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Capital Gains-How charged to tax?


Capital Gain means a gain or profit on sale of a Capital Asset. Most common examples of capital assets are House Property, Land, Shares and Mutual Funds. To be taxable as capital gain the gain or profit should be on sale/transfer of a capital asset. 

The two important points that needs to be understood clearly to find out taxability of capital gains are:

  1. Meaning of Capital Assets
Its important to find out whether the asset sold is a capital asset or not. Only gain on sale/transfer of a capital asset is taxable as capital gain. Some assets are not considered as capital asset and the gain on their sale is exempt from tax. For example gain on sale of Agricultural Land in rural area is not taxable, as agricultural land in rural area is not a capital asset. 

Term Capital Asset as defined in Section 2(14) of The Income Tax Act, expressly excludes agricultural land in rural area, bonds and personal belongings (like furniture) from being capital assets. So any gain on sale of these assets is not a capital gain and as gain is not a capital gain there will be no tax on such gains.

Following is a brief discussion on different assets:
  • The most commonly held and known Capital Assets are House Property, Land, Shares and Mutual Funds.
  • Personal belongings like Furniture and Vehicles are not capital assets and there is no tax on profit on sale of these items.
  • Jewellery even though purchased for personal use is a Capital Asset.
  • Gold ETF is also a Capital Asset.
  • Agricultural land in rural area is not a capital asset and hence profit from sale of such land is not taxable.
  1. The Holding/Owning period of Capital Asset 
If the asset is a Capital Asset, then the next step towards ascertaining taxability of gain/loss is the period of holding of the asset sold. The period in months/years till that asset was our property is called as period of holding of the asset and plays an important role to find out the taxability of gain/loss on sale/transfer of such capital asset. So its really important to keep the date of purchase/allotment related documents safely for correctly calculating capital gains.

TAXABILITY ON SALE/TRANSFER OF A CAPITAL ASSET


Capital gains are taxable on the basis of holding period of the Asset. Hence to determine the taxability of profits on sale of an asset, first of all one need to see how long (for how many months/ years) the asset was held by a person.  Taxability of a Capital Gain is divided in two parts as Long Term Capital Gain and Short Term Capital Gain on the basis of holding period of the Asset.

Short Term Capital Asset
  • means a capital asset which is held for 36 months or less.
  • However In case of securities like shares, mutual funds, exchange traded funds etc. it will be short term if held for less then 12 months. 
  • Gain on sale of a Short Term Capital Asset is called Short Term Capital Gain(STCG).
Some Quick reference links:
Short Term Capital Gain on sale/redemption of Shares & Mutual Funds-How to Calculate?
Tax implication of Short Term Capital Gain on Shares & Mutual Funds
Capital gain on sale of house property

Long Term Capital Asset

  • means a capital asset which is held for more than 36 months. 
  • From Assessement Year 2018-19, immovable property being land, building or both  will be treated as long term if held for more than 24 months(earlier the holding period was more than 36 months).
  • Assessment Year 17-18 had reduced the holding period in case of unlisted securities to 24 months (compared to earlier 36 months).
  • In case of listed securities (shares, mutual funds etc.) it will be long term if held for 12 months or more.
  • Gain on sale of a Long Term Capital Asset is called Long Term Capital Gain(LTCG).
Some Quick reference links:
Tax on Long Term Capital Gain on Shares/Mutual Funds-Applicable from FY 2018-2019
How to calculate LTCG & Indexed Cost of Acquisition
Long term capital gain on sale of house property-how to save
Various exemptions under Income Tax Act from LTCG
updated Cost inflation index for calculating long term capital gains


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