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When is an assessee liable to pay Capital Gain tax?

What is Capital Gain Tax?

Any gain or profit resulting from the transaction of an asset is viewed as 'capital gain'. Capital assets are properties or investments held by individuals, such as buildings, bonds, jewellery, etc. However, land used for agriculture, stocks, and specific bonds are excluded. Gains resulting from the disposal of capital assets are classified as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), depending on the period for which the capital asset has been held.

Note that the capital gains tax becomes payable only when you sell your investment, and not during the time it remains invested. For instance, if an investor is holding stocks that have gained in value, there is no obligation to pay tax on it till the stocks have actually been sold and the profit has been booked. Moreover, if the investor suffers a capital loss (when an asset is sold for less than the original price), the damage can be used to offset capital gains while filing the annual tax returns.

Short Term Capital Gain: The holding period to classify as ‘Short-Term’ differs from asset to asset, but generally, assets held for less than 24 or 36 months qualify as ‘Short-Term’. Some common situations under which an assessee is liable to pay Capital Gain tax are:

  1. Short Term Capital Gain on Securities: Equity gains which are listed in recognised stock markets in India and units of equity inclined Mutual Funds and business trusts attract small-term capital gains under section 111A. Such units transferred after October 1, 2004, are liable for a securities transaction tax, provided they are transferred via a recognised stock exchange.

  2. Short Term Capital Gain on Property: Property transactions within three years of ownership/purchase attract short term capital gains tax. Selling inherited property also attracts the same. This tax, however, is eligible to have rebate concessions which cover any additional cost incurred on renovating or redeveloping a property.

Long Term Capital Gain: t stands 10% for profits made through stocks and equity, and is 20% for gains made vis-a-vis real-estate trade and debt funds. Rules for some assets:

  1. Real Estate: The classification of long term capital asset was changed to 2 years instead of 3 years in Union Budget 2017-18. LTCG can be calculated by deducting the cost of acquisition from the actual sale price. Mathematically it can be presented as  Long-term capital gain = Sale price – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

  2. Gold: Unlike real estate, the time period between the purchase of gold and sale should be more than 36 months before the assessee is liable to pay the Long Term Capital Gains. From FY 2018-19, such gains are charged at 20.8% (including cess). 

  3. Agricultural Land: n a few cases, capital gains made from the sale of agricultural land may be entirely exempted from income tax. For instance, agricultural land in rural regions is not considered a capital asset and hence do not fall under LTCG. 

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