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A GAIN ON THE SALE OF CAPITAL ASSET.
They are classified as Short Term capital Gains and Long term capital gains
Capital gains attract tax, subject to allowances and reliefs in this regard. Capital Gains Tax doesn’t apply to personal belongings up to a specified limit.
Capital Gains Tax is a tax on the profit when you sell or give away something (an ‘asset’) that has increased in value.
It’s the gain you make that’s taxed, not the amount of money you receive.
You don’t normally have to pay Capital Gains Tax if you give something away to your spouse and dependants.
Example
You bought some shares for £2,500 and sold them later for £12,500. This means you made a gain of £10,000 (£12,500 less £2,500).
If you gave the shares to a friend when they were worth £12,500 instead of selling them, the gain would still be £10,000.
(We often hear the term “Capital Gains”. What is capital gain or loss? How is it classified into long term and short term? What is its treatment as far as income tax goes? )
While filling our income tax return forms, we encounter the section called “Income from Capital Gains”. Let’s understand what capital gains is, how it is classified into long term and short term, and how it is taxed.
Capital gain (or loss) is a profit (or loss) made while selling a capital asset. Therefore, let’s start by understanding what capital asset is.
Capital AssetCapital asset roughly means property – a house, an apartment, office space, factory,
go- down or a plot of land.
Agricultural land is not considered as a capital asset, unless it is situated within the limits of, or within8 kilometres of a municipality (just a reference, terms and conditions differ from country to country as per the Law to which it is related to)
Investments such as shares and bonds are also considered as capital assets.
When does a Capital Gain or Loss arise?
When the sale price of a capital asset is more than its purchase price, you incur a capital gain.
Similarly, when the sale price of a capital asset is less than its purchase price, you incur a capital loss.
(In some cases of long term capital gains, we have to consider the indexed cost of acquisition – but we’ll come to that later, while discussing long term capital gains)
Classification of Capital Gains
Capital gain is classified into two types, depending on the period of holding of the capital asset.
This classification also varies depending on the type of the capital asset. So, let’s understand this classification based on the type of the capital asset.
Shares / Stocks / Equities and Equity Mutual Funds (MFs)
Short Term capital gains
If shares or equity MFs are held for less than12 months before selling, the gain arising is classified as Short Term Capital Gain.
[The only condition here is that the shares / equities should be sold on a recognized stock exchange (In the recognised stock exchanges), and a securities transaction tax (STT) should be paid on it.
If the sale of shares is off-market (that is, if the sale is not on a stock exchange), the gain would be classified like that for other capital assets. More on this in later sections.]
In this case, the short term capital gain is taxed at X % of the gain. (This would increase to X +% for Financial year to which the transaction took place.
(Do not understand the difference between Financial Year, Assessment Year and Previous Year? Please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)“)
A short term capital loss arising from sale of shares can be offset against a short term capital gain from sale of other shares, as long as both the sales occur in the same financial year.
Long Term Capital Gain
If shares or equity MFs are held for more than12 months before selling, the gain arising is classified as Long Term Capital Gain.
In the case of long term capital gain arising out of the sale of shares or equity mutual funds, there is no income tax.
The long term capital gain in this case is tax free.
All Other Capital Assets
Short Term Capital Gain.
If the capital asset is held for less than36 months before selling, the gain arising from it is classified as Short Term Capital Gain.
This short term capital gain is clubbed with your income for the year, and is taxed at a rate as per the applicable tax slabs / brackets.
Short Term Capital Gain = Sale Price – Purchase Price
This is true even for shares or equity mutual funds sold off market.
For example, when a company comes out with a buyback offer, or when a company taking over another company comes up with an open offer, and you tender your shares to the company directly, any gain arising out of this would be taxed as if the sale was of “other capital asset”, and would be clubbed with your income for the year of sale for the purpose of calculation of income tax.
(To know the current income tax slabs / brackets, please read “Income Tax (IT) Slabs / Brackets and rates”)
Long Term Capital Gain.
If the capital asset is held for more than36 months before selling, the gain arising from the sale is classified as Long Term Capital Gain.
In case of assets other than equity shares or equity MFs, the long term capital gain is taxed at X%. In other words, X% of the long term capital gain has to be paid as income tax.
(In case of debt mutual funds, the capital gain tax is X% if the cost of acquisition is not indexed, and it is X% if the cost of acquisition is indexed)
But how do we calculate the gain? Is it just like short term capital gain: The sale price less the purchase price?
Capital Gain refers to the amount of profit arising as a result of selling equity shares at a price higher than the buying price.
profit realized from the sale (disposal) of a capital asset, or from holding it during a period when its market value is increasing. Such gains usually attract capital gains tax.
