What Are Capital Gains? How Are You Taxed For It?

By Adhil Shetty | October 27, 2017

Investment is an integral part of wealth creation. The profit earned from your investment is called Capital Gains. Read on to learn more about it.

What Are Capital Gains? How Are You Taxed For It?

Investment is an integral part of wealth creation. And the profit earned from investment in any capital asset is called Capital Gains. Depending on the type of investment instrument and the tenure associated, the capital gain is classified as short-term capital gain (STCG) and long-term capital gain (LTCG).

Classification Of STCG And LTCG For Various Types Of Investments

The STCG and LTCG period of debt and equity investments are defined as per the tax treatment. When it comes to debt investments such as debt fund, debenture and bonds, an investment period less than three years is considered short term, whereas an investment for more than three years is typically long term. The same rules apply to real estate investments and gold.

Equity-related investments such as shares, Equity Mutual Fund, ULIP, if held for less than a year, is treated as short term investment. On the contrary, an investment held for more than a year is considered long-term investment.

Tax On Shares And Equity Mutual Fund

If you invest in shares listed on recognised stock exchanges, the LTCG is tax exempted. LTCG from investment in an equity Mutual Fund is also exempt from tax. STCG from shares and equity mutual fund is subject to tax at 15% along with surcharge and education cess.

Tax On Debt Investments- Debt Fund/Debentures/ Bonds

LTCG from investment in debt-related instruments is subject to tax at 20% rate with indexation benefit. Short-term capital gain is taxed as per the applicable income tax slab rate of an individual.

Tax On Property Investments

While STCG from property investment is taxed as per the applicable tax slab of an individual, LTCG is taxed at 20% with indexation benefit.

Let’s look at how LTCG is calculated on a property transaction. From the gross sales proceeds of a housing property, expenses such as such as stamp paper cost, brokerage charges, and travelling cost are deducted to arrive at the long-term capital gain. Other relevant exemptions include the indexed cost of property acquisition and maintenance.

The indexed cost of property is calculated by multiplying the actual cost of acquisition with either the cost inflation index (CII) in the year of transfer or the cost inflation index (CII) in the year of acquisition or 2001-02, whichever has happened later. Similarly, the indexed cost of maintenance is calculated by multiplying the actual maintenance cost with the cost inflation index as in the year of transferring the property or the cost inflation index (CII) in the year in which the maintenance was done or 2001-02, whichever came later).

Say, the property was purchased in 1990 at Rs. 10 Lakh and sold in 2014-15 at Rs. 40 Lakh. The property was improved in the year 1998 at a cost of Rs. 3 Lakh. CII in 2001-02 was 426. CII in 2014-15 was 1024. The calculation for LTCG tax will be as follows:

Indexed cost of property= 1000000 x CII in 2014-15/CII in 2001-02 = 1000000x 1024/426= 2403755.8

Indexed cost of improvement = 300000 x CII in 2014-15/CII in 2001-02 = 300000x 1024/426 = 721126.7

LTCG= Sale price of property less indexed cost of property acquisition less Indexed cost of improvement = Rs4000000 ‘Less’ Rs 2403755.8 ‘Less’ Rs 721126.7 = Rs 875117.5 (Rs 8.75 Lakh).

LTCG tax = 20% of Rs 8.75 Lakh = Rs 1.75 Lakh

Tax On Gold Investment

STCG on the sale of gold investment such as physical gold and ETF is taxed as per the respective slab rate of the individual. LTCG, on the other hand, is taxed at 20% with indexation benefit. However, if you have invested in SGB and held it till maturity, the gain on redemption will be exempt from tax.

While investment is essential to achieving financial objectives, it’s important to keep tax efficiency in mind to make the most of an investment product.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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