What is Capital Gains Tax? - Definition, Types, Examples

Updated:7 Sep, 2022

A tax is a mandatory fee that is to be paid by an individual to the government or an organization so that the government/organization can do better work for the public. There are two types of taxes, Direct Tax, and Indirect Tax. Direct Tax is paid by the citizen to the government directly for example Income Tax and indirect tax are those tax which is paid by another person on your behalf for example GST. Direct taxes are paid on the previous year's income (i.e.; In India 1st April to next year 31st March). Direct Taxes are paid by filing Income Tax Returns (ITR). In India, all types of income sources come under the umbrella of heads of income and are categorized into five types. These are- 

  • Income from salary- Income received by the employee by the employer.
  • Income from house property- Any rental income comes under this category
  • Income from business or profession- Any type of Profit and Loss comes under this category
  • Income from capital gains- Income due to the selling of gold, Property, or shares comes under this.
  • Income from other sources- Any income that is not covered above come under this, For Example- Interest from a savings account, Fixed Deposit, or Compensation.

Nowadays with the craze of the stock market and digital currencies capital gain taxes is very important to understand to file your tax smartly. One fun fact is that all the direct taxes you know Capital Gain tax is the least among all of them. In this article, we will be having a detailed explanation of capital gains and their taxation.

Capital Gains Tax: What is Capital Gain?

Any profit made on account of the transfer of any capital asset comes under capital gain. Here the term transfer means a sale, exchange of goods, gifts, donation, etc. Also, Capital Assets mean, any kind of property held by the citizen; it can be gold, shares, ancestor property, etc. Things that are not considered capital assets: 

Personal Movable Effects: Any property that is movable and not used for business purposes. For example, any kind of white goods(car, fridge, etc), or furniture are considered to be nontaxable in India. As because when you sell your car it is always sold below your purchase cost hence there is no profit and no tax. However, in the case of Jewelry, you always sell it at a cost higher than you purchase Therefore there is a profit hence it is taxable. Some other taxable items are Drawings, Paintings, Archeological Collections, and any work of art.

Agricultural Land: Any land in a rural area is considered to be a noncapital asset. But, it has something more to know, rural and urban are based on the population. The land, where the area population is less than 10000, is considered to be nontaxable and other land where the area population is greater than 10000 will be considered capital assets. For example, if a municipality covers an area of radius of 20 km and has a population above 10000 then, any land within that radius will be considered Capital Assets.

Bonds by Government: This includes the gold bonds issued.

Types of Capital Gains:

Based on the period of holding there are two types of Capital Gains:

Assets

Asset Duration

 

Short Term

Long Term

Immovable Property

<=24 months

>24 months

Movable Property

<=36 month

>36 month

Equity Oriented Mutual Fund

<=12 month

>12 month

Listed Shares

<=12 month

>12 month

Debt Mutual Funds

<=36 month

>36 month

Computation of Short-Term Capital Gain:

Particulars

Rs

The full value of Consideration(Selling Price)

--

Reduce Cost of Acquisition(Cost Price)

--

Reduce the Cost of other expenditure

--

Reduce Cost of Improvement

--

Gross Short-Term Capital Gain

--

Less- Exemptions

--

Taxable Short-Term Capital Gain

--

Consider Mr. A buying 200 shares at a rate of 100/per share in June 2021 and selling at 150 per share in august 2021. Consider other expenditures of Rs 20 and zero exemptions, Find Capital gain.

Explanation: Since the shares are held for less than 12 months it comes under short-term capital gain,

Particulars

Rs 

The full value of Consideration(Selling Price)

30000

Cost of Acquisition(Cost Price)

-20000

Cost of other expenditure

-20

Cost of Improvement

0

Gross Short-Term Capital Gain

9980

Less- Exemptions

0

Taxable Short-Term Capital Gain

9980

Computation of Long-Term Capital Gain

Particulars

Rs

The full value of Consideration(Selling Price)

--

Reduce Index Cost of Acquisition(Cost Price)

--

Reduce the Cost of other expenditure

--

Reduce Index Cost of Improvement

--

Gross Long-Term Capital Gain

--

Less- Exemptions

--

Taxable Long-Term Capital Gain

--

Cost of Inflation Index(CII): The base was considered as 2001 - 2002 as 100, The motive of CII is to adjust the Cost price for long-term holding with Inflation. If the CII of 2022-2023 is 331 means, you have to pay 331 Amount of money for the same article that is bought in 100 in the year 2001-2002. 

Index cost is calculated as Cost of Acquisition ×(CII of transfer year÷ CII of acquisition Year).
Mr. A purchased a house on 1 May 2005 for 5lakh and sold it on 1 Jan 2015 for 20lakh. Find the Capital Gain. Given(CII for 2005-2006 =117; 2018-2019=280), Considering No Exemptions.

Explanation: Since the Asset is held for more than 36 months it comes under long-term gain
 Index Cost= Cost of Acquisition ×(CII of transfer year÷ CII of Acquisition Year). = 500000×(280÷100) = 1196581

Particulars

Rs

The full value of Consideration(Selling Price)

2000000

Index Cost of Acquisition(Cost Price)

-1196581

Index Cost of Improvement

0

Cost of other expenditure

0

Gross Long-Term Capital Gain

803419

Exemptions

0

Taxable Long-Term Capital Gain

803419

Lastly, with low taxation on capital gain, it increases capital investment and new business formation, Usually, salaried employees fill ITR-1 but if you have capital gain then you have to fill ITR-4 which is difficult to understand and you may require a Chartered Accountant.

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