Capital Gains Tax: Taxation of Short-term & Long-Term: The gain that arises on transferring a capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is divided into two categories as “Short Term Capital Gains” and “Long Term Capital Gains”. Short-term capital gains are profits from selling assets held for one year or less.
Capital gains tax is a tax on the profit realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property. In India, any profit or gain that arises from the sale of a ‘capital asset’ is known as ‘income from capital gains’ and is taxable in the year in which the transfer of the capital asset takes place. This is called capital gains tax¹. There are two types of Capital Gains: short-term capital gains (STCG) and long-term capital gains (LTCG).
This article will provide an overview of capital gains tax, including definitions of key terms, such as capital assets and non-capital assets, and an explanation of how the tax is calculated and applied.
Table of contents
What is Capital Asset
- A capital asset is something you own, like property or investments. It can be any type of property, whether or not it’s related to your business or profession. For example, it could be a house, land, or even stocks and bonds.
- Additionally, it includes certain types of investments called securities that are held by a Foreign Institutional Investor (FII) following specific regulations.
- Lastly, it covers a type of insurance plan called a Unit Linked Insurance Plan (ULIP) that doesn’t qualify for a certain exemption under section 10(10D) due to certain rules mentioned in the fourth and fifth provisions.
Jewellery1, archaeological collections, drawings, paintings, sculptures, and other forms of artistic expression, such as ceramics, textiles, and photography, are collectively referred to as capital assets. These valuable items are significant and considered investments, representing aesthetic and financial value.
Non-Capital Assets
However, the following items are not considered as “capital assets”: (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; (ii) personal effects, which are the movable property (including wearing apparel, furniture, motor vehicles etc.) held for personal use by the taxpayer or any member of his family dependent on him; (iii) Agriculture Land2; (iv) Special Beared Bods 1991; (v) 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980; and (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetisation Scheme, 2015.
Types of Capital Gains
There are two types of capital gains i.e. Short-term capital gains and Lon-Term Capital Gains.
Short-Term Capital Gains:
– Ownership period: Not more than 36 months.
– Applicable to: Various assets, including stocks, property, etc.
– Exceptions: For specific assets like stocks listed on an Indian stock exchange, mutual funds, debentures, government securities, UTI units, and Zero Coupon Bonds, the ownership period is reduced to 12 months instead of 36 months.
– Special note: Unlisted company stocks and property such as land or buildings have a ownership period of 24 months instead of 36 months.
Long-Term Capital Gains:
– Ownership period: More than 36 months.
– Applicable to: Various assets, including stocks, property, etc.
– Exceptions: For specific assets like stocks listed on an Indian stock exchange, mutual funds, debentures, government securities, UTI units, and Zero Coupon Bonds, the ownership period is reduced to 12 months instead of 36 months.
– Special note: Unlisted company stocks and property such as land or buildings have an ownership period of 24 months instead of 36 months.
The main difference between short-term and long-term capital assets lies in the ownership period, where short-term assets are held for not more than 36 months, while long-term assets are held for more than 36 months. However, there are exceptions for certain assets, with a reduced ownership period of 12 months for specific listed securities, and 24 months for unlisted company stocks and immovable property.
| Asset Type | Short-Term Holding Period | Long-Term Holding Period |
|---|---|---|
| Stocks listed on an Indian stock exchange, mutual funds, debentures, government securities, UTI units, Zero Coupon Bonds | 12 months | More than 12 months |
| Unlisted company stocks, property like land or buildings | 24 months | More than 24 months |
| Other assets | 36 months | More than 36 months |
Importance of Bifurcation of Capital Gains into Long-Term and Short-Term Gains
The taxability of capital gains depends on the nature of the gain, i.e., whether short-term or long-term. Hence, to determine taxability, capital gains are classified into short-term capital gain and long-term capital gain.
Long-term capital gains are taxed at a lower rate than short-term capital gains. This is because long-term investments are considered less risky than short-term investments.
Long-Term Capital Gains
A capital asset held by a taxpayer for more than 36 months before its transfer is considered a long-term capital asset. However, for certain assets like listed shares, units of equity-oriented mutual funds, listed securities like debentures and government securities, units of UTI, and zero coupon bonds, the holding period is 12 months instead of 36 months. For unlisted shares of a company and immovable property such as land or buildings, the holding period is 24 months instead of 36 months.
How to Calculate Capital Gains (Long-Term Capital Gains)
The calculation of long-term capital gain resulting from the transfer of a long-term capital asset is done in the following manner:
| Particulars | Rs. |
|---|---|
| Full value of consideration | XXXXX |
| Less: Expenditure incurred in connection with the transfer | (XXXXX) |
| Net sale consideration | XXXXX |
| Less: Indexed cost of acquisition (*) | (XXXXX) |
| Less: Indexed cost of improvement if any (*) | (XXXXX) |
| Long-Term Capital Gains | XXXXX |
What is Indexation
Indexation involves adjusting the acquisition cost of an asset to account for inflationary increases in its value. The Central Government has established a cost inflation index for this purpose. Indexation benefits are applicable only to long-term capital assets.
To calculate the indexed cost of acquisition, the following factors need to be taken into account: –
– Year of acquisition or improvement
– Year of transfer
– Cost inflation index for the year of acquisition or improvement
– Cost inflation index for the year of transfer.
Indexed cost of acquisition is computed with the help of the following formula :
Cost of acquisition × Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of acquisition
Indexed cost of improvement is computed with the help of following formula :
Cost of improvement × Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of improvement
Cost Inflation Index Table
Check here the latest cost inflation index table.
| Sr.No. | Financial Year | Cost Inflation Index |
| 1 | 2001-02 | 100 |
| 2 | 2002-03 | 105 |
| 3 | 2003-04 | 109 |
| 4 | 2004-05 | 113 |
| 5 | 2005-06 | 117 |
| 6 | 2006-07 | 122 |
| 7 | 2007-08 | 129 |
| 8 | 2008-09 | 137 |
| 9 | 2009-10 | 148 |
| 10 | 2010-10 | 167 |
| 11 | 2011-12 | 184 |
| 12 | 2012-13 | 200 |
| 13 | 2013-14 | 220 |
| 14 | 2014-15 | 240 |
| 15 | 2015-16 | 254 |
| 16 | 2016-17 | 264 |
| 17 | 2017-18 | 272 |
| 18 | 2018-19 | 280 |
| 19 | 2019-20 | 289 |
| 20 | 2020-21 | 301 |
| 21 | 2021-22 | 317 |
| 22 | 2022-23 | 331 |
| 23 | 2023-24 | 348 |
Tax on long-term capital gain
The table shows how to calculate taxable capital gains and the tax rates that apply in different situations. It gives an overview of how long-term capital gains are taxed based on the conditions specified in the tax laws.
| Scenario | Tax Rate |
|---|---|
| Sale of listed shares on recognized stock exchanges Mutual Funds (STT has been paid) | 10% tax on capital gain amount exceeding Rs. 1 Lakh |
| Sale of bonds, debentures, shares, and other listed securities (STT has not been paid) | 10% |
| Sale of debt-oriented mutual funds | With Indexation – 20% Without Indexation – 10% |
Please note that the definition of securities includes shares, stocks, bonds, debentures, government securities, and other similar instruments. The option for the lower tax rate on units sold is available only for transactions made on or before July 10, 2014.
Short-term Capital Gains
- A capital asset held by a taxpayer for not more than 36 months before its transfer is considered a short-term capital asset.
- However, for certain assets like listed shares, units of equity-oriented mutual funds, listed securities like debentures and government securities, units of UTI, and zero coupon bonds, the holding period is 12 months instead of 36 months.
- For unlisted shares of a company and immovable property such as land or buildings, the holding period is 24 months instead of 36 months.
Computation of Short-Term Capital Gains
The table shows the calculation of Short-Term Capital Gains. It starts with the full value of consideration, which is the sales value of the asset. From this, any expenditure incurred wholly and exclusively in connection with the transfer of the capital asset is subtracted, such as brokerage or commission fees. This results in Net Sale Consideration. From this, the cost of acquisition (i.e., the purchase price of the capital asset) and the cost of the improvement (i.e., post-purchase capital expenses on the improvement of the capital asset) are subtracted to arrive at the Short-Term Capital Gains.
| Particulars | Rs. |
|---|---|
| Full value of consideration (i.e., Sales value of the asset) | XXXXX |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.) | (XXXXX) |
| Net Sale Consideration | XXXXX |
| Less: Cost of acquisition (i.e., the purchase price of the capital asset) | (XXXXX) |
| Less: Cost of improvement (i.e., post purchases capital expenses on improvement of capital asset) | (XXXXX) |
| Short-Term Capital Gains | XXXXX |
Tax on Short-term Capital Gains
Short-term capital gains (STCG) covered under section 111A are taxed at a rate of 15%, plus any applicable surcharge and cess. On the other hand, normal STCG, which refers to STCG not covered under section 111A, is taxed at the normal rate determined by the total taxable income of the taxpayer.
| Short-term Capital Gains | Tax Rate |
| Short-term capital gains are covered under section 111A | @ 15% |
| Short-term capital gains are not covered under section 111A | Normal Tax Rate (Slab Rate) |
| Short-term capital gains on property | Normal Tax Rate (Slab Rate) |
Short-term capital gains are classified into two categories for the purpose of determining the tax rate. These categories are:
- Short-term capital gains are covered under section 111A.
- Short-term capital gains are not covered under section 111A.
Examples of short-term capital gains (STCG) covered under section 111A include:
- STCG from the sale of equity shares listed on a recognized stock exchange, subject to securities transaction tax (STT).
- STCG from the sale of units of an equity-oriented mutual fund sold through a recognized stock exchange, subject to STT.
- STCG from the sale of units of a business trust.
- STCG from the sale of equity shares, units of an equity-oriented mutual fund, or units of a business trust through a recognized stock exchange located in any International Financial Services Centre, where the consideration is paid or payable in foreign currency, even if the transaction is not subject to STT.
Examples of short-term capital gains (STCG) not covered under section 111A include:
- STCG from the sale of equity shares not made through a recognized stock exchange.
- STCG from the sale of shares that are not equity shares.
- STCG from the sale of units of non-equity-oriented mutual funds, such as debt-oriented mutual funds.
- STCG from the sale of debentures, bonds, and government securities.
- STCG from the sale of assets other than shares or units, such as immovable property, gold, silver, etc.
FAQ on Capital Gains
1. What is a capital asset?
A capital asset refers to any property or investment that you own, including real estate, stocks, bonds, and other valuable possessions.
2. How are capital gains categorized?
Capital gains are divided into two categories: short-term capital gains and long-term capital gains.
3. What are short-term capital gains?
Short-term capital gains are profits obtained from selling assets that have been held for one year or less.
4. Can you provide examples of capital assets?
Capital assets encompass a wide range of items, such as property (house, land), investments (stocks, bonds), and valuable items like jewellery, paintings, sculptures, and other forms of artistic expression.
5. What falls under the definition of “jewellery”?
Jewellery includes ornaments made of precious metals (gold, silver, platinum) or their alloys, with or without precious or semi-precious stones. It also covers stones set in any article or sewn into apparel.
6. What is considered non-capital assets?
Non-capital assets include stock-in-trade, consumable stores or raw materials for business purposes, personal effects for personal use, agricultural land, certain bonds, and gold deposit schemes.
7. How is the holding period different for short-term and long-term capital gains?
Short-term capital assets are held for one year or less, while long-term capital assets are held for more than one year. However, there are exceptions for specific assets like listed securities and unlisted company stocks or immovable property.
8. How is long-term capital gain calculated?
To calculate long-term capital gain, subtract the indexed cost of acquisition and improvement from the net sale consideration. Indexed cost factors in the effects of inflation on the asset’s value.
9. What is the tax rate for long-term capital gains?
The tax rate for long-term capital gains varies based on the type of asset. For the sale of listed shares and mutual funds with Security Transaction Tax (STT) paid, the tax rate is 10% on the gain exceeding Rs. 1 lakh. For debt-oriented mutual funds, the tax rate is 20% with indexation or 10% without indexation.
10. How are short-term capital gains computed?
To calculate short-term capital gains, subtract the cost of acquisition and improvement from the net sale consideration. The result is the short-term capital gains.
11. How is the tax on short-term capital gains determined?
Short-term capital gains covered under section 111A are taxed at a rate of 15%, while normal short-term capital gains are taxed at the taxpayer’s applicable slab rate.
In conclusion, capital gains tax is an important consideration for anyone who owns or plans to sell a capital asset. Understanding the difference between short-term and long-term capital gains, as well as the various exemptions and capital gains tax rates, can help you make informed decisions about your investments. By staying informed and planning ahead, you can minimize your tax liability and maximize your returns.
Other Important Terms Related to Capital Gains Tax
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Jewellery: Jewellery is a term that includes ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel. It also includes precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
Here are some examples related to the definition of “Jewelry”:
a. Ornaments made of gold, silver, platinum, or any other precious metal or alloy:
- A gold necklace with a diamond pendant
- A silver bracelet with intricate engravings
- A platinum ring with a sapphire gemstone
- Alloy earrings set with a mixture of gold and silver
b. Precious or semi-precious stones, whether or not set in any furniture, utensil, or other article or worked or sewn into any wearing apparel:
- A ruby-encrusted tiara
- A necklace adorned with emeralds
- A bracelet featuring a row of amethyst stones
- A pendant with a single large turquoise stone
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Agriculture Land: Agricultural land in India is not considered as land situated:
- within the jurisdiction of a municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000; or
- within the range of the following distance measured aerially from the local limits of any municipality or cantonment board
Population Range Distance from Municipality/Cantonment Board More than 10,000 but not exceeding 1 lakh Not more than 2 KMs More than 1 lakh but not exceeding 10 lakhs Not more than 6 KMs More than 10 lakhs Not more than 8 KMs The population should be determined based on the data from the most recent census, provided that the relevant figures were published before the first day of the year.
In summary, agricultural land in India refers to land that is located outside of these specified areas and distances