Capital Gains Tax - LTCG & STCG - Definition, Types, Exemptions & Tax Saving on Capital Gains
Capital Gains Tax, encompassing both Long-Term (LTCG) and Short-Term (STCG) gains, is a vital component to be aware of for anyone involved in investments. Whether you're contemplating selling an asset, investing in the stock market, or exploring real estate, knowing how your profits will be taxed can greatly influence your financial decisions.
Table of Contents
What is Capital Gain Tax?
Capital Gain Tax is levied on the profit or gain that arises from the sale or transfer of a capital asset. These assets can range from stocks and bonds to property and more. The tax is categorised into two types based on the asset's holding period: Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG). Here’s a breakdown for clarity:
|
Type of Capital Gain |
Definition |
Holding Period |
Tax Rate |
|
Short-Term Capital Gains (STCG) |
Gains on the sale of assets held for a short duration. |
Less than 12 months for stocks/equity mutual funds; less than 36 months for other assets. |
Taxed as per the individual's income tax slab rates. |
|
Long-Term Capital Gains (LTCG) |
Gains on assets held for a longer period. |
More than 12 months for stocks/equity mutual funds; more than 36 months for other assets. |
Taxed at 10% over ₹1 lakh for equities; varies for other assets. |
Points to keep in mind:
- Calculation: The calculation of Capital Gains Tax involves subtracting the cost of acquisition (and any improvement costs) from the sale price of the asset. Specific rules apply for indexation (adjusting the purchase price for inflation) in the case of LTCG.
- Exemptions & Tax Saving: Various exemptions are available under the Income Tax Act to save on Capital Gains Tax, such as reinvestment in specific assets, exemptions under Section 54, Section 54F, etc.
Understanding Capital Gains Tax is essential for making informed decisions about buying and selling assets. It’s not just about the gains you make but also how much of it you get to keep after taxes.
What are Capital Assets?
Capital assets are essentially any kind of property held by an individual, whether connected to their business or personal use. Understanding the different types of capital assets is crucial as their sale or transfer can lead to capital gains, which are subject to capital gains tax. Here’s a table breaking down various categories of capital assets:
|
Type of Capital Asset |
Examples |
Details |
|
Immovable Property |
Land, Buildings, House Property |
These include any kind of real estate assets, often leading to significant capital gains. |
|
Movable Property |
Jewellery, Vehicles, Machinery |
This category encompasses personal belongings and assets other than real estate. |
|
Securities |
Stocks, Bonds, Mutual Funds |
Investments in financial instruments are also considered capital assets and are subject to capital gains tax upon sale. |
|
Intangible Assets |
Patents, Trademarks, Copyrights |
Intangible assets are those that don't have a physical presence but hold value and can lead to capital gains. |
|
Collectables and Art |
Paintings, Antiques, Coins |
Items that may appreciate in value over time and can be sold for a profit fall under this category. |
It's important to note that not all assets are considered capital assets for tax purposes. For instance, personal goods like clothing and furniture (used personally) are typically excluded.
Understanding the types of capital assets is a step forward in effective tax planning. Whether you're selling a property, liquidating stocks, or parting with a cherished collectible, knowing how these assets are categorised helps in anticipating the tax implications.
Types of Capital Assets
Types of Capital Assets (Long Term and Short Term Capital Assets)
Capital assets are classified into long-term and short-term categories based on the duration for which they are held. This distinction is vital as it directly influences the capital gains tax calculation upon the sale of these assets. Here’s a breakdown of these types:
Long-Term Capital Assets:
- Definition: Assets held for a longer duration before being sold or transferred.
- Holding Period:
- For equity shares, equity-oriented mutual funds, and listed securities: More than 12 months.
- For property, real estate, and unlisted shares: More than 24 months (36 months in certain cases, depending on the acquisition date).
- Tax Implication: Long-term capital gains (LTCG) are taxed at different rates depending on the asset type, with certain exemptions available.
Short-Term Capital Assets:
- Definition: Assets held for a shorter duration as per income tax laws.
- Holding Period:
- For equity shares, equity-oriented mutual funds, and listed securities: Less than or equal to 12 months.
- For property, real estate, and unlisted shares: Less than or equal to 24 months (36 months in certain cases).
- Tax Implication: Short-term capital gains (STCG) are typically taxed as per the individual's applicable income tax slab rates.
Understanding the classification of capital assets is essential for effective tax planning. The duration for which you hold an asset can significantly impact your tax liability upon its sale.
Types of Capital Gain Tax
Capital Gain Tax is categorised based on the duration for which the capital asset is held. These are primarily divided into Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG). Here’s a table summarising these types:
|
Capital Gain Type |
Holding Period |
Tax Rate |
Key Features |
|
Short-Term Capital Gains (STCG) |
- Less than 12 months for stocks and equity mutual funds. - Less than 36 months for other assets like property, gold, etc. |
Taxed as per the individual's income tax slab rates. |
- No benefit of indexation. - Generally higher tax rate compared to LTCG. |
|
Long-Term Capital Gains (LTCG) |
- More than 12 months for stocks and equity mutual funds. - More than 24 or 36 months for other assets, depending on the type. |
- 10% over ₹1 lakh without indexation for listed equities and mutual funds. - 20% with indexation for other assets. |
- Benefits of indexation (except for equities). - Lower tax rate compared to STCG. |
Note: Indexation is a method used in the calculation of LTCG for certain assets, which adjusts the purchase price of an asset for inflation, effectively reducing the taxable gain.
Understanding the types of Capital Gain Tax is crucial in financial planning and investment decision-making. It helps in strategizing the purchase and sale of assets to optimise tax liabilities.
Tax Rate on Long-Term Capital Gain and Short-Term Capital Gain
|
Type of Investment |
Holding Period for Long Term Capital Asset |
Long Term Capital Gain Tax (LTCG) |
Short Term Capital Gain Tax (STCG) |
Remarks |
|
Stocks |
> 1 years |
10% of gain |
15% of gain |
Only when the overall long-term gain or profit for a financial year surpasses Rs. 1 Lakh is Long Term Gain Tax applicable. |
|
Unit Linked Insurance Plan (ULIP Funds) |
> 5 years |
10% of gain |
15% of gain |
Only when the overall long-term gain or profit for a financial year surpasses Rs. 1 Lakh is Long Term Gain Tax applicable. |
|
Equity Oriented Mutual Funds (Mutual Funds that invest at least 65% of their Portfolio in Stocks) |
> 1 years |
10% of gain |
15% of gain |
Only when the overall long-term gain or profit for a financial year surpasses Rs. 1 Lakh is Long Term Gain Tax applicable. |
|
Rest of the Mutual Funds |
> 3 years |
20% with inflation indexation benefits |
Gains are taxed as per your applicable income tax rates |
- |
|
Government and Corporate Bonds |
> 3 years |
20% with inflation indexation benefits |
Gains are taxed as per your applicable income tax rates |
- |
|
Gold |
> 3 years |
20% with inflation indexation benefits |
Gains are taxed as per your applicable income tax rates |
- |
|
Gold ETF |
> 1 year |
10% of gain |
Gains are taxed as per your applicable income tax rates |
Only when the overall long-term gain or profit for a financial year surpasses Rs. 1 Lakh is Long Term Gain Tax applicable. |
|
Immovable Property (like buildings, houses, and land) |
> 2 years |
20% with inflation indexation benefits |
Gains are taxed as per your applicable income tax rates |
- |
|
Movable Property (like jewellery, royalty, and machinery) |
> 3 years |
20% with inflation indexation benefits |
Gains are taxed as per your applicable income tax rates |
Tax is not applicable if the long-term profit has been reinvested in approved assets. |
|
Privately held Stocks |
> 2 years |
20% with inflation indexation benefits |
Gains are taxed as per your applicable income tax rates |
- |
Deduction of Expenses Allowed from the Final Value of Consideration
When calculating capital gains, certain expenses incurred in connection with the sale of a capital asset can be deducted from the final sale value. These deductions are crucial as they can significantly reduce the taxable capital gains. Here’s an overview of allowable deductions:
- Brokerage or Commission: Expenses incurred for brokerage or commission to facilitate the sale of the asset.
- Legal Fees: Legal expenses related to the sale, such as fees for legal services, documentation, etc.
- Improvement Costs: Costs incurred for any improvements or renovations made to the property. Note that this applies only to improvements made after April 1, 2001.
- Advertisement Expenses: If you incurred costs for advertising the sale of the asset, these could be deducted.
- Surveyor or Valuer Fees: Fees paid to surveyors or valuers for the valuation of the asset for sale purposes.
- Cost of Transfer: Expenses directly related to the transfer of the asset, such as stamp duty, registration fees, and transfer charges.
It's important to note that these expenses must be directly related to the sale of the asset and must be supported by proper documentation to be eligible for deduction. Understanding and accounting for these deductions can effectively lower the capital gains and, consequently, the tax liability.
Exemptions on Capital Gain Tax
There are several exemptions provided under the Income Tax Act of India that allow taxpayers to save on capital gains tax under specific conditions. These exemptions are instrumental in tax planning. Here's a table summarising the key exemptions:
|
Exemption Section |
Applicability |
Conditions for Exemption |
|
Section 54 |
On LTCG from the sale of residential property |
Reinvestment in another residential property within specified timeframes. |
|
Section 54EC |
On LTCG from any capital asset |
Investment in specific bonds (like NHAI, REC) within 6 months of the transfer, subject to a cap of ₹50 lakhs. |
|
Section 54F |
On LTCG from any capital asset other than residential property |
Investment in a residential property, subject to not owning more than one residential house (other than the new one) on the date of transfer. |
|
Section 54B |
On LTCG from the sale of agricultural land |
Reinvestment in another agricultural land within 2 years of the sale. |
|
Section 54GB |
On LTCG from the sale of residential property or a specified asset by an individual or HUF |
Investment in equity shares of an eligible startup, subject to certain conditions. |
|
Capital Gain Account Scheme |
On LTCG |
Deposit the gain amount in a Capital Gain Account Scheme before the due date of filing the income tax return. |
Conclusion
Capital Gains Tax, encompassing both Long-Term (LTCG) and Short-Term (STCG) gains, is an integral part of financial planning for investors. Understanding the nuances of these taxes, the types of assets involved, and the exemptions available is crucial for making informed investment decisions and optimising tax liabilities. While the process may seem daunting, being well-informed can lead to more strategic investment choices and better financial outcomes.
FAQs on Capital Gains Tax
Q1: What is Capital Gains Tax?
A1: Capital Gains Tax is the tax levied on the profit gained from the sale of a capital asset like property, stocks, or bonds.
Q2: What are Long-Term Capital Gains (LTCG)?
A2: LTCG are gains from the sale of an asset held for a longer period, typically more than 12 months for equities and more than 36 months for other assets.
Q3: How is LTCG taxed?
A3: LTCG is taxed at 10% over ₹1 lakh for listed equities and mutual funds without indexation, and at 20% with indexation for other assets.
Q4: What are Short-Term Capital Gains (STCG)?
A4: STCG are gains from the sale of an asset held for a shorter period, typically up to 12 months for equities and up to 36 months for other assets.
Q5: How is STCG taxed?
A5: STCG is taxed as per the individual's income tax slab rates.
Q6: Are there any exemptions available on Capital Gains Tax?
A6: Yes, several exemptions like Sections 54, 54F, and 54EC allow reinvestment of gains into specified assets to save on capital gains tax.
Q7: What is the indexation benefit?
A7: Indexation is adjusting the cost of acquisition of an asset for inflation, applicable to LTCG on certain assets, reducing the taxable gain.
Q8: Can capital loss be carried forward?
A8: Yes, both short-term and long-term capital losses can be carried forward for eight subsequent years to set off against future capital gains.
Q9: Is the sale of a primary residence taxable?
A9: The sale of a primary residence can be exempt from LTCG tax under Section 54, provided the gains are reinvested in another residential property.
Q10: What is Section 54EC?
A10: Section 54EC allows exemption of LTCG tax through investment in specific bonds (like NHAI, REC) within 6 months of asset transfer.
