Ever thought why there is a ‘Capital Gains Tax’ in place when we already have ‘Income Tax’ to take a bite from our earnings?
The answer lies in the source of income. Any profit from the sale of a capital asset is termed capital gains. A capital asset is officially defined as any kind of property held by an assessee, excluding goods held in the form of stock-in-trade, agricultural land, and personal effects.
Also, no capital gain is applicable on a gifted or inherited property as these are specifically excluded from tax liability as defined in the Income Tax Act.
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So, let’s dive right into it. We’ll begin with the basics.
Usually, if an asset is held for less than 36 months, any gain obtained from selling it is considered as a short-term capital gain (STCG) and taxed accordingly. It becomes a long-term capital gain (LTCG) if the asset is held for 36 months or more.
However, shares and equity mutual funds enjoy a special taxation procedure in capital gains tax. In this case, a holding period of 12 months or more qualifies as ‘long term’.
Why is this important?
Normally, the assets owned by you do not give a regular income by way of interest or dividend, but deliver returns through price appreciation on the asset, you stand to make a huge profit if you sell them.
Capital gains tax is designed to ensure that such profits do not escape the tax net.
The capital gain arising from assets such as property or gold is taxed at your slab rate if held for less than 36 months, and at 20 per cent if held for more than 36 months.
On the other hand, listed shares and equity funds enjoy concessions on both the holding period and the rate of tax. If you have paid Securities Transaction Tax (STT) on the sale transaction, the current tax laws state that LTCG arising on the sale of listed equity shares or equity oriented mutual funds are exempt from tax. While, STCG from such shares and funds is taxable at a flat 15 per cent (plus surcharge and cess).
You can learn more about the income tax process here.
What’s in it for me?
Long-term capital gains on equities is exempted mainly to encourage Indian households to invest more of their savings in the stock market, so as to increase its productivity.
If you want to save in India, shares and equity mutual funds are about the only investments where you can hope to make return without sacrificing a big chunk of your earnings. Bank fixed deposits, bonds, gold, and small savings schemes are all taxable, most of them as per your slab rate.
As India has a mere three crore equity investors, it is quite likely that shares will continue to get a tax-free status, while small savings and bank FDs are taxed to the hilt.
You can get help from our experts from here on any taxation related query that you might have.
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Capital gain is a profit on sale of capital assets, i.e., those assets not held for sale in the ordinary course of business. As tax rates are often much lower for capital gains than for ordinary income, there is controversy about the proper definition of capital. Also, since last year, Indian government has been busy changing tax laws in the country, there is possibility we might see more of these changes, besides GST (goods and services tax), in future.
So, keep yourself abreast of the latest news on capital gains and other taxation methods through our blogs. in case the government makes any important changes.
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