Capital Gains Tax: Types, Calculation and Current Rates

Capital gains tax is an essential aspect of investing in India. It affects how much you earn from selling assets like stocks or property. Understanding how it works can help you plan your investments wisely.

Capital Gains Tax Introduction

Capital gains tax is a fee for making money from selling certain investments or assets. In India, these assets include stocks, property, and precious metals like gold.

When you sell an asset for a higher price than you originally paid, the profit earned is termed a capital gain subject to taxation.

For example, if you bought shares of a company and later sold them at a higher price, the profit you make from that sale is subject to capital gains tax.

Understanding this tax is important because it affects how much money you keep from your investments. Different rules apply depending on how long you’ve held the asset before selling it.

Capital gains tax allows the government to share your profits from selling investments. Considering this tax when planning your investments is essential for managing your finances effectively.

Types of Capital Gains Tax

In India, capital gains taxes are categorised into short-term capital gains tax (STCG) and long-term capital gains tax (LTCG), determined by the duration you hold the asset before its sale.

Short-Term Capital Gains Tax (STCG)

This tax applies when you sell an asset, like stocks or property, within a short period after buying it. For most assets, if you sell them within three years of purchase, any profit you make is considered short-term capital gains. The current tax rate for short-term capital gains is 15%.

Long-Term Capital Gains Tax (LTCG)

When you hold an asset for a longer duration before selling it—typically more than three years—the profit from the sale is categorised as long-term capital gains. The tax rates for long-term gains vary based on the type of asset:

• Stocks and Equity Mutual Funds: If held for over a year, the LTCG tax rate is currently 10% on gains exceeding ₹1 lakh in a financial year.
• Property: The LTCG tax rate is 20% after indexation benefits for real estate held for more than two years.

Understanding these types of capital gains tax is crucial for investors as it impacts the tax they must pay when selling their investments. By knowing the rules for short-term and long-term gains, investors can strategise their investments to optimise returns and minimise tax liabilities effectively.

How Capital Gains Tax is Calculated

Calculating capital gains tax involves a straightforward formula based on the profit you make from selling an asset. Here’s how it works:

1. Calculate the Cost of Acquisition: This includes the asset’s purchase price and any expenses incurred while buying it (like brokerage fees).

2. Calculate the Cost of Improvement: If you’ve made improvements to the asset (like renovations to a property), add these costs to the acquisition cost.

3. Determine the Selling Price: The amount you get when you sell the asset.

4. Calculate the Capital Gain: Subtract the total acquisition cost (including improvements) from the selling price.

Example 

Suppose you bought a house for ₹50 lakhs and spent ₹5 lakhs on renovations. Later, you sell it for ₹70 lakhs. Your capital gain would be ₹70 lakhs (selling price) – ₹55 lakhs (acquisition cost + improvements) = ₹15 lakhs. Depending on how long you held the property, you would pay either short-term or long-term capital gains tax.

Current Capital Gains Tax Rates in India

Capital gains tax rates in India change depending on whether you’ve held the asset for a short or long period and the type of asset sold. Here’s a breakdown:

1. Short-Term Capital Gains Tax (STCG)

Short-term capital gains happen when you sell something within three years of buying it (one year for some assets like stocks and equity mutual funds). The current tax rate for short-term gains is 15%. This rate applies to the profit you make from selling the item for more than you paid.

2. Long-Term Capital Gains Tax (LTCG)

Long-term capital gains apply when you hold an asset for more than the specified period before selling it. The rates vary depending on the asset:

How Capital Gains Tax Works

Capital gains tax works by taxing your profit when selling certain assets, like stocks, property, or gold. Here’s a clear breakdown of how it operates:

Determining the Type of Gain

• Short-term Gains: If you sell an asset within three years of buying it, any profit is considered short-term capital gains. This is taxed at a higher rate, currently 15%.
• Long-term Gains: If you hold an asset for more than three years before selling, the profit qualifies as long-term capital gains. Tax rates vary by asset type, such as 10% for stocks held over one year and 20% for property held over two years after indexation benefits.

Impact on Investments

• Capital gains tax affects your overall investment returns. Higher taxes on short-term gains may reduce your profits compared to long-term investments.
• Investors often use strategies to minimise tax liabilities, such as holding assets longer to qualify for lower long-term capital gains tax rates.

Reporting and Payment

• When you sell an asset and make a profit, you need to report it in your income tax return.
• The tax on capital gains is typically paid when you file your taxes for the financial year in which the sale occurred.

Exemptions and Deductions

• Certain investments, like equity shares held for over a year, may qualify for exemptions up to ₹1 lakh in a financial year under LTCG.
• Deductions for expenses related to the sale (like brokerage fees) can reduce your taxable capital gains.

Conclusion 

Understanding capital gains tax is essential for every investor in India. Knowing the types, calculation methods, and implications allows you to make better financial decisions and optimise your investment returns.