Capital Gains Tax

Defining Capital Gains

The rise in the value of a capital asset at the time of its sale is referred to by the term capital gain. Simply put, capital gain arises during the time of sale of an asset where the seller receives more money than what they originally paid for it. Almost all forms of assets owned can be classified as capital assets which include but aren’t limited to certain kinds of investments (like real estate or stocks) and assets purchased for personal use (like furniture or a vehicle). By subtracting the original price at which an asset was purchased for from the price at which you choose to sell it, you can calculate the capital gains you earned.

Exploring the Realm of Capital Gains

The increase in the value of an asset is represented via capital gains which are ordinarily realized at the time at which an asset is sold. Capital gains are ordinarily tethered to investments like funds and stocks owing to their characteristic price volatility. However, this isn’t to say that these gains can’t be realized on other securities or possessions that have been sold at price that exceeds the price at which they were originally purchased

There are two different categories under which capital gains can be categorized, each of these has been touched upon below.

Short-term Capital Gains – These gains are realized on assets that have been sold after being held for a year or less.

Long-term Capital Gains - These gains are realized on assets that have been sold after being held for over a year.

Understanding Capital Gains Tax

If you derive a profit from the sale of a capital asset, the money you derive is understood to fall under your income. Since taxes are applicable to the income you earn, capital gains have taxes applicable on them which can be short term or long term. The tax levied on long term gains has a base amount of 10 per cent whereas the tax levied on short term gains begins at a base amount of 15 per cent.

As per the Income Tax Act of India, capital gains tax isn’t levied on property that has been inherited and if there is no sale. That being said, if the inheritor of the property wishes to sell the property, they will be required to pay tax on the income they draw from the sale of the property. In order to understand this better, consider the following assets which fall under the capital asset bracket – land, patents, trademarks, jewelry, leasehold rights, machinery and vehicles.

Factors to Consider when Calculating Capital Gains

Calculations applicable to capital gains vary and are dependent on the amount of time an asset has been held. A few pertinent facts that individuals ought to be aware of prior to calculating capital gains are as follows.

Costs Associated with Improvement – In case the seller has incurred any expenses associated with making alterations or additions to the asset, they must be taken into account. However, any improvements made prior to April 01, 2001, aren’t meant to be considered.

Cost at the Time of Acquisition – The money spent by the seller at the time of purchasing the asset must be considered.

Overall Value Considered – This is the amount that the seller will receive in case he transfers his asset over to someone else. Capital gains are charged for the year within the transaction was made even if the money wasn’t paid in that particular year.

In certain scenarios wherein the capital asset also happens to be the property of the taxpayer, the cost of acquiring and improving the asset by the previous owner may also be included.

Wrapping Up

Understanding all that capital gains tax is important for asset-owning individuals. The 2022-2023 Union Budget proposed on February 1, 2022, highlighted that the long-term capital gain surcharge would be capped at 15 per cent for all assets. This cap will be particularly beneficial to those that have an annual income that falls above INR 2 crores and will reduce the tax burden faced by those that have invested in manufacturing companies ,start-ups and other unlisted assets.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.