The levy on the profit gained from an investment that is incurred when the investment is sold is known as capital gains tax. When taxable investments like stock shares are sold, the profits or capital gains are referred to as having been ‘realised’.
Capital gains tax does not apply to unsold investments or ‘unrealised capital gains’. No matter how long a stock share is held for or how much they increase in value, it is not taxable until and unless they are sold.
The Income Tax has specifically exempted capital assets like an inheritance or will. On the other hand, in case the individual who has inherited the asset decides to sell it, the capital tax will be levied on the asset.
Assets like land, building, vehicles, patents, housing properties, leasehold rights, machinery, and jewellery are a few examples of capital assets.
Some of the assets that do not come under the category of capital assets are:
- Personal goods like furniture and clothes are held for personal use
- Agricultural land in rural India
- Any stock, raw materials or consumables held for the purpose of business or profession
- 6 ½% gold bonds (1977) or 7% gold bonds (1980) or the national defence gold bonds (1980) issued by the central government
- Special bearer bonds
Types of Capital Assets
There are two broad categories of capital assets:
- Short-term capital assets or STCG
An asset that is held for a period of 36 months or less is known as a short-term asset. The criteria of 36 months have been reduced to 24 months for properties that are immovable such as land, building and housing properties from FY 2017-18.
For example, if you sell a house property after holding it for a period of 24 months, any income generated will be treated as a long-term capital gain provided that property is sold after the 31st of March 2017
- Long-term capital asset or LTCG
An asset that is held for a period of more than 36 months is known as a long-term asset. The decreased period of the aforementioned 24 months is not applicable to movable property such as debt-oriented mutual funds, jewellery, etc.
Some assets are categorised as short-term capital assets when they are held for 12 months or less. This rule is applicable if the date of transfer is after the 10th of July, 2014, irrespective of what the date of purchase is.
There are certain terms that you need to know while calculating capital gains tax. Some of which are:
- Cost of acquisition
The value for which the ca[ital asset was acquired by the seller
- Full value consideration
The consideration that is to be received or received by the seller as a result of the transfer of his capital assets. Capitals gains are chargeable to tax in the year of transfer, even if no consideration has been received
- Cost of improvement
Expenses of capital incurred in making any additions or improvements to the asset by the seller.
Note: the improvements made prior to April 1, 2001, are not taken into consideration