The tax that is levied on capital gains is termed as capital gain tax. Such taxes are levied when an asset is transferred between owners. Though all capital gains are liable for taxation, the tax approach for long-term gains tend to differ from that of short-term gain. Taxpaying individuals can use tax-efficient financial strategies to reduce the burden of their capital gains taxes.
Here is an example of how it works –
Mr. B purchased a house for Rs. 50 Lakh in July 2004. The full value of consideration in the financial year of 2016-2017 stood at Rs. 1.8 Crore. The said property was held for over 36 months and was, therefore, deemed as a long-term capital asset.
After taking into consideration the inflation, the cost price was adjusted, and the indexed cost of acquisition was also taken into account.
The adjusted cost of the property was then settled at Rs. 1.17 Crore, which means Mr. B accrued a net capital gain worth Rs. 63 Lakh. After a long-term capital gains tax rate of 20% was levied on the net capital gain, the tax liability that was to be paid by Mr. B arrived at a total of Rs. 12,97,800
Types of Capital Gains Taxation
There are two types of capital gains –
- Short-term capital gain tax – Any asset that is held for less than 36 months is termed as a short-term asset. In the case of immovable properties, the duration is 24 months. The profits generated through the sale of such an asset would be treated as short-term capital gain and would be taxed accordingly.
- Long-term capital gain tax – Any asset that is held for over 36 months is termed as a long-term asset. The profits generated through the sale of such an asset would be treated as long-term capital gain and would attract tax accordingly.
Assets like preference shares, equities, UTI units, securities, equity-based Mutual Funds and zero-coupon bonds are also considered as long-term capital asset if they are held for over a year.