CAPITAL GAINS

Capital gains are the profits made from the sale of a capital asset, such as real estate, stocks, or bonds. The Income Tax Act of 1956 in India lays out the rules and regulations for taxation of capital gains.

Under the Income Tax Act, capital gains are classified into two categories: short-term capital gains and long-term capital gains. Short-term capital gains are those that are made from the sale of a capital asset that has been held for less than 36 months, while long-term capital gains are those that are made from the sale of a capital asset that has been held for more than 36 months.

Short-term capital gains are taxed at the normal income tax slab rate of the individual or entity. The slab rate ranges from 5% to 30% depending on the level of income. However, if the short-term capital gains are from the sale of equity shares or equity-oriented mutual funds, then it is taxed at 15% irrespective of the slab rate.

Long-term capital gains, on the other hand, are taxed at a lower rate of 20% with the benefit of indexation. Indexation is a method of adjusting the cost of acquisition of an asset to account for inflation. The indexed cost of acquisition is then used to calculate the long-term capital gains. This results in a lower tax liability as the inflationary gain is not taxed.

In addition to the above, the Income Tax Act also provides for certain exemptions and deductions for capital gains. For example, the capital gain from the sale of a residential property can be invested in a new residential property within specified time limits to claim exemption under section 54 of the Income Tax Act. Similarly, capital gains from the sale of agricultural land can be invested in specified bonds to claim exemptions under section 54B of the Income Tax Act.