In simple words, any profit or gain that arises from the sale of a ‘Capital asset’ is a Capital Gain. Some examples of capital assets can be Land, house property, building, vehicles, trademarks, patents, machinery, jewellery, and Leasehold rights. This profit is considered as Income and thus its attract certain Taxes in the year, which the transfer of the capital asset takes place. This is called as capital gains tax. One should note that capital gains are not applicable when an asset is inherited because there is no selling that is taking place, it is only a transfer. But, the person who inherits the asset decides to sell it out, capital gains tax will be applicable.
Note- The following are not considered capital assets:
Capital gains tax is based on the holding period of the capital asset. There are two categories of capital gains- the Long Term Capital Gain (LTCG) and the Short Term Capital Gain (STCG).
Any asset/property which is sold within less than three years of acquisition are considered as short-term assets, hence the profit earned by selling the asset is called to be short-term capital gain.
In shares/equities, if you sell the units before one year of the purchase date, the profit would be considered as the short-term capital gains.
Here, the profits earned by selling the property or asset after three years is called as long-term capital gains. In case of equities, LTCG is applicable if the units have been held for at least one year.
Capital assets that are classified as long-term capital assets if the period of holding exceeds 12 months include:
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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-
|Nature of Profits / Income||Non-Equity Funds Taxation|
|Minimum holding period for Long-term capital gains||3 years|
|Short-term capital gains||As per the tax rate of the investor (30% + 4% cess = 31.20% for investors in the highest tax slab)|
|Long-term capital gains||20% with indexation|
|Dividend distribution tax||25%+ 12% surcharge +4% cess = 29.120%|
Equity investments attract long-term capital gains if invested for more than 12 months. And if the units are sold before 12 months, short-term capital gains tax will apply.
Following are the taxes applicable-
|Equity Schemes||Holding Period||Tax Rate|
|Long Term Capital Gains (LTCG)||More than 1 Year||10% (with no indexation)*|
|Short Term Capital Gains (STCG)||Less than or equal to a year||15% Tax on Distributed Dividend - 10%#|
*Gains up to INR 1 lakh are free of tax. Tax at 10% applies to gains above INR 1 lakh. Earlier rate was 0% cost calculated as closing price on Jan 31, 2018. #Dividend tax of 10% + Surcharge 12% + Cess 4% =11.648% Health & Education Cess of 4% introduced. Earlier, education Cess was 3%.
Selling a house/property attracts tax and it is charged on the amount gained from the sale and not on the entire amount itself. If a property is sold before 36 months of purchase, the profit would be counted as short-term capital gains, and if the property is sold after 36 months, the profit would be considered as long-term capital gains.
The following rate of capital gains tax is applicable for the property.
|Capital Gain Tax Rate on Property|
|Short Term Capital Gains Tax||As per the applicable income tax slab rate|
|Long term capital Gains||20% with Indexation|
Below is a list of those cases which are exempted from any capital gains tax-
|Section 10(37)||Compulsory Acquisition of Farm land||The land should be used for agriculture|
|Section 10(38)||LTCG arising on transfer of equity shares or units of equity oriented mutual fund||The STT should be paid|
|Section 54||LTCG arising on transfer of residential house property||Gain to be re-invested in purchase or construction of one residential house property in India|
|Section 54B||LTCG or STCG arising on transfer of agricultural land||Gain to be re-invested for the purchase of agricultural land|
|Section 54EC||LTCG arising on transfer of any capital asset||Gain to be reinvested in bonds issued by National Highway Authority of India, Rural Electrification Corporation Limited, Power Finance Corporation Limited, Indian Railway Finance Corporation Limited|
|Section 54F||LTCG arising on transfer of any capital asset other than residential house property||Net sale consideration to be re-invested in purchase or construction of one residential house property in India|
|Section 54D||Gain arising on transfer of land or building forming part of an industrial undertaking which is compulsorily acquired by Government and was used for an industrial purpose for a period of 2 years prior to its acquisition||Gain to be re-invested to acquire land or building for an industrial purpose|
|Section 54GB||LTCG arising on transfer of residential property (a house or a plot of land). The transfer should take place during 1st April’ 2012 and 31st March’ 2017||The net sale consideration should be utilised for subscription in equity shares of an “eligible company”|