Any profit or gain which arises from the sale of a ‘capital asset’ comes under the head ‘income.’ Therefore, you will need to pay tax for that amount in the same year in which capital transfer has taken place. This is called capital gains tax. There are 2 types of capital gains tax: Short-term capital gains tax (STCG) and long-term capital gains tax (LTCG). Capital gains exhibit an increase in the asset’s value. These gains are realized at the time when an asset gets sold.
Capital gains will not be levied to an inherited property. This is because there is no sale, but only a transfer of ownership. Income Tax Act specifically exempts assets which are received as gifts by way of an inheritance or will. If the person who has inherited that asset decides to sell, then capital gains tax will be applied. Land and building, house property, vehicles, patents, trademarks, leasehold rights, jewellery, etc. are some of the examples of capital assets. All the unrealized gains and losses exhibit an increase or decrease in the value of an investment, but are not treated as a taxable capital gain. Capital loss means when the value of capital asset decreases in comparison to an asset’s purchase price.
Capital gains are of 2 types: Realised gains and Unrealised gains. Realised capital gain is the gain made on an investment which has been sold and profit on the same investment has been booked. Unrealised capital gain means the gain on an investment which has not been sold yet, but the investment is in profit. Therefore, profit-booking has not been made yet. In financial parlance, capital gains refer to the realised capital gain.
Long-Term Capital Gains and Short-Term Capital Gains
Holding period considers the duration for which the investment is held. It begins from the date of acquisition to the date of sale or transfer. For the purposes of income tax, the holding periods for equity shares and equity mutual funds are different from other capital assets.
Any asset which is owned by an individual (taxpayer) for less than 3 years since the date of transfer/ownership is the short-term capital asset. An asset which is owned by an individual (taxpayer) for over 3 years is treated as the long-term capital asset. STCGs falling under section 111A are levied 15% tax, excluding surcharge and cess. LTCGs attract a tax of 20%, excluding cess and surcharge.
If listed equity shares are sold within one year of purchase, the seller of the shares may make short-term capital gain or incur short-term capital loss (STCL). If the shares are sold at a profit or at a price higher than the purchase price, then the seller has made a short-term capital gain. These gains are taxable at 15%, irrespective of the tax slab of the investor. As per the income-tax provisions, short-term capital losses from the sale of equity shares are allowed to be offset against short-term or long-term capital gains from any capital asset. It can be carried forward for 8 years, if the loss has not been set off entirely. If equity shares are sold after the period of 12 months of purchase, the seller can make a long-term capital gain (LTCG) or incur a long-term capital loss (LTCL). If a seller makes a LTCG exceeding INR1 lakh on the sale of equity shares or equity-oriented mutual funds, the gain made will be levied a LTCG of 10%, plus applicable cess. Indexation benefit will not be available to the seller.