Explainer on Capital Gains Tax - Short Term and Long Term Capital Gains

Explanation of Capital Gains

Any income derived from the sale of capital assets is referred to as capital gain. In a simple terms, capital assets as per Income Tax Act, 1961 consist of the following –

• Jewellery
• Lease rights
• Trademarks and patents
• Building
• Land
• Machinery
• House property
• Rights in any Indian company

However, note that the following list of incomes does not include capital gains as per Income Tax Act, 1961-

• Private ownership of agricultural land in India's rural parts.
• Privately owned clothing and furniture
• Unique bearer bonds
• Consumables or stocks kept for usage in the workplace or for business purposes
• National defense bonds, 6.5 percent and 7 percent gold-backed securities. which all need to be issued by the government.

You must begin comprehending the nuances of taxes on such profits after you have a good concept of what a capital gain is in terms of income tax.

What is meant by Capital Gains tax?

A tax known as capital gains tax, or CGT, is one that is only applied to profits made from the sale of capital assets. To make this true, you would have to sell the specific capital asset for more money than you paid for it (Cost of Acquisition should be less than Sale Value)

As a result, inherited real estate or other capital assets are not subject to this levy. In these situations, there isn't even a transaction; only a hand-off from one individual to another.

Types of Capital Gain

Capital gains are divided primarily into two parts, namely –

1. Short Term Capital Gains (STCG)
2. Long Term Capital Gains (LTCG)

You must first realize that the difference between a long term capital gain and a short term capital gain primarily relates to how long one maintains capital assets before deciding to sell them.

What is a Long Term Capital Gains (LTCG) Tax?

Long-term capital gains are generally referred to as any capital asset owned for more than 36 months. The long-term capital gains tax is the name of the tax on these earnings.

However, some assets, though, are regarded as long-term even if they are held for a year or more. These consist of:

• Unit Trust of India bonds, whether quoted or unquoted.
• Securities listed on a recognized Indian stock exchange, such as debentures, bonds, and government securities.
• Equity mutual funds.
• Zero-coupon bonds.
• Stocks, preferred shares, or other securities of a business listed on a reputable Indian stock exchange.

You would need to perform the following short steps in order to calculate long-term capital gains:

Step 1: Start with the total revenue realized from the sale of capital assets.

Step 2: Eliminate the indexed cost of acquisition, indexed cost of improvement, and indexed cost of transfer.Now, you must be aware of what each of these terms means in order to assure accurate calculation.

• Indexed cost of transfer = Expenses incurred for advertising, deals and legal expenses.
• Indexed cost of acquisition = Cost of inflation index for the concerned acquisition year X acquisition cost/transfer year cost of inflation index.
• Indexed cost of improvement = Improvement expenses X inflation index cost of the improvement year /transfer year cost of inflation index.

What is Short term Capital Gains (STCG) Taxes?

Short-term capital gains are profits from capital assets that are held for 36 months or less. This segregation does have a few exceptions, though. For instance, this period has been shortened to just 24 months in the event of real estate such as land, buildings, or houses. This means that if you sell such assets after possessing them for more than 24 months, it will be regarded as a long-term capital gain.

The formula used to calculate short-term capital gains is the same as that used to calculate long-term capital gains. This is what it is:

Short-term capital gain = Full value of consideration – (cost of improvement + cost of acquisition+ cost of transfer)

What are the Capital Gain Tax Rates?

What is the long-term capital gain tax rate?

What is the short-term capital gain tax rate?

Exemptions of Long-term Capital Gain Tax Payment

The following scenarios would allow a full exemption from having to pay long-term capital gains taxes, if you are wondering "what are the regulations surrounding exemption of capital gain."

• People who are 80 years of age or older and make less than Rs.5lakhs annually. The issue, "What is the maximum for LTCG to be tax-free?" is thus answered by this.
• In 2021, people between the ages of 60 and 80 who have an annual income of less than Rs.3 lakhs would not be required to pay this tax

However, keep in mind that long-term capital gain taxes are not covered by the Section 80U and Section 80C exemptions.

To maximize the scope of gains, you must be aware of these characteristics of capital gains before investing.

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