Capital gains tax is a tax levied on the profit or gain that arises from the sale of a capital asset. In India, capital gains tax is applicable to both residents and non-residents. In this blog, we will discuss the types, rates, and calculation process of capital gains tax in India.
Types of Capital Gains Tax in India
There are two types of capital gains tax in India:
- Short-Term Capital Gains (STCG):
- STCG applies to the profits made from the sale of assets held for a short duration.
- For equities and equity-oriented mutual funds, assets held for less than one year are considered short-term.
- For other assets like real estate, debt mutual funds, and gold, assets held for less than two years are considered short-term.
- STCG on equities and equity-oriented mutual funds is taxed at a flat rate of 15%.
- STCG on other assets is taxed as per the individual’s applicable income tax slab rate.
- Long-Term Capital Gains (LTCG):
- LTCG applies to the profits made from the sale of assets held for an extended period.
- For equities and equity-oriented mutual funds, assets held for more than one year are considered long-term.
- For other assets like real estate, debt mutual funds, and gold, assets held for more than two years are considered long-term.
- LTCG on equities and equity-oriented mutual funds was exempt from taxation until March 31, 2018. However, from April 1, 2018, LTCG on equities is subject to a tax of 10% on gains exceeding INR 1 lakh annually, without the benefit of indexation.
- LTCG on other assets is taxed at 20% with indexation benefits, which adjusts the purchase price for inflation.
- Indexation Benefit:
Indexation is applicable to long-term capital gains on non-equity assets. It helps adjust the purchase price of the asset for inflation, reducing the taxable gains. The cost inflation index (CII) is used to calculate indexed cost, and it is published by the government every financial year.
Securities Transaction Tax (STT):
In addition to capital gains tax, equities and equity-oriented mutual funds are also subject to STT at the time of sale. STT rates vary for different types of transactions (e.g., delivery-based and intra-day) and are set by the government.
Capital Gains Exemptions:
Some capital gains may be exempt from taxation, such as gains from agricultural land in rural areas, certain bonds, and under certain specific conditions like reinvestment in specified assets. It’s essential for taxpayers in India to be aware of these different types of capital gains tax and their respective rates to effectively manage their investments and tax liabilities. Tax rules may change over time, so consulting a tax professional or referring to the latest tax regulations is advisable for accurate and up-to-date information.
Rates of Capital Gains Tax in India
The rates of capital gains tax in India are as follows:
- Short-term Capital Gains Tax: The tax rate for STCG is the same as the income tax slab rate of the taxpayer.
- Long-term Capital Gains Tax: The tax rate for LTCG is 20% (plus applicable surcharge and health and education cess).
However, long-term capital gains arising from the transfer of listed securities, units, or zero-coupon bonds on which STT is not paid are taxed at 10% (without adjusting the cost for inflation) or at 20% (after adjusting the cost for inflation), whichever is more beneficial to the taxpayer.
Calculation Process of Capital Gains Tax in India
Understanding the calculation process for capital gains tax is crucial. Here’s a step-by-step breakdown:
Step 1- Sale Price Calculation: Start by determining the sale price of the capital asset.
Step 2- Expense Deduction: Subtract any expenses incurred during the sale, such as brokerage fees, legal fees, and transfer charges.
Step 3- Cost of Acquisition Deduction: Deduct the cost of acquiring the capital asset, which includes the purchase price, brokerage fees, and other related expenses.
Step 4- Cost of Improvement Deduction: Subtract the cost of improving the capital asset, which encompasses expenses incurred in enhancing the asset’s value.
Step 5- Capital Gains Determination: The result after these deductions represents your capital gains.
Step 6- Tax Liability Calculation: Finally, calculate the tax liability on the capital gains based on the applicable tax rate.
Capital gains tax is a tax levied on the profit or gain that arises from the sale of a capital asset. In India, there are two types of capital gains tax: short-term capital gains tax and long-term capital gains tax. The rates of capital gains tax in India vary depending on the type of capital gains and the applicable tax rate. The calculation process of capital gains tax in India involves deducting the expenses incurred in the sale of the capital asset, the cost of acquisition of the asset, and the cost of improvement of the asset.