Updated Mar 24, 2022

What is Capital Gain Tax in India?

What is Capital Gain Tax in India?

Introduction

Any gain or profit after the sale of some capital asset is termed as capital gains and comes under the income tax act 1961 to be charged. The act specifies that a capital asset is any property held by a person like- lands, buildings, debentures, jewellery, machinery, trademarks, leasehold, patents, house property, vehicles and equities. However, it does not include agricultural land, specific bonds and stock-in-trade. The tax on the capital gain could be long term or short term, and they start from 10 per cent and 15 per cent.

The income tax in India specifies that the property, when inherited by a person, does not come under the taxable chart when the property isn’t sold. But if there is any income generation with the help of the property either by selling the property or renting it out or any other way, then the individual must be taxed on the income thus earned.

Taxation Rate

Two factors decide the tax on capital gains in India. These factors are:

• The capital assets’ nature
• The capital assets period

Short term capital gains

These gains are taxed according to individual income tax slabs as they arise from selling property, bonds, or gold like capital assets. The securities listed with the short term capital gains are taxed at 15 per cent flat. This is done to discourage those individuals who purchase or invest a property only for quick profits by predicting or speculating the stock market. Further, it is done to incentivise more people to take up long term investments to better economic growth.   

Long term capital gains

These gains are taxed differently as per the asset involved. On the sale of assets like bonds, stocks or equity, debt funds and other assets are taxed at 10 per cent whereas it is 20 per cent on debt funds, real estate and 20 per cent plus a 3 per cent cess on property and gold. The equity shares and equity-oriented mutual funds listed with long term capital gains are not taxed because of the condition of paying Security Transaction Tax (STT) at the buying of transactions like these.

Debt-Oriented Mutual Funds

The tax rates vary for these types of mutual funds. The mutual funds invested in equity and equity-related instruments are not more than 65 per cent are known as debt-oriented mutual funds.

Calculation of Capital Gain

To calculate the right capital gain tax, it is important to calculate the capital gains accurately. The capital gains’ calculations are as follows:

Shares and Equity

The expenditure that occurs at the transfer or sale of mutual funds or shares is to be subtracted from the sale proceeds when capital gains are to be calculated. And then, the final amount that comes is taxable under the capital gain tax calculation. The securities transaction tax cannot be subtracted as the expenditure. For instance: a broker’s commission and Demat account fee can be subtracted from the total capital gains. As the equity market is volatile, the loss in short term capital, if any, could be set off against some other short term capital gains.

Real Estate

The cost at which the property was acquired with other expenditures is subtracted from the sum amount of sale price of that asset to find short term capital gains. The tax is thus then levied on the remaining amount as it is taken as income. The asset transfer does occur at a cost, and these costs are also subtracted from the sum amount as an expenditure. For instance- brokerage, advertisement expense, commissions etc. The indexed cost that occurred at the time of acquisition with other expenditures is subtracted from the sum amount as that of the selling price of the property. And the tax is then levied on the remaining amount.

NRIs

The non-resident Indians are taxed when selling any property or asset after about 36 months of purchase as per the long-term capital gains of 20 per cent. But if the purchased property is sold before 36 months; then the property is taxed according to the short term capital gains that are under the individual income tax bracket.

Conclusion

Thus the profit that one earns by the sale of a capital asset is termed as capital gain, and the profit, therefore, earned, comes under the category of income and must be taxed. Tax levied on this profit or capital gain is capital gain tax. And capital gain tax could be either long term or short term as levied on the capital gain.