What are Capital Gains?

A capital gain results from sale of asset such as shares, bonds, real estate, etc. where there is a difference between purchase price and sale price. Capital gain, can either a profit or a loss. When the proceeds from the sale of a capital asset are less than the purchase price it is a capital loss.

When the proceeds from the sale of a capital asset are more than the purchase price it is a capital Profit. Capital gains may refer to investments that arise in relation to real assets, such as property or financial assets, such as shares or bonds.

We have tax on Capital Gain, although relief or exemption would be available in relation to holding period or type of asset or to compensate for the effects of inflation.

Classification of Capital Gains

Capital gain is classified into two types, depending on the period of holding of the asset.

·         Short Term Capital Gain (STCG)

·         Long Term Capital Gain (LTCG)

This classification also varies depending on the type of the asset. So, let’s understand this classification based on the type of asset.

Short Term Capital Gain (STCG)

If the type of asset is a share or mutual fund and held for less than 12 months before selling, the gain arising is classified as STCG. The only condition here is that the share should be sold on a recognized stock exchange, and securities transaction tax (STT) should be paid on it. In case of equity mutual fund, when redeemed the Asset Management company would deduct STT.

If the sale of shares is off-market (that is, if the sale is not on a recognized stock exchange) or non-equity mutual fund, the gain would be classified like that for other capital assets (given below). In this case, the short term capital gain is taxed at 15% of the gain. A short term capital loss can be set-off against short term capital gain, as long as both the sales occur in the same financial year. (Click here for set-off details)

In case of all other capital assets if the capital asset is held for less than 36 months before selling, the gain arising from it is classified as STCG. This short term capital gain is clubbed with your income for the year and is taxed at the rate applicable to you.

Long Term Capital Gain (LTCG)

If shares or mutual funds are held for more than 12 months before selling, the gain arising is classified as Long Term Capital Gain. In the case of long term capital gain arising out of the sale of shares or mutual funds, there is no income tax if STT has been paid. The long term capital gain in this case is tax free.

In case where STT has not been paid the capital gain tax is 10% if the cost of acquisition is not indexed, and it is 20% if the cost of acquisition is indexed. For all other assets, if the capital asset is held for more than 36 months before selling, the gain arising from the sale is classified as Long Term Capital Gain.

The long term capital gain is taxed at 20%. In other words, 20% of the long term capital gain has to be paid as income tax.