Capital gains tax is levied on the profit earned from the sale of capital assets such as land, buildings, stocks, virtual digital assets and other investments. In India, long-term capital gains (LTCG) are generally taxed at 12.5%, while short-term capital gains (STCG) on certain assets attract a flat 20% tax.
What is Capital Gains Tax?
Capital gains tax is charged on the profit earned when a capital asset is sold at a price higher than its purchase cost. The tax applies only to the gain from the transaction, not to the total sale amount.
If an asset is sold at a profit, it results in a capital gain. If it is sold at a price lower than the purchase cost, it results in a capital loss. Capital gains are taxable in the financial year in which the transfer of the asset takes place.
Taxpayers who earn capital gains are required to report them when filing their using the appropriate ITR form.
Types of Capital Gains
Capital gains are classified into two categories: Short-term capital gains (STCG) and Long-term capital gains (LTCG).
The classification depends on the type of asset and the duration for which it was held before being sold.
What is Short-Term Capital Gain Tax?
Short-term capital gains arise when capital assets are sold within a specified holding period. In most cases, assets held for up to 24 months are treated as short-term assets, although some financial assets qualify after 12 months.
For assets where Securities Transaction Tax (STT) applies, STCG is taxed at 20%. In cases where STT does not apply, gains are added to the taxpayer’s total income and taxed according to the applicable slab.
What is Long-Term Capital Gain Tax?
Long-term capital gains are earned when assets are sold after being held for the prescribed long-term period.
LTCG is generally taxed at 20%, except in the case of listed equity shares and equity-oriented mutual funds. For these assets, gains above ₹1.25 lakh are taxed at 12.5%.
What are Capital Assets?
Capital assets include property and investments owned by an individual or business that can be transferred. These include: land and buildings, shares and securities, patents and trademarks, jewellery, leasehold rights, machinery and vehicles.
However, some items are not treated as capital assets under tax laws. These include:
- Stock-in-trade, consumables and raw materials used for business
- Personal-use items such as clothes and furniture
- Rural agricultural land
- Certain government-issued gold and defence bonds
- Gold deposit certificates under the notified schemes
Types of Capital Assets
Capital assets are broadly divided into short-term capital assets and Long-term capital assets.
The classification depends on the holding period before the asset is sold.
What are Short-Term Capital Assets?
Assets held for 24 months or less are generally treated as short-term capital assets. However, for certain financial instruments, the holding period is reduced to 12 months.
Examples include:
- Listed equity shares
- Units of UTI
- Equity-oriented mutual funds
- Zero-coupon bonds
For immovable property and unlisted shares, the holding period remains 24 months.
What are Long-Term Capital Assets?
Assets held for more than 24 months are classified as long-term capital assets. For listed shares, mutual funds and certain securities, the long-term classification applies after 12 months of holding.
Holding Period for Different Capital Assets
Asset Type Holding Period for LTCG
Listed equity or preference shares: 12 months
Unlisted shares: 24 months
Land or building: 24 months
Listed securities, bonds and debentures: 12 months
Units of UTI: 12 months
Equity-oriented mutual funds: 12 months
Debt-oriented mutual funds: 24 months
Zero-coupon bonds: 12 months