Tax free Interest Income in India
Investing in the market is no longer exclusive to expert investors but those new to the market can take advantage of a number of investment tools too…
4.8
30 Jul, 2021
11 min read
2689 Views
Are you planning to sell your stocks sometime soon? Then, be prepared to pay a tax on the growth value of your stocks at the time of their sale. Capital investments like stocks, mutual funds, or real estate assets usually attract a capital gains tax when they are sold higher than their buying price.
Capital gains are the value at which the capital assets grow by the time of their sale since their purchase date. Capital gains are calculated only when the price at which the assets were sold is higher than its original price of purchase. Capital assets mostly include shares, mutual funds, or any real estate property like house, land, etc.
Capital gains derived from the sale of any of the above capital assets are treated as ‘income’ and thus become taxable and are termed as capital gains tax. The capital gains tax is a one-time tax payable during a financial year in which the sale of capital assets took place.
It must be noted that capital gains tax is not levied on inherited properties, as it is not a sale transaction, and the Income Tax Act of India exempts such assets as gifts by way of will or inheritance. However, when the inheritor decides to sell it, capital gains tax shall be applicable on the rise in property value.
Common kinds of capital assets in India include open land, constructed properties, vehicles, machinery, jewellery, patents, trademarks, leasehold rights, stocks, and mutual funds. Exempted categories of capital assets in India comprise:
Capital Assets in India are further classified into two main types: short-term and long-term.
Capital assets held for upto a period of 36 months are called short-term capital assets. For immovable assets like land or properties, this period has been reduced to 24 months since FY 2017-18, and since then, properties or land held upto a period of 24 months are treated as short-term capital assets.
Few capital assets like equity shares in a listed company, government securities, equity mutual funds, zero coupon bonds, held for less than 12 months are also considered as short-term capital assets. Tax levied on gains made from the sale of short-term capital assets is called the short-term capital gains (STCG) tax.
Capital assets held for 36 months or more are classified as long-term capital assets. However, capital assets like equity shares in a listed company, securities, equity mutual funds, zero coupon bonds held for over 12 months are also treated as long-term capital assets. Tax applicable on the gains acquired from the sale of the long-term capital assets is called long-term capital gains (LTCG) tax.
Calculation of Capital Gains Tax
Computation of Capital Gains Tax depends on the type of capital gain and holding period – STCG or LTCG. It is essential to understand few terms associated with the calculation of capital gains tax, as listed below:
Calculation of tax on STCG is fairly simpler, and can be done so using the formula given below:
STCG = Full Value Consideration – [Cost of Acquisition + Cost of Improvement + Transfer Cost]
The gains value, thus obtained, is added to the total annual income, and taxed as per the individual’s income slab eligibility.
Computing LTCG is a slightly long process, given the indexation process and inflation factor involved in it. LTCG can be computed as:
LTCG = Full Value of Consideration – [Indexed Cost of Acquisition + Indexed Cost of Improvement +
Cost of Transfer]
The Indian Income Tax Act allows for a slew of tax exemptions on capital gains in the following cases:
To sum up, earnings capital gains can be quite lucrative with various investment options in the market, especially with reduced taxing on stocks or shares. While the tax on STCG from listed shares stands at 15 percent as per u/s 111A of the Income tax Act, the tax on LTCG above Rs. 1 Lakh from listed shares in a financial year stands at 10 percent under u/s 112A of the IT Act. Similarly, in the case of unlisted shares, the tax on LTCG is levied at 20 percent.
How would you rate this blog?
Related Blogs
Translate the power of knowledge into action. Open Free* Demat Account
Subscribe to #SmartSauda Newsletter