Capital gains are the gains made after the selling of a capital asset. The gains from selling 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 capital gain and its taxation structure.
What are capital assets?
Before understanding capital gains tax, it’s essential to understand what constitutes a capital asset. Capital assets come in two forms – financial and non-financial. While shares, stocks, bonds and mutual funds are financial assets, land, property, buildings, etc., are non-financial assets.
Period of holding of capital assets
Capital gains and their subsequent taxation are determined by the length of time you hold your capital asset. Generally, an asset held for less than 36 months is a short-term capital asset. In the case of immovable property (land, buildings, etc.), this had 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 doesn’t apply to movable property such as jewellery, debt mutual funds, etc. Assets such as securities, UTI units, equity-oriented mutual funds, etc., when held for more than 12 months, qualify as long-term assets.
Long and short-term gains tax
Long and short-term gains tax long-term capital gains are taxable at 20%, along with the surcharge and cess. On the other hand, for taxation on short-term capital gains, if securities transaction tax (STT) isn’t applicable, the gains are added to your income and taxed as per the tax slab. However, if STT is applicable, short-term capital gains are taxed at 15% along with the education cess and surcharge.
Capital gains tax on the sale of property
If 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. The central government provides the cost inflation index for different years. A flat rate of 20% is charged after indexation as capital gains tax plus surcharge and cess.
Capital gains tax on mutual funds
Capital gain tax on mutual funds depends 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 optimise your capital gains.
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