Capital Gain Tax is part of income tax levied under Income Tax Act, 1961. It is a tax levied on profit made from sale of a capital asset. In other words, if you sale a capital asset in profit, you will have to pay capital gain tax on such profit.
To understand the concept of capital gain tax, we must know what is capital asset. As per income tax Act, the capital asset includes property of any kind. It does not include stock in trade and, personal assets held for personal use such as furniture, utensils, vehicles and wearing apparel.
However personal assets excludes Jewellery, Archeological collection, Drawings, Paining & Scriptures, Any work of art.
For detailed definition of capital asset please refer section 2(14) of income Tax Act.
Rural Agricultural land is also excluded from the definition of capital asset, only urban agricultural land in specified area is liable for capital gain Tax.
Example of Capital Asset are car, building, plant & Machinery, furniture (not used for personal use), computer etc.
For taxation purpose the capital asset is divided into two types according to number of years held by a person.
- Long Term Capital Asset: Asset held more than 36 months.
- Short Term Capital Asset (Section 2(42A): Asset held not more than 36 months.
Exceptions to above:
In case of immovable property or unlisted share the period is reduced to 24 months to consider it as long term or short term
The following assets shall be treated as short term capital assets, if the holding period is not more than 12 months.
- A security listed in a recognized stock exchange of India
- Units of UTI
- A unit of equity oriented fund
- A zero coupon bond
The reason of such division into short term capital asset and long term capital asset is difference in rate of taxation of long term capital asset and short term capital asset.
Capital Gain Tax Rates
Short Term Capital Gain Tax Rates
Short term capital gain (STCG) shall be taxable at normal slab rates applicable for a person.
Find here normal tax slab rates
In below mentioned cases STCG is taxable @15% concessional rate. (Section 111A)
- Transfer of equity shares in a company or
- Transfer of a unit of an equity oriented fund or
- Transfer of unit of a business trust
But there are some conditions to avail 15% concessional rate on STCG.
- Transfer must take place after 1.10.2004
- Security Transaction Tax (STT) should be chargeable on such transfer.
However, no STT condition is applicable on any transaction in foreign currency on a recognized stock exchange in international financial service centre (IFSC).
It is important to now that, in case of individual or HUF, if the basic exemption limit is not exhausted by any other income, then the STCG will be reduced by such unexhausted amount and the balance would be taxable at 15%.
For Example: Mr. A transfer some shares (STT paid) of Rs. 10 Lac. He calculate his STCG after considering purchase cost. The STCG comes to Rs. 2 Lacs. His STCG will be taxable at 15%. Since he is individual, as per normal tax slab, his basic exemption limit is Rs. 2.5 Lac. He has no other income. Then unexhausted limit of Rs. 50 thousand will get reduced from STCG, remaining 1.5 Lac will get taxed @15%.
Long Term Capital Gain Tax Rates
20% (Section 112)
The long term capital gain (LTCG) is taxable @ 20%.
For non-corporate non-resident or foreign company, LTCG would be taxable @10% (without giving indexation benefit) if such capital asset is unlisted securities or shares of company in which public are not substantially interested.
Where the tax payable from transfer LTCG of listed security (other than unit) or zero coupon bond, exceeds 10% of the amount of capital gain before indexation, then excess shall be ignored while computing tax payable. i.e lower of tax @10% without indexation or tax @20% with indexation benefit.
10% (Section 112)
10% tax will be paid on LTCG from equity shares in company or a unit of equity oriented fund or a unit of business trust, if such long term capital gain exceeds Rs. 1 Lac.
As per notification no. 60/2018, dated 1st Oct 2018, states that condition of STT paid will not apply to the purchase equity shares entered into before 1stOctorber 2004 or on or after 1st October, 2004 which are not chargeable to STT, other than transactions mentioned in the said notification. Please refer notification for details of transactions.
Like STCG, benefit of unexhausted exemption limit is also available for LTCG as explained above in STCG.
Examples of Capital Gain Tax.
- If Mr. A transfers his house, which was purchased 5 years back, the same will be treated as long term capital Asset. Any gain from such sale will be treated as long term capital gain and will be chargeable to tax @20%.
- If Mr. X transfer his shares, which was purchased 2 months before, the same will be treated a short term assets. Any gain from such sale will be treated as short term capital gain and will be chargeable normal slab rates. However if such shares are sold through recognized stock exchange and security transaction tax is applicable, then the capital gain tax rate will be 15%.
- If Mrs. R transfers her jewellery, which was purchased 2 years before, the same will be treated as short term capital Assets. Any gain arising from such sale will be treated as Short term capital gain and will be chargeable at normal tax slab rates.
- If Mr. P transfers his listed shares, which was purchased 9 years back, the same will be treated as long term capital Asset. Any gain from such sale will be treated as long term capital gain and will be chargeable to tax @10% without indexation.
- If Mr. L transfers his mutual funds (equity oriented), which was purchased 9 years back, the same will be treated as long term capital Asset.
If you have any query for capital gain tax, please comment.