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Demystifying Capital Gains Tax

  • Highlights

  • Capital gain is the profit made on sale of capital assets

  • Capital gain tax is classified as short and long-term

  • Long-term capital gains are taxed at 20%

  • Taxation of short-term capital gains depends on application of STT

Capital gains are the gains made after the selling of a capital asset. The gains from the selling of a capital asset are added to your income and taxed accordingly in the financial year when the gains have taken place. This article looks at what constitutes a capital gain and its taxation structure.

What are capital assets?

Prior to understanding capital gains tax, it’s essential to understand as to what constitutes a capital asset. Capital assets come in two forms – financial and non-financial. While shares, stocks, bonds, mutual funds are financial assets, land, property, building, etc., are non-financial assets.

Period of holding of capital assets

The period of holding of your capital asset determines capital gains and its subsequent taxation. Generally, an asset held for less than 36 months is a short-term capital asset. In case of immovable property (land, building, etc.,) this has been reduced from 36 months to 24 months for FY 17-18.

An asset held for more than 36 months qualifies as a long-term capital asset. The reduced tenor of 24 months isn’t applicable to movable property such as jewellery, debt mutual funds, etc. Assets such as securities, UTI units, equity-oriented mutual funds, etc., when held for a period of more than 12 months, qualify as long-term assets.

Long and short-term gains tax

Long-term capital gains are taxable at 20% along with surcharge and cess. On the other hand, for taxation on short-term capital gains, if securities transaction tax (STT) isn’t applicable, then the gains are added to your income and taxed as per the tax slab.

However, if STT is applicable, then short-term capital gains are taxed at 15% along with education cess and surcharge.

Capital gains tax on sale of property

In case the gain on the sale of your property is short term, it is added to your income and taxed as per your income tax slab. However, if the gain is long-term, then the tax calculated on it involves the process of indexation.

Indexation is a process in which the cost of acquiring and improving a long-term asset is adjusted against the inflationary rise in its value to determine the taxable gain. The cost inflation index is provided by the central government for different years. A flat rate of 20% is charged after indexation as capital gains tax plus surcharge and cess.

Capital gains tax mutual funds

Capital gain tax on mutual funds depend on the type of fund. The table below explains the capital gains tax applicable on mutual funds:

Mutual fund type Long-term capital gain tax Short-term capital gain tax
Equity 10% of gains above Rs.1 lakh without indexation benefit 15%
Debt 20% with indexation benefit Added to income and taxed accordingly

Now that you know these essential things about capital gains tax, you can make prudent financial decisions to optimize your capital gains.

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