The tax imposed on the profit or gain earned on selling any capital assets is Capital Gains Tax. Depending on the period of holding, Capital gains tax can be Long term Capital Gains Tax (LTCG) or Short term Capital Gains Tax (STCG). LTCG is basically 10% for stocks and equity mutual funds and 20% with indexation for any real estate, Debt mutual funds and other assets. LTCG on equities/equity mutual fund does not get the benefits of indexation. STCG is imposed as per your slab rate. The holding period for any classifying tax as LTCG or STCG changes from any asset to asset. LTCG generally applies to real estate for a Holding period of more than 2years, to debt funds for a holding period more than 3 years and to stocks/equity mutual funds for holding period of more than 1year.
Any asset such as Immovable property, vehicles, leasehold earning, jewellery, machinery or any intellectual property such as Patents and Trademarks is termed a Capital Asset. Capital assets include any direct rights, which in of Indian companies, includes the Rights of management or ownership control as well as any other holding rights.
Capital gain is the net profit which an investor makes after selling his capital assets at a price that is greater than the original purchase price. The transfer of such capital asset should have had been done in the previous financial year in order to be eligible for the taxation during the Current year. The entire value of this sale is taxable under the Income head termed as ‘Capital Gain’. This whole process is backed by three basic fundamental elements:
- Any capital asset such as Property, Gold etc.
- The transfer of such Capital asset.
- A particular profit earned as a result of this transfer.
However, let’s say if there is any loss at the time of selling the Capital assets, in the context of purchase price can result in Capital loss, which would of course be tax exempt. Capital gains tax does not apply for inherited assets or any asset acquired through gift or partition of HUF property.
Assets exempted from capital gains
- Any stock held in trade (profits on this will be taxed as Business income).
- Any consumable raw materials which are kept for the specific purposes of any business or as per profession (taxed under Business income).
- Personal effects which are movable/effects kept for Personal use.
- Any agricultural land which is not located within an 8 km radius of any Municipality, Municipal Corporation, notified area board, any town committee/cantonment area board having a minimum residential population of atleast 10,000 people.
- Any National Defense Gold Bonds 6.5 % Gold Bonds or the Special Bearer/ Gold Deposit bonds under the Government Gold Deposit Scheme.
Type of Capital Gain
- Long-Term Capital gain (LTCG): Capital gain is long term if the particular asset is held for greater than any specified period. This period is- 2 years for any real estate, 1 year for any stocks/equity mutual funds/listed debentures or government securities/zero-coupon bonds/units of UTI and, 3 years for Debt funds/any other assets.
- Short-Term Capital gain (STCG): The gain in any particular asset sold before the expiry of a defined period is termed as Short term capital gain. The holding periods for different assets are mentioned above. Holding these assets for less than the periods mentioned will ultimately bring them under STCG.
Calculation of Capital Gains
For the ease of calculation of capital gain tax it is done as per the nature of capital gain.
- Taxation policy on short-term capital gains– STCG is calculated by adding the capital gain to the Total income of the taxpayer. Subsequently, Income tax is applied as per the individual’s tax bracket.
- Taxation policy on long-term capital gains – LTCG is imposed at:-
- 20% for any real estate, debt funds, other assets, after giving taxpayers the benefit of indexation.
- 10% for any stocks/equity mutual funds/listed bonds/zero coupon bonds/units of UTI.
Basically any profit or gain that arises from the sale of any ‘capital asset’ is a Capital gain. This gain or profit comes under the category ‘Income’, and hence you will need to pay tax for that particular amount in the year in which the transfer of the Capital asset takes place. This is called Capital Gains Tax, which can also be short-term or long-term.