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Fincash » Capital Gains Tax

Capital Gains Tax

Updated on November 25, 2020 , 119 views

What is Capital Gains Tax?

Capital gains tax is a tax applied to capital gains or profit that a company or an individual acquires over the selling of their assets. This tax is applied when the person makes the sale and gets cash in hand.

Capital Gains Tax

If you as an individual own shares in a company, you will have to pay tax if your appreciated shares are sold at a higher price than the purchase price. However, no tax is levied if the shares are appreciated with regards to price, but not sold.

Major countries have capital gains tax as part of their tax regulations. It is levied on various kinds of assets like stocks, Bonds and real estate property.

Businesses need to understand that tax applied to assets are not equal all the time. It depends on investment income. The amount of tax applied will depend on the holding period of the asset. In the same way, the company can make two types of profits namely short-term and long-term capital gains.

Short-term capital gains are what you get when assets are held for a period of lesser than 12 months, whereas long-term capital gains are for assets that are held for a period for more than 12 months.

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How to Reduce Capital Gains Tax?

Various factors affect the rise of Capital Gain tax. Mentioned below are some ways to reduce the tax.

1. Waiting Period

It is important to note that one of the major ways to save capital gains tax is to wait longer. Selling it in short-term attracts higher capital gains tax, whereas waiting long-term, attract lower capital gains tax.

2. Sell when Income is Less

The long-term capital gains rate is defined by one’s marginal tax rate, which is dependent on an individual’s income. Therefore, when the income is low, selling of long-term capital gain assets can help reduce the capital gains tax.

Income can be affected through loss of employment, retirement, etc.

3. Capital Loss and Capital Gain

The net capital gain is an important factor that is considered during a period of time. When an individual uses capital losses in years where capital gains are made, the individual can lower capital gains tax greatly.

For instance, an individual owns stocks X and Y. When stock X is sold, the individual makes a profit of Rs. 90 whereas when stock Y is sold, a loss of Rs. 30 is made. Therefore, the net capital gain is the difference between the capital gain and loss which Rs. 60.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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