Answer By law4u team
Capital Gains Tax (CGT) is a tax imposed on the profit earned from the sale or transfer of a capital asset. In simpler terms, when an individual, company, or entity sells an asset - like property, stocks, mutual funds, or gold for more than its purchase price, the gain or profit is called a capital gain, and the government levies tax on this profit. Key Features of Capital Gains Tax in India 1. Capital Asset: A capital asset includes almost all types of property, whether movable or immovable, tangible or intangible. Common examples are: Land or building Shares and securities Mutual fund units Gold, silver, or other precious metals Intellectual property like patents or copyrights Certain assets, like stock-in-trade of a business or personal items under a specific limit, may be exempt. 2. Calculation of Capital Gain: Capital gain is calculated as: Capital Gain = Sale Price of Asset – (Cost of Acquisition + Expenses on Transfer) Cost of Acquisition: The price paid to acquire the asset. Expenses on Transfer: Any costs incurred to sell the asset, such as brokerage, legal fees, or registration charges. 3. Types of Capital Gains: Capital gains are classified based on the holding period of the asset: Short-Term Capital Gain (STCG): If the asset is held for a shorter period than prescribed under the Income Tax Act. For listed shares and equity mutual funds: less than 12 months. For immovable property: less than 24 months (recently revised to 24 months for properties acquired after April 1, 2017). Long-Term Capital Gain (LTCG): If the asset is held longer than the threshold period. 4. Tax Rates: The tax rates differ based on the type of asset and whether the gain is short-term or long-term. STCG on equity shares or equity mutual funds: 15% (plus applicable cess) LTCG on equity shares and equity mutual funds: 10% on gains exceeding ₹1 lakh in a financial year STCG on other assets (like real estate): Added to income and taxed as per the individual’s slab rate LTCG on other assets (like property, debt funds): 20% with indexation benefits (for inflation adjustment) 5. Exemptions and Deductions: Certain exemptions are available under the Income Tax Act: Section 54: Exemption on sale of residential property if reinvested in another residential property Section 54EC: Exemption if LTCG is invested in specified bonds within 6 months of sale Section 54F: Exemption on sale of any long-term capital asset (other than a residential house) if proceeds are invested in a residential house Purpose of Capital Gains Tax Revenue Generation: CGT is a significant source of income for the government. Regulate Speculation: Taxing capital gains discourages excessive short-term speculation in markets like real estate or equity. Promote Long-Term Investments: Lower LTCG rates encourage individuals and businesses to hold assets longer, supporting stable economic growth. Example of Capital Gains 1. Example 1 – Sale of Property: Mr. A buys a house for ₹50 lakh in 2015 and sells it for ₹80 lakh in 2025. Sale Price: ₹80 lakh Cost of Acquisition: ₹50 lakh Expenses on Transfer: ₹2 lakh (legal fees, brokerage) Capital Gain = 80 – (50 + 2) = ₹28 lakh Since the property was held for more than 24 months, this is a long-term capital gain, and Mr. A may pay 20% LTCG with indexation or claim exemptions if reinvested as per Section 54. 2. Example 2 – Sale of Equity Shares: Ms. B buys shares for ₹2 lakh and sells them within 6 months for ₹2.5 lakh. Short-term capital gain = ₹50,000 Tax = 15% of ₹50,000 = ₹7,500 (plus cess) Key Points to Remember CGT applies only on profit, not on the total sale value. Holding period determines whether the gain is short-term or long-term. Exemptions and deductions can significantly reduce tax liability. Capital gains can arise from any form of capital asset, including property, shares, bonds, and gold. Indexation benefits for LTCG on non-equity assets adjust the cost of acquisition for inflation, reducing the taxable gain.
