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Capital gains tax in India

Have you invested in shares? Mutual funds? Property? Art? Or property of any kind, barring certain exceptions?

If you do, Capital Gains Tax is certainly a worry. If you don’t, well, start investing! What are you doing with your money? Let’s take a look at Capital Gains Tax and how it will affect your investment.

Do you have a capital investment?

Capital gains arise from sale of capital investments. We all know that. But do you have a capital investment? It can be a home, a farm, a business, shares, mutual fund, jewellery, paintings, bonds, other real estate, etc. It excludes items for personal use like apparel, motor vehicle, furniture. It also excludes stock-in-trade for business and agricultural land.

What triggers Capital Gains Tax?

You should know that Capital Gains Tax can be triggered by the ‘Transfer’ of above mentioned assets, which includes:

  • Acquisition of an asset
  • Sale of asset
  • Exchange of asset
  • Relinquishing of asset
  • Extinguishment of rights of an asset, etc

Capital Gains Tax – The long and short of it

Capital Gains Tax can be classified as ‘Long Term Capital Gains Tax’ and ‘Short Term Capital Gains Tax’. As the name suggests, Long Term Capital Gains Tax arises when an asset is held for a ‘long term’ which is 3 years. In case of shares/equity or mutual funds which are traded on a listed exchange, long Term is defined as 1 year. Short Term Capital Tax arises when the asset is sold prior to minimum required period for it to be classified as ‘long term’.

How will you be taxed?

In case of a long term capital gain, a rate of 20% is applied as Long Term Capital Gains Tax. However there is good news for those of you who have investments in shares/equity or mutual funds where Securities Transaction Tax (STT) has been paid at the time of the transaction, which is generally the case. Capital gains from such assets will be exempt if they are held for a ‘long term’.

In case of a short term capital gain, the gain amount is taxed as any other income. It is clubbed with income earned during that period and can be negated against short term losses.

The computation of Short Term Capital Gains Tax is as follows:

  • Full Value of consideration
  • Less: Cost of acquisition
  • Cost of improvement (if any)
  • Expenditure incurred wholly and exclusively for that transfer
  • Less: Exemptions (if any) u/s 10, 54B, 54D, 54EC, 54 ED, 54F, 54G

Balance of the above is the short term capital gain. This will be a part of your gross income. What you need to note is that shares or mutual funds (SST paid) will attract 10% Short Term Capital Gains Tax.

That was Capital Gains Tax 101 for you ladies and gentlemen. We hope that you are now armed with enough knowledge that will help you make wiser and smarter investment decisions.

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