What is Capital Gain Tax? Types of capital gains taxation

The term "capital gains" finds widespread use in finance, investments, and taxes. Capital gain refers to the profit an investor earns when he sells a capital asset at a price higher than its purchase cost. In simpler terms, if the selling price is higher than the acquisition cost, it results in a capital gain.

To further elaborate on capital gains, they are categorized as short-term capital gains and long-term capital gains. The differentiation is determined by the "capital gains retention period". A short-term capital gain occurs when the asset is sold within 36 months.

What is Capital Asset?

All assets such as real estate, vehicles, rental income, jewellery, machinery or intellectual property such as patents and trademarks are called capital assets. Capital assets include all direct rights, including management rights, ownership control and other tenure rights, of an Indian company.

What is Capital Gains Tax?

Capital gains tax is a tax levied on capital gains or profits earned by individuals from the sale of assets. Taxes are levied only after the assets are converted to cash and not while the assets are in the investor's hands.

For example, assume an individual owns stock in a company that increases in value each year. In this case, capital gains tax is not imposed simply because the stock price has risen. The only time capital gains tax is due is if an individual decides to sell shares for a higher price than the purchase price.

Types of Capital Gains Tax

As mentioned earlier, the tax treatment differs between long-term and short-term gains, resulting in two types of capital gains tax that you should take into account:

Long-term Capital Gain Tax: an asset is typically considered long-term if it's been owned for more than 36 months. Long-term capital gain (LTCG) is the profit earned from selling such an investment, and long-term capital gains tax is the tax applied to it. However, the investment period can be shorter for specific assets like listed equity shares, which qualify for LTCG after a certain period, typically less than 36 months, and for immovable property, which qualifies for LTCG after 24 months.

Short-term Capital Gain Tax: Understanding the concept of short-term capital gain is necessary in order to comprehend the concept of short-term capital gain tax. For numerous capital assets/investments, selling before holding for at least 36 months results in them being eligible for short-term capital gains. The profits are subject to the tax regulations for short-term capital gains.

Rates of Capital Gains Tax in India

The rates of capital gains tax in India are as follows:

Short-term Capital Gains Tax: The short-term capital gains tax rate matches the taxpayer's income tax slab rate.

Long-term Capital Gains Tax: The long-term capital gains tax rate is 20%, and it includes any applicable surcharge and health and education cess. However, if the long-term capital gains are from the sale of listed securities, units, or zero-coupon bonds without Securities Transaction Tax (STT) paid, they are taxed at 10% without adjusting for inflation or 20% after adjusting for inflation, whichever is more advantageous for the taxpayer.

Calculation Process of Capital Gains Tax in India

It is essential to comprehend how capital gains tax is calculated. Here is a detailed explanation in sequential order:

Step 1- Sale Price Calculation: Begin by identifying the selling price of the capital asset.

Step 2- Expense Deduction: Deduct any costs accumulated during the sale, like brokerage fees, legal fees, and transfer charges.

Step 3- Cost of Acquisition Deduction: Subtract the expenses associated with obtaining the capital asset, such as the buying price, commission fees, and other relevant costs.

Step 4- Cost of Improvement Deduction: Deduct the cost of enhancing the capital asset, including costs related to increasing the asset's worth.

Step 5- Capital Gains Determination: The outcome following these subtractions signifies your profits from investments.

Step 6- Tax Liability Calculation: In the end, determine the tax responsibility for the capital gains using the appropriate tax rate.

FAQs

Q. What capital gains are taxable?

A. Any time you sell an investment for more than you bought it, you potentially create a taxable capital gain. Capital gains can apply to almost any investment that is sold at a profit, such as stocks, bonds, real estate, precious metals, options contracts, or even cryptocurrency.

Q. What are the types of capital assets as per income tax?

A. Capital assets can be of two kinds- LTCA (Long-Term Capital Asset) and STCA (Short-Term Capital Asset). LTCA are assets that are held for a period longer than the prescribed holding period.

Q. What are the two types of capital gains?

A. Capital Gains are classified according to their time horizon. The two types of Capital Gains are: Short-Term Capital Gain. Long-Term Capital Gain.

Q. How to calculate capital gain tax?

A. To calculate capital gains, subtract the cost of acquisition and sale expenditures from the sale price. If capital gains exceed Rs. 1 lakh in a fiscal year, apply a 10% tax rate (plus surcharge and cess) on the excess profits. There is no tax duty on gains that are less than Rs. 1 lakh.

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