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We often hear the term Capital Gains. What is capital gain or loss? How is it classified into long term and short term? What is its treatment as far as income tax goes? Read on While filling our income tax return forms, we encounter the section called Income from Capital Gains. Lets understand what capital gains is, how it is classified into long term and short term, and how it is taxed. Capital gain (or loss) is a profit (or loss) made while selling a capital asset. Therefore, lets start by understanding what capital asset is.
Capital Asset
Capital asset roughly means property a house, an apartment, office space, factory, godown or a plot of land. Agricultural land is not considered as a capital asset, unless it is situated within the limits of, or within 8 kilometers of a municipality. Investments such as shares and bonds are also considered as capital assets.
Short Term Capital Gain (STCG) Long Term Capital Gain (LTCG)
This classification also varies depending on the type of the capital asset. So, lets understand this classification based on the type of the capital asset.
But the Reserve Bank of India (RBI) has made our task easy here for every year (starting in 1980), they have come up with a number. This is called the Cost Inflation Index. The Cost Inflation Index in itself doesnt convey anything but the increase in the number from one year to another is a representative of the change in prices (and therefore, inflation) between these years. The purchase price that needs to be used for calculating the long term capital gains is thus called the Indexed Cost of Acquisition. Indexed Cost of Acquisition = Actual Purchase Price * (Cost Inflation Index during the year of sale / Cost Inflation Index during the year of purchase) And, Long Term Capital Gain = Sale Price Indexed Cost of Acquisition Also, in case of a house, you can add the cost of improvement (incurred during your ownership of the house) in the cost price of the house. Again, this cost can be indexed (and therefore, increased!).
How much capital gains tax to pay if your income is below the taxable threshold?
(To know the current income tax slabs / brackets, please read Income Tax (IT) Slabs / Brackets and rates)
This is just preliminary information about Short Term and Long Term capital gains, and the income tax on them. Please also read: - Long Term Capital Gains (LTCG) on Sale of a House Calculation and Income Tax - How to save / avoid Long Term Capital Gain (LTCG) Tax on Sale of a House - Set Off and Carry Forward of Losses Capital Gains