Guide to Income Tax on Capital Gains: What You Need to Know

Understand the essentials of capital gains tax, including short-term and long-term gains, tax rates, and exemptions. Simplify your financial planning with this comprehensive guide.

Introduction to Capital Gains Tax

Capital gains tax is a tax you pay on the profit from selling an asset, like real estate, shares, or mutual funds. Knowing how this tax works is important for good financial planning. In this guide, we'll explain everything you need to know about capital gains tax in simple terms, so you can manage your personal finances with confidence.

What are the Different Types of Capital Gain Tax?

What is Short-term Capital Gain Tax?

Short-term capital gains (STCG) are the profits you earn when you sell off your capital assets within one year of holding them. Note that the holding period varies as per the capital asset.

• When the security transaction tax is applicable: Short-term Capital Gain tax  is 15%
• When a security transaction tax is not applicable, the short-term capital gain tax will be calculated based on the taxpayers' income and will be automatically added to the taxpayer's ITR and charged at normal slab rates.

What is Long-term Capital Gain Tax?

Long-term capital Gain Tax (LTCG) are the profits you earn when you sell off your capital assets after one year. Note that the period of holding for different assets to be claimed as long-term assets varies according to the asset.

• Long-term capital gain tax is applicable at 20% except on the sale of equity shares and the units of equity-oriented funds.
• Long-term capital gains are 10% over and above Rs 1 lakh on the sales of equity shares and units of equity-oriented funds.

What are Capital Assets?

Capital assets are the property you own and can be transferred, like land, buildings, shares, patents, trademarks, jewelry, leasehold rights, machinery, vehicles, etc.

Here is a list of assets that do not fall under the category of capital assets:–

• The stock of consumables or raw materials held for use in business or profession.
• Personal belongings meant for personal use like clothes, furniture, etc.
• A piece of agricultural land is located in a rural area.
• Special bearer bonds, 6.5% gold bonds (1977), 7% gold bonds (1980), or national defense gold bonds (1980) which the Central Government has issued.
• Gold deposit bond (1999), issued under the gold deposit scheme or deposit certificate issued under the Gold Monetisation Scheme, 2015, notified by the Central Government.

What are the Different Types of Capital Assets?

Capital assets are divided into two types based on the period after which they are sold. The types of capital assets are as follows –

Short-term Capital Assets

Short-term capital assets are those held for less than or equal to 36 months. This means that if you sell off the asset within 36 months of buying it, it would be called a short-term capital asset. However, in some cases, the holding period is reduced to 24 months and 12 months. These cases include the following 

Long-term Capital Assets

 Long-term capital assets are those held for more than 36 months and then sold off. Immovable property sold after 24 months would be categorized as a long-term capital asset. In the case of equity shares, securities, mutual fund units, etc., however, the holding period of 12 months is applicable. If sold off after 12 months, they would be called long-term capital assets.

Generally, the holding period of capital assets to be considered as long-term is 36 months. However, there are certain exceptions to this rule. Here’s a summary of different types of capital assets and the period of holding, after which they are considered long-term capital assets -

How to Calculate Capital Gains Tax?

Short-term capital gains Calculations

Example Here-

 A house property was bought on 1st January 2021 for INR 50 lakhs. On 1st January 2022, INR 5 lakhs were spent on improving the house. On 1st November 2022, the house was sold for INR 65 lakhs.

Since the house was sold after 22 months of buying it, it would be categorized as a short-term capital asset. The gain from selling the house would be called a short-term capital gain, and it would be calculated as follows –

Long-Term Capital Gain Calculations

Example Here-

A house property was purchased on 1st January 2000 for INR 20 lakhs. On 1st January 2005, repairs were done on the house, which amounted to INR 5 lakhs. On 1st January 2023, the house was sold for INR 75 lakhs. A brokerage was paid to the broker, which was INR 1 lakh. What would be the capital gain amount?

Since the asset has been held for more than 36 months, it is a long-term capital asset, and the gain is a long-term capital gain. The gain would be calculated as follows –

Capital Gains Tax Rates

Short-term capital gains tax rate

Long-term capital gains tax rate

FAQs

Q. What is the difference between short-term capital gains (STCG) and long-term capital gains (LTCG)?

A. Short-term capital gains are earned from assets held for less than three years, while long-term capital gains are from assets held for more than three years. The tax rates and exemptions for these two types of gains differ.

Q. How is capital gains tax calculated on property?

A. Capital gains tax on property is calculated based on the difference between the sale price and the indexed cost of acquisition. Long-term capital gains are taxed at 20% with indexation, while short-term gains are taxed as per the individual's income slab.

Q. What are the exemptions available under Section 54?

A. Section 54 allows exemption from capital gains tax if the sale proceeds of a residential property are reinvested in another residential property within two years of the sale.

Q. How does indexation benefit reduce tax liability?

A. Indexation adjusts the purchase price of an asset for inflation, reducing the taxable gain. This adjustment lowers the capital gains tax liability.

Q. What is the tax rate on long-term capital gains for shares?

A. Long-term capital gains on shares exceeding ₹1 lakh are taxed at 10% without indexation benefit.

Q. Can I claim deductions for capital gains tax?

A. Yes, you can claim deductions under sections like 54, 54F, and 10(38), which provide exemptions for reinvestment in residential property and gains from listed securities.

Q. How can I minimize my capital gains tax liability?

A. Consider diversifying investments, investing in tax-free bonds, and utilizing tax-saving funds like ELSS. Also, make use of exemptions and deductions available under the Income Tax Act.

Q. What is the impact of the new tax regime on capital gains?

A. The new tax regime offers lower tax rates but removes most deductions and exemptions. You should compare both regimes to see which one benefits you more.

Q. What are the key differences between STCG and LTCG?

A. The key differences are the holding period (less than three years for STCG and more than three years for LTCG) and the tax rates (higher for STCG and lower for LTCG, with indexation benefits for LTCG).

Q. How can I use a capital gains tax calculator?

A. Input details like asset type, purchase date, sale date, and sale price. For long-term assets, apply the indexation benefit. The calculator will provide the taxable gain based on current tax rates.

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Author- Ayush Naik  

Ayush Naik is an expert in personal finance with an MBA in Finance. With over five years of experience working alongside stock market traders, Ayush has a deep understanding of market dynamics and investment strategies. His practical insights and analytical skills have helped many individuals navigate the complexities of financial planning and investment. Ayush’s professional background and commitment to educating others make him a valuable contributor to our personal finance blog.