Taxation / Taxation / Capital Gains Tax...
- Definition: Capital Gains Tax is a tax imposed on the profits (gains) derived from the sale of assets such as land, shares, etc.
- Types of Capital Gains:
- Long-Term Capital Gains (LTCG): Gains made on assets held for a period exceeding three years (one year for shares and mutual funds).
- Short-Term Capital Gains (STCG): Gains made on assets held for a period of three years or less.
- Tax Rates:
- LTCG Tax: Historically, LTCG arising from the transfer of listed equity shares were exempt from tax until the Union Budget 2018-2019. The budget reintroduced LTCG tax on equity investments, taxing gains exceeding 1 lakh at a rate of 10%, without allowing the benefit of indexation. Gains up to January 31, 2018, are grandfathered, meaning they are not subject to the new tax.
- STCG Tax: Gains from equity shares held for up to one year are taxed at the rate of 15% for short-term capital gains.
- Cost Inflation Index (CII):
- The Cost Inflation Index (CII) is an index that reflects the inflation rate in the country. It is issued annually by the Central Board of Direct Taxes (CBDT).
- Indexation Benefit: If indexation benefit is given for LTCG, the inflation cost is added to the purchase price. The resulting amount is then deducted from the sale price to calculate the amount on which tax is levied. This means that the inflation cost is deducted from the gains before taxation.
- The taxation of capital gains aims to encourage long-term investment over short-term speculation. Changes in LTCG tax rates, exemptions, and indexation benefits are part of government efforts to balance revenue generation and promote a stable investment environment.
