Capital Gains Tax: what is it, how it works, and current rates

Come February, and every tax-paying individual in India gets ready to figure out their tax outgo and the best means to limit the same, while adhering to the law of the land. If you are in a similar place, and want to know about the different taxes you need to pay, you are at the right place. Read on to know everything about capital gains tax and understand how your investments in equity funds, debt funds, international funds, hybrid funds will be taxed. You can also analyse the capital gains tax on shares to plan out the best way forward.

Decoding Capital Gains Tax

Let us start by understanding the concept of capital gains. The term refers to all the profits you accumulate, from the sale of any capital asset, be it your mutual funds or equities investment or real estate. These profits are categorised as income and, therefore, attract capital gains tax. As a tax-payer, there are various avenues which help you limit the capital gains tax outflow and ensure that a large portion of the profit remains in your kitty.

Types of Capital Gains Tax

Based on the duration for which you hold the investment, capital gains tax can be categorised into two classes – short term capital gains tax and long term capital gains tax. As the name suggests, short-term capital gains tax is applicable on investments which are held for less than three years. In the case of immovable property, this duration is reduced to two years. Similarly, long-term capital gains tax is levied on investments held for longer than three years and the primary distinction between the two is the difference between the long term capital gain tax rate and the short term capital gains tax rate. Separately, if you have investments in preference shares, equities, UTI units, zero-coupon bonds, and equity-based mutual funds, then your holding is considered as a long-term capital asset, as long as you hold it for more than 12 months.

Regulations to Consider

According to Section 80C of the Income Tax Act, your short-term capital gains are liable to attract a tax of 15%, and long-term capital gains on equity mutual funds and shares are taxed at 10% of the profits exceeding 1 lakh rupees. Further, long term capital gains tax, in the case of sale of other assets, is charged at 20%, without adjusting for indexation, which refers to the rise in inflation during the period of holding the asset. Separately, under short-term capital gains, when the securities transaction tax is not liable, the profit from the transaction is added to the income and taxed in accordance with your income tax slabs. Finally, for debt funds, short-term capital gains are levied in line with your income tax slab and long-term gains tax stands at 20%, with indexation benefit.

Exemptions You Should Note

Long-term capital gains availed through the sale of a residential property can be exempted if you reinvest the sale proceeds into a maximum of two residential properties. However, the capital gains accumulated should be less than 2 Crore rupees. In the case of a long-term asset that is not a residential property, you can enjoy an exemption by reinvesting your freed corpus, along with capital gains, in a new property, as long as this purchase is made 12 months before or at least 24 months after the sale. You can also avail exemptions by reinvesting the proceeds from the sale of the first property into specific bonds, within the first six months of the sale. Please note that the capital thus invested cannot be redeemed for the next five years. Separately, Indians aged over 60 years, and with a minimum annual income of 3 Lakh rupees, need not pay capital gains tax on their long-term gains.

Tax-Saving Strategies

The best way to reduce your capital gains outflow is to hold your assets for longer, since you can enjoy lower taxes as well as the benefit of indexation. You can also enjoy exemptions by reinvesting the proceeds, as mentioned above. If you are unable to invest in a new property within the stipulated time, you can park your capital gains in a capital gains account, to reduce the tax outflow.

The Indian government offers investors a number of ways to limit their capital gains tax outflow, so use the best option and save unnecessary tax expenditure seamlessly.  

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