When are Capital Gains Tax applicable in India

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  • Last Updated on 1 March, 2022

Capital Gains Tax:

Capital Gains are the gain on selling of any of the capital assets which includes stocks, mutual funds and real estate.  It came into existence in 1947 when a new section 12B was inserted in 1922 Income-tax act. The tax is assessed under the head of “Capital Gain” on the profit and gains which arise from sale, exchange or transfer of a capital asset. Such profit and gains will be part of income of previous year in which the transaction took place except in few circumstances. The tax levied on capital assets is called capital tax and it could be long term or short term based on the time for which an investor has held that assets. When you sell off your capital assets the capital gain from that sale is added to the income of the investor for the year in which transfer of the asset is done however if the capital asset is inherited then there is no tax applicable on the same as there is no sale involved only a transfer is done.

Taxmann’s Taxation of Capital Gains provides complete analysis on each aspect of capital gain with the help of ‘relevant’ judicial pronouncements, Circulars & Notifications, illustrations, checklists of actions to claim deductions & FAQs

What categorizes as capital asset?

As per section 45 the capital asset considered for capital gain tax are any form of land, building, house property, patents, machinery, patents, trademarks, vehicles and your rights in any of the Indian company which can be mere legal or management rights. However, any form of stocks, consumables or any form of raw material which is being held for business purpose is not counted as capital asset and not considered for capital gain when sold. Also, personal goods like clothes and furniture which one have acquired for his own use is also not counted as capital asset and no capital gain tax is levied on their sale. Agricultural Land in rural India is also not counted for capital gain when sold. Also, gold deposits bonds which were there under gold deposit scheme under 1999 are not counted as for capital gain.

Short Term and Long Term Capital Asset:

Capital Gains Tax varies with the Capital asset being short term capital gains tax or long term capital gains. This depends on for how long an investor have held that property. As per Income Tax Act, a person must have held the property for at least 36 months before it could be classified as long term capital assets. However, if you have an immovable capital asset like land, house, building then this term was reduced to 24 months by Income Tax Act passed in year 2017-18 however for movable capital assets like jewelry, and debt oriented funds it is still 36 months.

Some assets like equities, securities, Units in UTI, Units of equity oriented mutual funds and zero coupon bonds are short term assets in case they are held for less than 12 months or else they are considered as long term capital assets.
 
When one acquires an asset in terms of gift, or inheritance then the period of it beingpossessed by previous owner is also added to the age of property to calculated whether it is under long term capital gains or short term capital gains tax.
 
From year 2017-18, one must hold the debentures for more than 36 months to be considered underlong term capital gains.
 

Income Tax Applicable on Long Term and Short Term Capital Assets:

Long Term Capital Assets are taxable at 20% on the net profit or long term capital gains made on its sale value. To calculate short term capital gains tax, the income from sale is added to investor’s income for the financial year and is income tax is applicable as per the income tax salary slab for that person or entity.

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