What are capital gains and how tax rates are applied on them? Find out here

Where there is income, there is income tax too. Income here includes salary, rental income, profits from carrying on a business or a profession, profits made on the sale of an asset, interest income etc. While all of these incomes after allowing the applicable deductions are subject to income tax at rates applicable to the individual based on the income slab he falls under, capital gains taxation is a little different. Interestingly, determining whether capital gains are long term or short term is crucial to determining the rate of tax applicable on capital gains. Lets us see how.

Capital Gains - Short Term and Long Term

Capital gains are the profit you make when you sell a capital asset. A capital asset commonly includes land, a house property, shares, machinery or equipment used in a business etc. The capital gain is arrived at by reducing the purchase price from the sale price. 

There could be instances where the sale could result in a loss too where the sale price is lesser than the purchase price. This is termed as Capital loss. 

The rate of income tax payable on such gains would depend on whether the gains made are short term or long term. Hence the need to determine the nature of the asset i.e. whether the asset is a Long Term Asset (LTA) or a Short Term Asset (STA). Gains on sale of these assets would be called Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) respectively. 

An asset can be classified as an LTA or an STA depending on its period of holding. Period of holding is nothing but the duration for which the taxpayer has held the asset from the time he acquired it till the time he sold it. 

Let us take the example of listed equity shares to understand this concept better. These shares, if held for less than 12 months will be considered STAs and accordingly, any gains made from their sale would be STCG. If these shares are held for more than 12 months, they would qualify as LTAs and gains made on their disposal would be LTCG. 

Interestingly, as already stated above, rates of tax on capital gains depend on the nature of the gains made and also the nature of the asset held. In the above example, since the asset held are listed equity shares, STCG would be taxed at 15% while LTCG, which earlier enjoyed a complete exemption, with effect from 1 April 2018 would be taxed at a concessional rate of 10% for gains in excess of Rs 1 lakh.

Rates of capital gains taxes for different assets

Here is a table that gives you a glimpse of the capital gains tax rates for various categories of assets under both scenarios i.e. when short-term gains are made as well as when long-term gains are made.

Type of Capital asset	Period of holding	Short Term / Long Term capital asset	Rate of tax
Listed securities	<= 12 months	STA	15%
Listed securities	>12 months	LTA	10% on gains above RS 1 lakh
Unlisted shares	< = 24 months	STA	Slab rates
Unlisted shares	> 24 months	LTA	20% with indexation*
Immovable Property (eg land)	< = 24 months	STA	Slab rates
Immovable Property (eg land)	> 24 months	LTA	20% with indexation*
Any other capital asset	<= 36 months	STA	Slab Rates
Any other capital asset	> 36 months	LTA	20% with indexation*

*Indexation is a benefit allowed to the taxpayer when he makes LTCG. Indexation is done to factor in the effects of inflation and accordingly recompute the purchase price to be reduced from the sale price.

 

(Author is the founder & CEO of ClearTax)