Tax is something that every individual has to pay whether on the income earned or the business involved. Taxes are compulsory contributions that are applied to individuals or corporations by government entities.
By collecting taxes from the public, the government uses the amount collected in public services such as building roads, schools, medicare and more.
The tax applies to many things. You normally pay tax on income earned, but many of you don’t know that tax can be applicable to selling capital assets. In addition to this, if someone made gains from transferring capital assets, that can also be subject to gains tax.
In this blog, we will discuss the capital gain tax in India.
What is Capital Gain?
The profit or benefit you earned by selling a capital asset is known as a capital gain. The profit you made from the capital asset is of two types: Short Term Capital Gains and Long Term Capital Gains.
These gains heavily depend on the duration of the assets that come under your category.
Let’s know the conditions when you are required to pay capital gains:
- If you sold an asset that comes under the category of a capital asset.
- If you did sales and made some profit out of it.
- The sale is made in the previous year (immediately before the assessment year)
What’s Included in Capital Gains?
It includes both tangible and intangible properties.
- Tangible properties can be:
Intangible properties include:
- Lease Rights
The securities that FIIs hold under the rules of SEBI.
Assets that are not Included under capital assets:
- The raw material that is used in the business, as well as the stock, is used in any business or profession.
- Items used for daily use such as clothing, footwear, utensils etc.
- Household items such as movable furniture, personal vehicles etc.
- Agriculture land is located in the rural part of India.
- Gold bonds are issued by the government.
What are Short Term Capital Gains and Long Term Capital Gains?
Capital gains come in two types: Short Term Capital Gains and Long Term Capital Gains. Since short term capital gains are not subject to security transaction tax are added to your income and then taxed as per the income tax slabs.
If the gains come under the scope of securities transaction tax, then a 15% of taxation is applied to a surcharge and education cess. However, a Long Term Capital Gain attracts a 20% tax in addition to a surcharge and education cess.
Short Term Capital Assets
A capital asset which you hold for 36 months can be called a short term capital asset.
There are other specific assets whose holding period can be lowered to 24 months or 12 months.
Short term assets generally have criteria of holding for 24 months.
Examples are: Unlisted shares
Immovable properties such as buildings, land and house.
Note: If you exceed the holding period for more than 24 months, a Long Term Capital Gain would be applied.
Short Term assets Have a Holding Period of 12 months.
Equity shares that are listed on the Indian Stock Exchange
Units from UTI
Government Securities and Debentures are listed on the stock market in India.
Long Term Capital Assets
Capital assets which you can hold for more than 36 months can be classified as long term capital assets. Mobile assets for instance jewellery, if held for 36 months, will be considered long term assets.
What is Long Term Capital Gain Tax (LTCG)
Long Term Capital Gains refer to the profit that you make from an investment for a long period. LTCG can be held for 1-3 years.
These gains are eligible to be taxed under the Income Tax Act called Long Term Capital Gain Tax.
Long term capital gains for debt and equity funds are very different. As equity funds have no tax on long term gains, debt funds have a 20% tax with indexation.
There is no tax exemption on Short Term Capital Gain Tax, Long Term Capital Gain Tax are subject to tax deductions. This shows that you can save money on Long Term Capital Gain Tax by applying certain rules which come under Income Tax Act.
If you want to get an exemption from paying capital gain tax is the reinvestment of the amount received from the sale of the property.
Take a look at the three main exemptions for long term capital gain:
Section 54: This includes the long term capital gain on the sale of a house and the reinvestment of the amount received on the other house.
Section 54EC: Long term capital gains on the sale of a house and reib=vest the amount received in bonds.
Section 54F: This relates to long-term capital gains on the sale of any asset other than a home and the reinvestment of the proceeds in the purchase of a home.
Capital Gains Account Scheme
You can deposit long-term capital gains in a CAGS account if you cannot invest them within the prescribed time frame. The funds must be used within a certain time frame to construct or purchase another residential property.