Capital gains tax is a tax that is levied on the profit made by an individual or an entity from the sale of a capital asset. In India, capital gains tax is classified into two categories, namely short-term capital gains tax and long-term capital gains tax.
Short-term Capital Gains Tax
Short-term capital gains tax is levied on profits made from the sale of a capital asset that is held for a period of less than or equal to 36 months. The tax rate for short-term capital gains tax is the same as the tax rate for the individual’s or entity’s income tax slab.
For instance, if an individual has an annual income of Rs. 10 lakhs and falls under the 20% tax slab, any short-term capital gains made from the sale of a capital asset held for a period of less than or equal to 36 months will also be taxed at 20%.
An example of short-term capital gains tax is when an individual sells shares that were held for less than or equal to 36 months, resulting in a profit of Rs. 50,000. In this case, if the individual's income tax slab is 20%, the short-term capital gains tax liability will be 20% of Rs. 50,000, which is Rs. 10,000.Long-term Capital Gains Tax
Long-term capital gains tax is levied on profits made from the sale of a capital asset that is held for a period of more than 36 months. The tax rate for long-term capital gains tax depends on the type of capital asset sold.
For instance, long-term capital gains tax on the sale of equity shares and equity-oriented mutual funds is exempt up to a limit of Rs. 1 lakh, and any gains above this limit are taxed at 10%. Long-term capital gains tax on other capital assets such as real estate is calculated at a flat rate of 20%.
An example of long-term capital gains tax is when an individual sells a residential property that was held for more than 36 months, resulting in a profit of Rs. 10 lakhs. If the individual invests this profit in a new residential property within two years of the sale, then the long-term capital gains tax liability can be reduced to zero under Section 54 of the Income Tax Act.In conclusion, understanding the tax implications of capital gains is crucial for tax planning. Taxpayers must be aware of the different rates of short-term and long-term capital gains tax and the exemptions and deductions available under the Income Tax Act to reduce their tax liability. It is recommended to consult a tax professional to ensure proper tax planning and compliance with the relevant tax laws.
