staying in a rented home as well as get a deduction on your home loan interest if you have opted for the old tax regime.

Are capital gains taxable for hufs or only individuals?

Using an income tax calculator, you can determine the taxability of capital gains for both individuals and Hindu Undivided Families (HUFs). For HUFs, capital gains become taxable if they own more than two house properties (i.e., an existing house property and a new house property). If another house property is purchased, the amount of exemption allowed earlier will be chargeable as capital gains..