Explainer on Capital Gains Tax - Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) as per Income Tax Act, 1961.
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 –
However, note that the following list of incomes does not include capital gains as per Income Tax Act, 1961-
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.
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.
Capital gains are divided primarily into two parts, namely –
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.
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:
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.
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 is the long-term capital gain tax rate?
What is the short-term capital gain tax rate?
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."
To maximize the scope of gains, you must be aware of these characteristics of capital gains before investing.
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