Capital gain is an increase in asset value or investment value due to the increase in the price of the asset or investment. This gain happens when the price of an asset or the sale of an asset increases and crosses its purchase price. This kind of capital gain is applicable for all kinds of capital like stocks, Bonds, goodwill and even real estate. A capital gain is always counted as an income.
A capital gain may be short-term or a long-term gain. Any capital asset that is held by an assessee for less than a year is considered under short-term gains. Whereas, any asset held for more than a year is termed under long-term gains. Capital gains must be claimed on income taxes.
In the same way, a Capital Loss occurs when the price value of the asset or investment falls and becomes lower than the price at which it was purchased.
Capital gain can be both realised and unrealised, Realised gain is when a business records a gain on the sale of an asset or investment. An unrealised gain is when the price of the asset or investment increases, but there is no sale of the same.
Realised gains are taxed since a transaction takes places whereas unrealised gains remain on paper. Since they remain on paper, they are taken into account only during the Accounting period and are not taxable.
Realised capital gains are either short-term or long-term. Short-term gains are when an asset or an investment sold was held for less than a year. Long-term gains are when the asset or investment is held for more than a year.
Note: When there is a gain on investments like Mutual Funds, the tax on the gain is applied to the fund’s investors. However, the short-term and long-term aspect of the gain is applied to the taxable rate. If the asset or investment sold was short-term, the gain is taxed at the ordinary income tax rate. However, if the gain is long-term, the gain is taxed at a lower tax rate.
There will not be any capital gains applicable when an asset is inherited. This is because there is no actual ‘sale’, it is only a transfer.
If this asset is sold by the person who inherits it, capital gains tax will be applicable on account of actual ‘sale’.
The Income Tax act has explicitly exempted assets received as gifts by means of inheritance or will.
Capital gains are chargeable to tax in the year in which the transfer or sale of the capital asset takes place.
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The tax rate of capital gains is divided into the short-term capital gains tax and long-term capital gains tax. They are such as-
The short-term capital gain is taxable at the rate of 15 percent +surcharge and education cess. In case of debt mutual fund, STCG is taxed as per individual's tax slab.
As per Union Budget 2018, long-term capital gains exceeding INR 1 lakh arising from the redemption of mutual fund units or equities on or after 1st April 2018, will be taxed at 10 percent (plus cess) or at 10.4 percent. Long-term capital gains till INR 1 lakh will be exempt.
For example, if you earn INR 3 lakhs in combined long-term capital gains from stocks or Mutual Fund investments in a financial year. The taxable LTCGs will be INR 2 lakh (INR 3 lakh - 1 lakh) and tax liability will be
INR 20,000(10 per cent of INR 2 lakh).