What is Capital Gains Tax? Its Types and Computation

What are the Assets on Which Capital Gains Tax is Applicable?

When assessing what the capital gain tax rate is, it’s vital to know the assets on which the tax type will be applicable. Here is the list of assets that qualify as capital gain assets: 

• Jewellery 
• Stocks 
• Property 
• Bonds 
• Household furnishings 
• Timber
• Cryptocurrency 
• Vehicles 
• Collectables
• Work of Fine Art

Additionally, when we discuss what the capital gains tax rate is, it’s important to know the asset types that are not eligible for the capital gain asset. Here’s a list of few such assets:

• Depreciable business property
• Property used by investor’s business or for rent
• Business inventory 

It’s also worth noting here, especially for those who want to know what the percentage of capital gains tax is, an inherited property is exempted from capital gains tax. This is because by way of a legal document, property ownership is transferred. There’s no actual selling that happens. However, capital gains tax will be levied only after a capital asset has been sold. 

Short-term and Long-term Capital Gains Tax Rates

As we further understand the concept of capital gains in India, we will now learn what the long-term capital gains tax rate is and what the short-term capital gain tax rate is. 

The long-term capital tax is calculated at 20% (plus surcharge and cess as applicable). But in some cases, the tax can be charged at 10% (plus surcharge and cess as applicable).

Following are the conditions under which 10% long-term capital gain tax may be applicable: 

• Long-term capital gains that happen on the sale of listed securities that exceed the ₹1 lakh mark. The provision is under Section 112A of the Income Tax Act of India. 
• Profits earned by selling securities listed under the recognized stock exchange of India. Tax on mutual funds that primarily invest in equities is 10% if units have been held for 1 year or more prior to redemption. Zero coupon bonds qualify under the 10% long-term capital gain tax rate regime.

Similarly, u/s 111A, short-term capital gain tax rate is 15% for asset classes like equity mutual funds, while for other asset classes like gold investments and debt mutual funds, STCG tax rate is as per the income tax slab rate of the tax payer.

Below are the capital gains tax rates for some key types of capital assets and different investment tenures

As you can see, when calculating the capital gains tax in India, you have to consider both the capital asset sold as well as the period you have stayed invested for in the asset prior to the sale.

Steps to Compute Long-term Capital Gains Tax

Now that you theoretically know what long-term capital gain tax is, let us find out the steps that can help us calculate long-term capital gains tax. It can be computed in a single step using an easy formula. 

This is how you can calculate long-term capital gains tax (LTCG): 

LTCG = Final sale price – (indexed cost of acquisition + indexed cost incurred for improvement or alteration or renovation+ cost for making the sale)

Now, a 20% tax will be levied on it. 

Here, the indexed acquisition cost is based on the inflation level of the country. And it means the purchase price of the asset. The indexed cost incurred for improvement or alteration, or renovation, also accounts for inflation and is the cost incurred to make any improvement in the asset. The cost of making the sale means the cost required to manufacture or buy a product that was later sold to a customer. 

Steps to Compute Short-term Capital Gains Tax

Since you now know the LTCG and its tax calculations, you might be wondering what the short-term capital gains (STCG) tax calculation is. Read on to find out the single-step calculation: 

STCG= Final sale price - (cost of acquisition + cost incurred for improvement or alteration or renovation + cost for making the sale)

Once the figure is in place, tax can be levied based on if the gains qualify under Section 111A or not. Do keep in mind that capital gains tax rates are based on the type of capital asset being transferred and your applicable income tax slab does not impact capital gains tax calculation in any way.  

Exemptions on Capital Gains Tax

Now that we have given you the lowdown on what the capital gain tax rate is let us know about the tax exemptions that apply to capital gains. 

Section 54: If the amount earned by selling a property is spent on buying another property, the capital gains made by transferring the ownership of the first property are exempted from tax. 

Section 54F: The section will apply only when the capital gains are made from a long-term investment that is not a residential property. 

Section 54EC: If long-term capital gains are invested in specific investment instruments within a six months from the date of transfer, it’s exempted from the tax deduction. 

Conclusion

Now that you know what the capital gains tax rate is, it’s time to plan your finances and investments better. You may also explore options to minimize your capital gains tax liabilities. The amount saved can then be used to buy more stocks, bonds, and other profit-making investment instruments.

FAQs

Q. Are income tax and capital gain tax the same?

A. No, they both are different. Income tax is a direct tax levied by the Indian government on various incomes like salaries, interests, rental income, royalties, etc. On the other hand, a capital gain tax is levied only on profit made on selling a capital asset. In this sense, we can say that the capital gain tax is a subset of income tax.

Q. What are the strategies to reduce capital gains tax?

A. Some strategies include holding the asset for a longer time, exploring the reinvestment scope, and investing the capital gains thus generated into new investments. 

Q. Do NRIs pay capital gains tax?

A. Yes, NRIs need to pay tax on capital gains as per applicable short and long-term capital gains tax rates on sale of relevant capital assets.

Q. What are age-related exemptions regarding capital gains tax? 

A. No. Capital gains tax rates depend only on the investment period and the capital asset being sold. Age of the investor does not have any impact on the applicable tax rate.

Q. Does the duration for which you own an asset before selling it affect the tax rate? 

A. Yes, it does make a difference, and those who know what the capital gain tax rate is will know it too. And this is precisely how short-term and long-term capital gain taxes work. Typically, LTCG leads to a lower tax rate for the investor leading to higher returns on the investment.

Sources:

https://economictimes.indiatimes.com/wealth/tax/each-investment-decision-must-be-made-with-how-capital-gains-tax-will-play-out-when-you-redeem/articleshow/89680247.cms

https://www.incometaxindia.gov.in/tutorials/15-%20ltcg.pdf

https://www.incometaxindia.gov.in/tutorials/14-%20stcg.pdf

https://www.livemint.com/money/personal-finance/itr-filing-for-fy-2021-22-how-to-calculate-capital-gain-tax-on-sale-of-property-11658975489298.html

http://www.differencebetween.net/business/difference-between-income-tax-and-capital-gains-tax/

https://cleartax.in/s/tax-implications-for-nri-willing-to-sell-property-in-india

ARN No:Jan23/Bg/18