What Does Capital Gains Tax Apply To: What You Need To Know

Are you curious about what capital gains tax applies to but feeling a bit lost in the lingo? You're not alone! Let's break it down for you. Basically, when you sell an asset, the profit you make could be subject to capital gains tax, including:

• Stocks

• Security Bonds

• Real Estate

• Jewellery

• Archaeological collection

• Drawing or Painting

• Collectibles (like art and antiques)

As per the Income Tax Act, capital gains is included as a part of your income and attracts taxation. Capital gains tax comes into play here, applied to the profit you make from selling an asset, which is the difference between your original purchase price (your basis) and the selling price.

Capital gains tax (CGT) is charged on the profit you make when you sell an asset that has increased in value. The tax applies to the gain(profit), not the total amount you get from the sale.

In India, this is governed by the Income Tax Act of 1961. Whether or not you run your business, you're required to pay the tax. The Indian Revenue Service (IRS) has two types of capital gains tax:

• Short-term for assets held 2 years or less

• Long-term for anything over the 2 years 

Typically, short-term gains are taxed at a higher rate, as they are treated as ordinary income. Long-term gains often benefit from a lower rate. To figure out what is your capital gains tax, you'll need to know your basics, such as:

• Sale price

• The duration you have held the asset

Based on the period of holding the asset, there are two types of capital gains:

• Short-term

• Long-term

Short-term capital gains tax applies when you’ve held a capital asset for 2 years or less. For this holding period, it’s considered a short-term asset, and you’ll be liable for short-term capital gains (STCG) tax. This tax will apply to:

• Moveable and immoveable properties

• Funds

• Security bonds

In some cases, the holding period threshold is 12 months. If you exceed this period, you’ll be subject to short-term investment capital gains tax. The tax rate will depend on the asset class you’re dealing with.

If you hold an asset for more than 24 months, the profit will be taxed as Long-Term Capital Gains (LTCG). Similar to short-term capital gains, the tax rate will depend on the asset class.

Keep in mind that the holding period threshold can vary by asset type. For some, LTCG tax applies after 12 months, while others require a minimum of 24 months.

Finding out capital gains is straightforward if you know the short-term gain tax calculating formula. 

For example, if you bought stock for ₹1 lakh and sold it for ₹1.5 lakh, your capital gain would be ₹50,000. Based on the type of asset and applicable tax rate, you can calculate the amount of tax you need to pay on the profit. 

The tax rates you pay on capital gains depend primarily on how long you have held the asset. Here are the details:

There is a formula which you can use to calculate your short-term capital gains, which is: 

Selling price - (purchase price - transaction costs) = Short-term capital gains

But first, you need to know the following:

• Purchase Price: The amount you paid to buy the asset.

• Selling Price: The amount you are getting on selling the asset.

• Transaction Expenses: The brokerage or any associated costs you have paid to buy the asset.

To keep it simple, you can use any short-term gain tax calculator available online. Similarly, using a long-term capital tax calculator is an easy and fast option to understand how much you will need to pay as tax

Understanding what is short-term capital gains tax and how it differs from long-term gains is imperative to planning out your investment. Since the tax rates change with both types of capital gains, it helps you decide when to sell the asset. This is at the end; the goal is to keep your hard-earned money where it belongs— with you.  

What is capital gains tax, and when does it apply?

Capital gains tax applies to the profit from selling a capital asset. For example, if you bought land for ₹5 lakh, kept it for 5 years, and sold it for ₹8 lakh, your profit of ₹3 lakh will be taxed.

What are short-term and long-term capital gains taxes?

Short-term capital gains tax applies if you hold an asset for 12 months or less. Long-term capital gains tax applies if the asset is held for more than 12 months. The tax depends on how long you hold the asset.

What is the tax rate for short-term capital gains?

If you are wondering what capital gains tax is paid on, then you should learn it is the profit you earn. Typically, it can be 15% or 10%, but in most cases, it will align with your income tax rate.

How is long-term capital gains tax calculated?

To successfully calculate your long-term capital gains, follow these steps:

1. Figure out the full value of the sale consideration

2. Calculate the net value of the sale consideration

3. Calculate the cost of acquisition and improvement

4. Follow the formula to calculate: 

Cost of acquisition x (CII of the year of transfer\CII of the year of acquisition) = Indexed cost of acquisition

1. Deduct tax exemptions under section 54/54B/54D/54EC/54F

2. Long-term capital gains chargeable to tax

Follow the formula- Net sale consideration - (Indexed cost of acquisition + Indexed cost of improvement) - exemptions under Section 54/54B/54D/54EC/54F = LTCG chargeable to tax

What assets are subject to capital gains tax?

Assets subjected to capital gain tax: 

• Stocks

• Security Bonds

• Real Estate

• Jewellery

• Archaeological collection

• Drawing or Painting

• Collectibles (like art and antiques)

Are there any exemptions for capital gains tax?

Yes, for long-term gain, there are several exemptions under sections 54, 54B, 54D, 54EC, and 54F.

How can I reduce my capital gains tax liability?

There are several options which you can avail of:

• Go for joint ownership

• Reduce your selling expenses (For instance, deducting renovation costs when calculating capitals gains on sale of a property)

• Reflect upon the holding period 

• Avail of the indexation benefit

• Use tax loss harvesting

• Buy a new property or invest in a new residential property

• Invest in bonds