A Brief on Capital Gain Tax

Any profit or gain that emerges from the sale of a ‘capital asset’ which can be either property or any investment, is called as capital gain. This gain or profit falls under the category of income, so you will have to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called as the capital gains tax, and it can be short-term or long-term.

Capital gains are not applied to an inherited property as there is no sale of the asset and only a transfer of ownership. Assets received as gifts by way of inheritance or will has been exempted by The Income Tax Act. But if the person who inherited the asset decides to sell it, capital gains tax will be applicable.

Defining Capital Assets

Any Land, building, house or property, vehicles, patents, trademarks, leasehold rights, machinery, jewellery comes under the capital assets. It also includes having rights in or in relation to an Indian company.

Types of Capital Assets

This is broadly divided into two categories – Short term and Long Term Capital assets.

1.  Short-term capital asset – Any asset if held for a period of 36 months or less is termed as a short-term capital asset. From the FY 2017-18, the criteria of 36 months have been reduced to 24 months only for immovable properties such as land, building and house property.

For instance, if you sell any house or property after holding it for a minimum period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after the financial year end as on 31st March 2017.

2. Long-term capital asset – Any asset which is held for over 36 months is called a long-term capital asset. The reduced period of 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They are classified as long-term capital asset if they are held for more than 36 months.

Some assets are considered short-term capital assets even if they are held for 12 months or less. This is applicable if the date of transfer is post 10th July 2014 (where the date of purchase is not relevant).

These assets include:

1. Equity/shares of a company listed in a recognized stock exchange in India
2. Debentures, bonds, government securities etc, listed on any recognized stock exchange in India
3. Units of equity oriented mutual fund, UTI and Zero coupon bonds either quoted or otherwise.

If an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included while   determining if it’s a short term or a long-term capital asset. For bonus and rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.

Tax on Equity and Debt Mutual Funds –

Gains from the sale of debt funds and equity funds are managed differently. Any fund that invests heavily in equities which are more than 65% of their total portfolio is called an equity fund.

Debt Funds –

• For Sort Term Gains – At Tax slab rates of individual
• For Long Term Gains – At 20% with indexation

Tax Rules for Debt Mutual Funds –

To be qualified as a long term capital asset, any Debt mutual funds have to be held for more than 36 months. So you have to remain invested in these funds for at least 3 years to get the benefit of long-term capital gains tax. If redeemed within 3 years, the capital gains will be included in your income and taxed as per your income tax slab rate.

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