What is income tax?
Income tax is a direct tax that the government charges on the income you earn during a financial year. This includes money you make from your job, rent from property, business profits, bank interest, and more. Everyone — individuals or businesses — is required to file income tax returns annually, stating how much they earned and how much tax they owe.
India follows a progressive tax system, which means people with higher incomes are taxed at higher rates. The tax slabs are announced by the government and may differ between the old and new tax regimes.
The money collected from income tax is a major source of government revenue. It’s used for infrastructure projects, social schemes, public welfare, and more. So, every rupee you pay in income tax plays a part in building the nation
What is capital gains tax?
Capital gains tax is the tax you pay when you make a profit from selling certain types of investments or assets like stocks, mutual funds, or property. When the value of an asset goes up, and you sell it for more than you paid, the difference is called a "capital gain". That’s where this tax kicks in.
But not all gains are treated equally. If you sell the asset within a short period (usually under 12 months), it’s classified as a short-term capital gain and is taxed at a higher rate. Hold it longer, and it becomes a long-term capital gain, which typically enjoys a lower tax rate.
In India, for example, if you sell equity mutual funds within a year, you may pay 20% short-term capital gains tax. But if you hold them longer, the long-term capital gains above Rs. 1 lakh are taxed at 12.5% (as of 23rd July 2024). Debt mutual funds are treated differently and may be taxed as per your income slab, depending on when they were bought.
Difference between income tax and capital gains tax
Both income tax and capital gains tax contribute to the government’s revenue, but they serve different purposes and apply to different types of income. Understanding their differences can help you make better financial decisions.
Here’s a quick comparison to clarify:
Parameter
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Income Tax
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Capital Gains Tax
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Definition
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Tax on overall income earned in a year
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Tax on profits from selling capital assets
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Source of Income
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Salaries, rent, interest, business income, etc.
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Profits from sale of stocks, mutual funds, property, etc.
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How It’s Determined
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Based on your total annual income and applicable tax slab
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Based on how long you held the asset (short or long term)
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Tax Categories
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Salaries, business/profession, capital gains, house property, other sources
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Short-term capital gains and long-term capital gains
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Coverage
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Broader – includes capital gains within its scope
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Narrower – only applies when you sell or transfer certain capital assets
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Income tax vs. capital gains tax example
Let’s make it even simpler with a real-world example.
Imagine Ravi, a salaried individual, earns Rs. 3.5 lakh in a year. His income tax would be calculated based on the current slab he’d pay 5% on the first Rs. 2.5 lakh and 10% on the remaining Rs. 1 lakh, resulting in a total tax of Rs. 7,500.
Now let’s say Ravi also earns a short-term capital gain of Rs. 10,000 from selling a stock he bought less than a year ago. This Rs. 10,000 would be added to his taxable income and taxed at the same 10% rate — so another Rs. 1,000 in tax.
However, if Ravi had held the stock for more than a year, it would qualify for long-term capital gains tax, which is just 10% for listed securities above the Rs. 1 lakh exemption threshold. That means the same Rs. 10,000 gain might not even be taxed if he stays within the exemption limit.
This example shows how understanding the nature of your income can influence your tax planning and savings. Even a small shift in how you invest—or how long you hold—can make a big difference in what you owe in taxes. Learn how to align your investments better. Open your mutual fund account today
Which is better for investors: Capital gains tax or income tax?
If you're an investor, you’ll likely prefer capital gains tax over income tax—and for good reason. Capital gains, especially long-term ones, are usually taxed at lower rates compared to ordinary income. That means if you hold your investments like mutual funds or stocks for more than a year, you might pay less tax on the gains than you would on your salary or interest income.
There's another benefit too: capital losses can be used to offset gains. So, if some of your investments underperform, you can use those losses to reduce the taxable capital gains you make from other investments. That’s a flexibility you don’t get with regular income tax.
In short, capital gains tax often results in a lighter tax burden—as long as you're smart about holding periods and offsetting strategies. It’s a key reason many investors choose to stay invested longer and let compounding do its magic.
Key takeaways
To quickly recap the comparison between income tax and capital gains tax:
Income tax is charged on earnings like salary, rent, and interest. Capital gains tax applies only when you make a profit from selling capital assets like mutual funds, shares, or property.
Income tax is based on annual income slabs, while capital gains tax is linked to the holding period of the asset—short-term vs. long-term.
Long-term capital gains are usually taxed at lower rates, encouraging long-term investing.
You can use past capital losses to reduce your current capital gains tax, which is not allowed for income tax.
Knowing how each tax applies lets you plan better—whether that means structuring your salary, selling assets at the right time, or choosing tax-efficient investments.
Conclusion
At the end of the day, both income tax and capital gains tax are here to stay—and both have a big impact on your finances. If you're earning a salary or running a business, you're liable to pay income tax as per your slab. But when you sell investments like mutual funds, stocks, or property, capital gains tax comes into play.
What really matters is how well you plan around these taxes. Holding your investments longer, using capital losses wisely, and understanding when each tax applies can significantly reduce what you owe. With a bit of planning, you can turn taxes from a burden into an opportunity to grow wealth more efficiently.
Learning about the ins and outs of capital gains tax is crucial for investors seeking to earn more through mutual fund schemes and investments. Now that you know the differences between income tax and capital gains tax, it's time to start investing through the Bajaj Finserv Mutual Fund Platform. Here, you can browse different types of mutual fund schemes, compare 1000+ mutual funds, estimate returns with the in-house mutual fund calculator tool, and more—all with a few easy clicks!
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