At some point in your life, you will have to deal with capital gains. Which means that you will have to be aware of how it is taxed. This is to help you get a good understanding about it.
The Income Tax department categorises all sources of income under 5 heads:
- Salary
- House Property
- Profits and Gains from business/profession
- Capital Gains
- Other Sources
What is capital gain?
When you make a profit by selling an asset, it is known as a capital gain (difference between the purchase price and the sale price). Gold, jewellery, fixed-income instruments, stocks, mutual funds, real estate, paintings, sculptures, cars are examples of assets.
This is further divided into short-term capital gains (STCG) and long-term capital gains (LTCG).
What is STCG & LTCG?
If you sell your asset before the completion of 36 months of holding, the gain is treated as STCG. If you sell your asset after the completion of 36 months of holding, the gain is treated as LTCG.
When it comes to shares, equity mutual funds (minimum 65% of the portfolio is in stocks), listed securities like debentures and Government securities, Units of UTI and zero-coupon bonds, the period of holding to be considered is 12 months instead of 36 months. If you sell after 12 months, it is considered as LTCG.
When it comes to certain immovable property (land or building) or unlisted shares of a company, the period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company or an immovable property being land or building or both. If you sell after 24 months, it is considered as LTCG.
For example, let us say Kapil and Anita purchased gold in April 2019. Kapil sold it in December 2020. Anita sold it in December 2022. In both cases, gold was a capital asset for each. But for Kapil, it will be treated as a short-term capital asset (he held it for a period of less than 36 months). For Anita, it will be treated as a long-term capital asset (she held it for a period of more than 36 months).
What is the tax rate?
The taxability of capital gains depends on the nature of gain, i.e., whether short-term or long-term. The tax rates for long-term capital gain and short-term capital gain are different.
STCG tax on stocks and equity mutual funds is 15%. Non-equity investments are taxed as per the income tax slab rate of the investor. Which means that if your tax rate is 30%, STCG tax is 30%.
LTCG tax for non-equity investments is 20% with indexation. Union Budget 2018 introduced a flat 10% tax on LTCG on stocks and equity mutual funds. This is a flat tax and so unlike in debt funds, there is no indexation benefit available. There is one basic annual exemption limit – Rs 1 lakh. So LTCG are taxed at 10% on gains in excess of Rs 1 lakh per annum.
All the above mentioned tax rates exclude cess and surcharge.