Capital Gains Tax: Here is everything you need to know

New Delhi: The deadline for filing income tax returns is July 31. Many individuals generate income from avenues beyond their salaries, including investments in shares, mutual funds, and property. It’s crucial to declare such earnings in your Income Tax Return (ITR) and settle the applicable income tax.

Let’s understand what capital gain is

When a profit arises from the sale or transfer of a capital asset, it is termed as capital gain or capital profit. The government levies tax on this profit, known as capital gains tax. Capital assets encompass both immovable properties such as land, plots, buildings, residential flats, and movable assets like shares, mutual funds, unlisted shares, bonds, etc. There exist two categories of capital gains – long-term and short-term capital gains.

According to a BusinessLine report, data from the Income Tax Department indicates that in Assessment Year 2021-22, capital gains nearly doubled compared to the Financial Year 2020-21. There has been notable growth in long-term capital gains in contrast to short-term capital gains.

In Assessment Year 2023, Income Tax Returns indicated long-term capital gains amounting to Rs. 8.20 lakh crore, up from Rs. 3.52 lakh crore in Assessment Year 2021-22. Over the same period, short-term capital gains rose from Rs. 1.52 lakh crore to Rs. 2.22 lakh crore. Profit derived from selling an asset can lead to either long-term or short-term capital gains.

These assets come with predetermined holding periods, which indicate the duration they must be held before sale. If someone holds a capital asset for more than 36 months before selling it, it qualifies as a long-term capital asset, and any resulting profit is classified as long-term capital gain.

However, certain assets such as stocks listed on the stock exchange (equity or preference), units of equity mutual funds, debentures, and government securities have a holding period of 12 months instead of 36 months.

Similarly, for unlisted shares and properties (houses or buildings), the holding period is 24 months instead of 36 months. The computation of short-term and long-term capital gains tax on the sale of a capital asset…

Firstly, concerning equity shares or mutual funds, if you hold units of listed shares or equity mutual funds for 12 months before selling them, the profit qualifies as long-term capital gain. There is no tax on profits up to Rs. 1 lakh in a financial year. Beyond this threshold, a 10% LTCG tax is applicable. If the holding period is less than 12 months, the profit is treated as short-term capital gain, attracting a 15% tax rate. As for properties such as houses or commercial buildings, holding them for more than 24 months before selling them is classified as long-term capital gain.

In this case, after indexation benefit, a 20% long-term capital gain tax (LTCG tax) is applicable. Similarly, for holding periods less than 24 months, the profit is considered short-term capital gain. The profit amount will be added to your income and taxed according to the income slab…

Income tax, along with the opportunity to save it. With long-term capital gains, you can save tax under Section 54 and Section 54F. However, this exemption is not available for short-term capital gains. Under Section 54 of the Income Tax Act, long-term capital gains from selling residential property can be saved by purchasing a new house. Similarly, under Section 54F, by using the money received from selling shares or other assets (investment amount + profit), you can save tax by buying a house.

A crucial requirement is that when selling shares or other assets, you should not possess more than one residential property in addition to the new home. Tax savings under Sections 54 and 54F are applicable only on long-term capital gains, limited to a maximum of Rs. 10 crore.