What is Capital Gains Tax?
The tax laws in India are very comprehensive. There are different sections and provisions in the Indian Tax Act that define taxation policy on different types of income. One such tax is capital gain tax levied on capital gains made by individuals. Now since there are different types of capital assets, the Indian Tax Act also has several sections defining how gains made from all capital assets are taxed.
Not only that there are different types of capital assets, but the capital gains in general are also classified under different categories giving rise to a number of capital gains tax India. We will learn everything about capital gains tax and how you can enjoy tax benefits from laid provisions for capital gain tax in India.
What is Capital Gains Tax?
Whenever you sell a capital asset at a price higher than its purchase price, you make capital gain. There are several capital asset classes such as house property, jewelry, machinery, patents, land, equities, etc. Further, the capital gains are also classified as short term capital gains or STCG and long term capital gains LTCG. The definition for STCG and LTCG for different asset classes is also different. Understanding all these is necessary because the taxation policies for different asset classes and different capital gains vary accordingly.
Types of Capital Gains
As said, there are two types of capital gains-
- Short Term Capital Gains (STCG): Speaking broadly, profits made from selling assets within 36 months of their purchase are known as short term capital gains or STCG.
- Long Term Capital Gains (LTCG): Similarly, profits made from selling assets after a holding period of 36 months are known as long term capital assets or LTCG.
Let us understand this in detail.
Taxation on Short Term Capital Gains
Previously, short term capital gains for all types of capital assets were realized when the asset holding period was less than 36 months. However, the time period was reduced from 36 months to 24 months for immovable properties like land, buildings, house properties, etc.
Short Term Capital Gains Tax Rate
There are two different tax slabs for short term capital gains:
|Type of Capital Asset||Tax Rate|
|Capital Assets other than Equity Shares||Taxpayer’s Tax Slab|
STCG: Things to Know About Calculating Capital Gains
- STCG for a few assets are realized when the holding period is less than 12 months. These assets are: equity shares of a listed company, securities such as debentures and bonds, UTI units, and zero coupon bonds.
- STCG tax is also applicable on mutual funds. However, the holding period is different for equity based funds and debt funds.
- In case the capital asset has been gifted, the short term capital gain is calculated taking the holding period of the previous owner of asset into account.
Taxation on Long Term Capital Gains
Income from capital gains made when the assets are sold after being held for at least 36 months are called long term capital gains or LTCG. The time period for immovable properties, however, has been reduced to 24 months.
Long Term Capital Gains Tax Rate
Just like STCG, LTCG has also two different two different tax rate slabs for different asset categories:
|Type of Capital Asset||Tax Rate|
|Equity Shares||10% of capital gains of more than Rs 1 lakh|
|Capital Assets other than Equity Shares||20%|
LTCG: Things to Know About Calculating Capital Gains
- LTCG for a few assets are realized when the holding period is at least 12 months. These assets are: equity shares of a listed company, securities such as debentures and bonds, UTI units, and zero coupon bonds.
- LTCG tax is also applicable on mutual funds. However, the holding period is different for equity based funds and debt funds.
- In case the capital asset has been gifted, the long term capital gain is calculated taking the holding period of the previous owner of asset into account.
- LTCG of below Rs 1 lakh gets capital gain exemption, i.e. the investor/taxpayers is exempted from paying any tax if the LTCG is below Rs 1 lakh.
Let us summarize everything in brief:
|Type of tax||Type of capital asset||Holding period||Capital Gain||Applicable tax|
|LTCG||Equities||At Least 12 months||Up to 1 lakh||Nil|
|LTCG||Equities||At Least 12 months||1 lakh or above||10%|
|LTCG||Immovable properties||At Least 24 months||Any amount||20%|
|LTCG||All other asset type||At Least 36 months||Any amount||20%|
|STCG||Equities||Less than 12 months||Any amount||15%|
|STCG||Immovable properties||Less than 24 months||Any amount||As per taxpayer’s tax slab|
|STCG||All other asset type||Less than 36 months||Any amount||As per taxpayer’s tax slab|
How to Calculate Capital Gains Tax?
One can calculate capital gain tax easily using a calculator. You just need to need to know the meaning and value of the following things:
- Purchase price: Price at which the capital asset has been purchased
- Sale price: Price at which the capital asset has been sold
- Date of purchase and sale of the capital asset
- Type of capital asset
After knowing the following details, you have to evaluate the following:
- Capital gain type- STCG or LTCG
- Cost inflation index of the purchase year
- Cost inflation index of the sale year
- Capital gains incurred
Formula to Calculate Capital Gain
- STCG = Sale price - (acquisition cost + improvement cost + transfer cost)
- LTCG = Sale price - (cost of acquisition considering indexation + cost of improvement considering indexation + cost of transfer)
What is Indexation?
Indexation means recalculation of asset purchase price after adjusting the inflation index. It allows the taxpayer to reduce the net amount of capital gain and thereby lower the tax liability. The indexation is calculated using Cost Inflation Index or CII. The index is declared by the central government and remains fixed until the next year.
Here is the list of CII of the last 10 years:
What is the maximum threshold of capital gain to claim complete tax exemption?
Complete tax exemption is offered only on long term capital gains of up to Rs 1 lakh. LTCG of above Rs 1 lakh is taxable at 10%.
What is the LTCG gain definition for equities?
LTCG on equities is realized when the assets are sold at least after 12 months of their purchase. The LTCG on equities is nil if the capital gain is up to Rs 1 lakh, above which, it is taxed at 10%.
What is the duration for debt mutual funds to fall under LTCG?
For debt mutual funds, LTCG is realized when the holding period is at least 36 months.
How much tax do I need to pay on STCG?
STCG on equities are taxed at 15% and on any other type of asset class, STCG is applicable as per the taxpayer’s income tax slab.