What is Capital Gain Tax?

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Demystifying Capital Gains Tax on Investments in India

Key Takeaways

• Capital Gains Tax refers to the tax you pay on the gains from your investments.
• Capital Gains Tax is categorised into two types – Long and Short Term Capital Gains
• You are liable to Capital Gains Tax only when you sell your assets or investment.
• The Indian Government levies Capital Gains Tax on capital assets like stocks, bonds, jewellery, real estate, etc.
• Long-term gains are taxed at a lower rate than short-term gains.

When you invest in something, you do so, intending to book profits. The idea is to get a better value than the investment value. This philosophy guides all investments. But did you know that you have to pay Capital Gains Tax when you sell your assets and investments?  Let us know more about capital gains tax in India in this article.

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What is Capital Gains Tax?

When you own any capital asset, any profit that you receive from the sale of that asset is termed as a Capital Gain. The government charges you a tax on the profits, called a Capital Gains Tax. The profit you earn is chargeable to your taxable income in the financial year in which you sell the assets. Thus, when you sell capital assets such as property, jewellery, land, market investments, etc., you have to pay a Capital Gains Tax.

Types of Capital Gains that attract Capital Gains Tax

Short-Term Capital Gains (STCG)

You are liable to pay Short-Term Capital Gains Tax when you sell an asset before the expiry of a defined period. Holding these assets for less than the specified periods will bring them under STCG. For instance, if you sell an immovable property like land, house or building before 24 months of its purchase, you will attract STCG tax. Similarly, if you sell equities, bonds, debentures, or units of equity mutual funds before 12 months, you will have to shell out STCG tax for the short-term gains earned.

Long-Term Capital Gains (LTCG)

LTCG applies when you hold a capital asset for more than a specified period. For real estate, it is a minimum of two years. For stocks, equity mutual funds or government securities, if you hold the asset for one year, you will attract LTCG tax. For debt funds and other assets, it is a minimum of three years.

How to calculate Capital Gains Tax?

STCG are taxable at 15% irrespective of your income tax slab rate.

LTCG is levied at 20% for real estate, debt funds and other assets after giving taxpayers the benefit of indexation. Your Capital Gains Tax Rate stands at 10% for stocks, equity mutual funds, listed bonds, zero-coupon bonds, units of UTI, etc.

For LTCG, you need to adjust the acquisition cost and the cost of improvement with the inflation index of the economy. This translates to an increase in the costs incurred on the assets, thereby reducing the Capital Gains.

Further, under Section 54 of the Income Tax Act, if you sell your house property, you can claim exemption from such capital gains if the proceeds are invested in acquiring, purchasing, or constructing another residential property.

Final Note

Ensure you check your tax liabilities and the applicable Capital Gains Tax in India before filing your tax returns. Note that you may also be eligible for tax exemptions on specific investments, and you should check the same before filing your returns.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.