KNOWLEDGE CENTRE Tax Planning / What Are Capital Gains And How Are They Taxable?
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What Are Capital Gains And How Are They Taxable?


Profits earned from the sale of a capital asset are known as capital gains. This profit is taxable in the financial year during which the sale of the capital asset is completed.

In case an asset is inherited, there are no capital gains because there is no sale, but just a transfer of ownership. However, if you sell an inherited capital asset, there is an instance of capital gains. The Income Tax (IT) Act exempts assets that are received as gifts through a will or inheritance. Usually, most of the capital gains tax you’ll have to pay will come from your investments in mutual funds or the share market.

What Are Capital Assets?

Some capital assets include patents, jewelry, land and building, leasehold rights, house property, trademarks, vehicles, and machinery. However, the following are not considered as capital assets:

  • Raw materials, consumables, or stocks held for business purposes
  • Gold deposit bond issued under the 1999 scheme
  • Personal use items such as furniture or clothes
  • 1991 special bearer bonds
  • Agricultural land in rural areas
  • Various gold bonds issued by the central government

What Is The Difference Between Long-Term And Short-Term Assets?

Any capital asset that is held for less than 36 months is classified as a short-term asset. The period of 36 months is now reduced to 24 months from the financial year 2017 – 18 only for immovable assets such as house property, land, and building. However, this reduced period is not applicable for a moveable property, such as debt mutual funds, jewelry, and others.

The following assets, if transferred after July 10, 2014, are considered as short-term assets when these are held for less than 12 months.

  • Quoted or unquoted zero coupon bonds
  • Equity or preference shares issued by a listed company
  • Equity-oriented mutual funds
  • Government securities, bonds, and debentures listed on stock exchange
  • Quoted and unquoted units from Unit Trust of India (UTI)

Capital assets that are held for a period extending 36 months are considered as long-term assets.

  • If a capital asset is acquired through inheritance, will, gift, or succession: To determine whether such asset is short-term or long-term, the holding period of the previous owner is also taken into account.
  • In case of rights or bonus issues, holding period commences from the date of allotment of such shares.

How Are Capital Gains Taxed?

The rates for capital gains tax are discussed below:

  • Long-term capital gains tax: 20% + education cess + surcharge
  • Short-term capital gains tax, if securities transaction tax (STT) is levied: 15% + education cess + surcharge
  • Short-term capital gains tax, if securities transaction tax (STT) is not levied: The short-term capital gains are included in your taxable income and taxed as per Your Slab.

What Are The Taxes On Debt And Equity Mutual Funds?

Once you invest in mutual funds, you will realize that the taxes on mutual funds are different for debt and equity schemes. When 65% or more of the fund corpus is invested in equities or related instruments, it is known as an equity mutual fund.

As from July 11, 2014
Mutual fund type Short-term gains tax Long-term gains tax
Debt funds As per your income tax slab 20% with indexation
Equity funds 15% NA

 

If you invest in debt mutual funds, the holding period to qualify as a long-term capital asset is 36 months. This means that you must stay invested for at least three years from the date of purchase to enjoy long-term capital gains tax. If you redeem the mutual fund units before this period, the profits are added to your income and subject to tax as per your slab.

The taxes on mutual funds’ equity schemes also depend on the holding period. If you hold these for less than 12 months, the capital gains are considered as short-term. However, if you hold the mutual fund units for more than one year, the gains are long-term.

How To Calculate Capital Gains Tax?

The simple formula to derive the value of short-term and long-term capital gains are given below:

  • Short-term capital gains = Full value of consideration – expenses incurred for transfer – acquisition cost – improvement cost
  • Long-term capital gains = Full value of consideration – expenses incurred for transfer – indexed acquisition cost – indexed improvement cost

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