What is Capital Gains Tax, and Difference Between LTCG and STCG

What is Capital Gains Tax, and Difference Between LTCG and STCG

Any profit or gain generated by the sale of the Capital assets is termed a 'Capital gain Tax'. 

This can be for any asset you own. The profit which is received falls under the category of income. Hence, tax is to be paid on that income. 

If an individual has inherited property, then this tax is not payable for it. If that individual decides to sell that property, he or she has to pay the tax for it. 

Capital assets include patents, property, land, jewellery, machinery, factories, trademarks, etc. 

The Capital assets have been broadly classified into two categories: -

  1. The assets which an individual holds for at least 36 months, i.e. 3 years or more, are termed long-term capital assets.
  2. The assets which an individual holds for less than 36 months, i.e. 3 years, are termed short-term capital assets.

Types of Capital Gains Tax: -

The Capital Gains Tax is divided into two categories: -

1. Short term Capital gains tax ( STCG )

2. Long term Capital gains tax ( LTCG )

About ltcg and stcg:-

The tax which is charged on long-term gains usually starts from 10%, and the tax which is charged on short-term gains starts from 15%

Difference between long-term capital gains ( LTCG ) and short-term capital gains ( STCG ): -

  • The short-term capital gains tax ( STCG ) is payable for the profit which is earned from the sale of Short term capital assets.
  • The long-term capital gains tax ( LTCG ) is payable for the profit which is earned from the sale of Long term capital assets.
  • The risk involved with the Short term capital assets is relatively low because the holding period for the assets is short.
  • The risk involved with the Long term capital assets is relatively high because the holding period for the assets is longer, and there's a risk associated with the assets becoming non-liquid in the near future.
  • For the financial assets, the short-term capital gain holding period is less than or equal to 12 months, i.e. 1 year.
  • For the financial assets, the long-term capital gain holding period is more than 12 months, i.e. 1 year. ( ltcg time period )
  • The indexation benefit does not apply to short-term capital gains  (STCGs ).
  • The indexation benefit is applicable for long-term capital gains ( LTCGs ).
  • For the short-term capital gains tax ( STCG ), the period for holding the immovable property is less than or equal to 24 months, i.e. 2 years, and the period for holding the movable property is less than or equal to 36 months, i.e. 3 years.
  • For the long-term capital gains tax ( LTCG ), the period for holding the immovable property is more than 24 months, i.e. 2 years, and the period for holding the movable property is more than 36 months, i.e. 3 years. ( ltcg time period )
  • The real estate tax for short-term capital gains ( STCG ) is as per the income tax slab. ( stcg tax )
  • The real estate tax for long-term capital gains ( LTCG ) is at around 20% ( with the indexation benefit included ).

This was all about ltcg and stcg. 

The calculation for Short term capital gains: -( stcg tax);

  1. Take into account the consideration value.
  2. From the consideration value, subtract the cost associated with improvement and acquisition and the expenditure generated by the sale or the transfer of the assets.
  3. The amount thus received is termed short-term capital gains.

The calculation for Long term capital gains: -

  1. Take into account the full value of consideration associated with long-term assets.
  2. From the value above, subtract the indexed cost of improvement and acquisition and the expenditure generated by the transfer or the sale of the assets.
  3. The amount thus received is termed long term capital gains.

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Capital gain tax in INDIA: -

The profit earned from the sale of capital assets is called Capital Gains. A certain amount of tax is payable on such type of profit received. 

This tax is called Capital Gain Tax in INDIA. As clearly specified by the Income Tax Act, this tax does not apply to inherited properties until and unless sold to a third party. 

in INDIA, for capital gains, both the short-term capital gains tax and the long term capital gains tax are payable. For each year, the capital gains tax is calculated in accordance with a certain fixed rate. 

This rate for the calculation of the capital gains tax varies from year to year. For calculating long term capital gains, indexation is used. 

The term which is associated with this process of indexation for long term capital gains is the Cost Inflation Index ( CII ). 

In INDIA, for the year 2022, the capital gains tax is calculated for 0%, 15% and 20% for most of the financial assets which are held for more than a year. 

In comparison, the capital gains tax for the assets held for a period longer than a year is calculated ordinarily by the rates of 10%, 12%, 20%, 26%, 33% or 37%.

FAQ Related to What is capital gain Tax

1. What do you understand by the term Capital Gains Tax?

Any profit or gain which is generated by the sale of the Capital assets is termed a 'Capital gain Tax'. This can be for any asset you own. The profit which is received falls under the category of income. Hence, tax is to be paid on that income. If an individual has inherited property, then this tax is not payable for it. If that individual decides to sell that property, he or she has to pay the tax for it. Capital assets include patents, property, land, jewellery, machinery, factories, trademarks, etc. 

2. How many types of Capital Assets are there?

The capital assets have been broadly classified into 2 categories: -

  • Short-term capital gain ( STCG ) assets
  • Long-term capital gain ( LTCG ) assets

3. How can an individual avoid or minimize the capital gains tax?

To avoid or minimize the capital gains tax, an individual can do the following things: -

  • Hold an asset for more than a year to convert the tax to long term capital gains tax, as the levy for ( LTCG ) is relatively lower.
  • Rather than investing, again and again, learn the art of rebalancing the dividends.
  • Use tax-advantaged bank accounts, such as savings accounts; hence, with the help of these, your investments can easily grow tax-free.
  • Heir is an advisor who can assist you with each and every step related to finance. This will save you from risky situations associated with the future.

4. Is the capital gains tax exempted for agricultural land?

When the land inherited is used for the purpose of agriculture for two years, considering the date of transfer, then that kind of land can be exempted from the capital gains tax. 

5. What is the time period for holding properties regarding short-term capital gains and long-term capital gains?

For the short-term capital gains tax ( STCG ), the period for holding the immovable property is less than or equal to 24 months, i.e. 2 years, and the period for holding the movable property is less than or equal to 36 months, i.e. 3 years. For the long-term capital gains tax (LTCG ), the period for holding the immovable property is more than 24 months, i.e. 2 years, and the period for holding the movable property is more than 36 months, i.e. 3 years.

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