In India, income from capital gains is a key part of the Income Tax Act. This income arises from the sale of assets like property, stocks, or mutual funds. Here’s a simple guide to help you understand how it works.
What Are Capital Gains?
Capital gains refer to the profits earned from the sale of assets like stocks, real estate, or mutual funds. The Income Tax Act divides these gains into two categories:
- Short-Term Capital Gains (STCG):
This arises when you sell an asset within three years of acquiring it. For example, if you buy shares of a company and sell them within a year, any profit you make is considered short-term. In India, STCG is taxed at different rates depending on the asset:
- Equity Shares/Mutual Funds: Taxed at 15% on the gains.
- Other Assets: Taxed at the individual’s applicable income tax slab rate.
- Long-Term Capital Gains (LTCG):
This refers to the gains made from selling an asset after holding it for more than three years. The tax treatment for LTCG is more favorable:
- Equity Shares/Mutual Funds: Gains exceeding ₹1 lakh in a financial year are taxed at 10% without indexation benefits.
- Other Assets: Gains are taxed at 20% with indexation benefits, which adjusts the cost of the asset for inflation.
Calculating Capital Gains:
To determine capital gains, subtract the asset’s purchase price (along with any expenses related to its purchase) from the selling price. For long-term gains, you can also adjust the purchase price for inflation using indexation, which helps reduce your tax burden.
Example
Let’s say you bought 100 shares of XYZ Ltd. at ₹50 per share on January 1, 2020. You sell these shares on January 1, 2024, for ₹100 each. Here’s how you calculate your capital gains:
- Purchase Price: 100 shares × ₹50 = ₹5,000
- Selling Price: 100 shares × ₹100 = ₹10,000
- Capital Gain: ₹10,000 – ₹5,000 = ₹5,000
Since you held the shares for more than 36 months, this is a long-term capital gain. For listed shares, long-term capital gains up to ₹1 lakh in a financial year are exempt from tax. So, if your total long-term capital gains from all sources in the year are below ₹1 lakh, you pay no tax. If it exceeds ₹1 lakh, you pay 10% tax on the excess.
Conclusion:
Thus, understanding capital gains is crucial for effective tax planning. By keeping track of holding periods and knowing the applicable tax rates, you can manage your tax liabilities better and also make informed investment decisions.
– Ketaki Dandekar (Team Arthology)
Read more about Income from Capital Gains here – https://cleartax.in/s/capital-gains