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?’
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
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
Simply speaking, capital assets can include the following –
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 –
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.
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.
Capital gains are divided primarily into two, namely –
Before assessing what is 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 transfer them.
In most instances, profits on the transfer of 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:
Unlisted shares and immovable property including land and building held for more than 24 months will be considered as long-term capital assets.
Calculation of long-term capital gains would require you to follow a few simple steps:
Now, to ensure proper calculation, you must know what each of these terms represents. Read on –
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
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)
| Asset | Condition | Tax Rate |
Equity Shares, units of Equity oriented Funds, Units of a business trust |
LTCG Above 1 lakh | 10% without indexation |
| Others | 20% | |
| Listed Securities, units or zero-coupon bonds | Lower of the two |
20% with indexation or 10% without indexation
|
| Other Assets | - | 20% |
| 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 | 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 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.
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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