CAPITAL GAINS UNDER INCOME TAX ACT,1961
WHAT IS CAPITAL GAIN?
Capital gain is the profit realized from the sale of a capital asset, such as real estate or stocks. Under the income tax laws of many countries, including the United States, capital gains may be taxed at a lower rate than ordinary income. The tax rate may also vary depending on how long the asset was held before it was sold.
For example, in the US short-term capital gains (assets held for one year or less) are taxed at the same rate as ordinary income, while long-term capital gains (assets held for more than one year) are taxed at a lower rate.
WHAT ARE THE TYPES OF CAPITAL GAINS?
There are two main types of capital gains: short-term and long-term.
Short-term capital gains occur when a capital asset is sold within one year of its purchase. The tax rate for short-term capital gains is typically the same as the taxpayer’s ordinary income tax rate.
Short-term capital assets include:
- Immovable property: Less than 24 months
- Listed equity shares: Less than 12 months
- Unlisted shares: Less than 24 months
- Equity mutual funds: Less than 12 months
- Debt mutual funds: Less than 36 months
Tax Rate On Short-Term Capital Gains When the securities transaction tax is not applicable – The STCGT is added to the ITR of the taxpayer and the individual is taxed as per his income tax slab When the securities transaction tax is applicable – 15%
Long-term capital gains occur when a capital asset is sold after being held for more than one year. The tax rate for long-term capital gains is generally lower than the ordinary income tax rate, and it depends on the tax bracket of the individual.
Long-term capital includes:
- Immovable property: More than 24 months
- Listed equity shares: More than 12 months
- Unlisted shares: More than 24 months
- Equity Mutual funds: More than 12 months
- Debt mutual funds: More than 36 months
Tax Rate On Long-Term Capital Gains
Except on the sale of equity-oriented funds or equity shares – 20% On the sale of equity-oriented funds or equity shares – 10% over and above Rs.1,00,000
Another type of capital gain is called unrealized capital gain. This is when an asset has increased in value but the owner has not yet sold it. It is not taxed until it is sold and realized.
It is important to note that different countries may have different tax laws for capital gains and different types of capital assets may also be taxed differently. It’s always best to consult with a tax professional or check the relevant tax laws for your country to get a clear understanding of how capital gains are taxed.
HOW TO INVEST IN CAPITAL GAINS?
There are several ways to invest in capital gains:
- Stocks: Investing in stocks can provide long-term capital gains if the value of the stock increases over time. It’s important to do thorough research on the company and its performance before making an investment.
- Real estate: Investing in real estate can provide long-term capital gains if the value of the property increases over time. This can be done by purchasing a property and renting it out, or by flipping properties (buying and reselling them quickly for a profit).
- Mutual funds and Exchange-Traded Funds (ETFs): Investing in mutual funds or ETFs that focus on stocks or real estate can provide exposure to capital gains without the need for individual stock picking or property management.
- Collectibles: Investing in certain collectibles such as art, stamps, and coins can also provide capital gains if the value of the item increases over time.
- Businesses: Investing in a business can provide capital gains if the business is successful and the value of the company increases over time.
It’s important to note that there is no guarantee of profit and any investments can have risk attached, it’s important to do your research, consult with a financial advisor, and understand the risk involved before making an investment.
DEDUCTIONS FOR REDUCING CAPITAL GAINS:
There are several deductions available to reduce capital gains tax in India:
Section 54: Under this section, if an individual sells a long-term capital asset and reinvests the capital gain in a residential property within a specified time period, the capital gain is exempt from tax. Purchase of another Property within 1 year or 2 years after the transfer of the Property sold and Construction of house Property within a period of 3 years from the date of transfer of property
Section 54EC: Under this section, if an individual sells a long-term capital asset and invests the capital gain in specified bonds within a specified time period, the capital gain is exempt from tax.
Section 54F: Similar to Section 54, this section allows an individual to claim exemption from capital gains tax on the sale of a long-term capital asset if the capital gain is invested in a residential property within a specified time period. The purchase should be within 2 years of earning the capital and in the case of construction, should be within 3 years from the date of sale
