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FAQ on Taxation of Capital Gains in India

FAQ on Taxation of Capital Gains in India

What is the meaning of the term ‘short-term capital asset’?

Any capital asset held by a person for a period of not more than 36 months immediately preceding the date of its transfer will be a short-term capital asset.

However, in respect of certain assets like shares, units of specified mutual fund, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds the period of holding to be considered is 12 months instead of 36 months.

Illustration for better understanding

Mr. Raj is a salaried employee. On 8th April, 2012, he purchased a piece of land and sold the same on 29th December, 2013. In this case, land is a capital asset for Mr. Raj. He purchased the land on 8th April, 2012 and sold it on 29th December, 2013, i.e., after holding it for a period of less than 36 months. Hence, land will be a short-term capital asset.

FAQ on Taxation of Capital Gains in India

short-term-capital-gains

FAQ on Taxation of Capital Gains in India

Illustration for better understanding​

Mr. Kumar is a salaried employee. On 8th April, 2013, he purchased shares of SBI Ltd. and sold the same on 29th January, 2014. In this case, shares are capital assets for Mr. Kumar. He purchased shares on 8th April, 2013 and sold them on 29th January, 2014, i.e., after holding them for a period of less than 12 months. Hence, shares are short-term capital assets.

​What is long-term capital gain and short-term capital gain?

Gain arising on transfer of long-term capital asset is termed as long-term capital gain and gain arising on transfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.

​Why capital gains are classified as short-term and long-term?

The taxability of capital gain depends on the nature of gain, i.e. whether short-term or long-term. Hence to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term capital gain are different.

Is the benefit of indexation available while computing capital gain arising on transfer of short-term capital asset?

​ Indexation is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset (as discussed in earlier FAQ). The benefit of indexation is available only in case of long-term capital assets and is not available in case of short-term capital assets.​

​In respect of capital asset acquired before 1st April, 1981 is there any special method to compute cost of acquisition?

FAQ on Taxation of Capital Gains in India

​ Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 1981, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 1981. This option is not available in the case of a depreciable assets.​

​ As per the Income-tax Law, gain arising on transfer of capital asset is charged to tax under the head “Capital gains”. What constitutes ‘transfer’ as per Income-tax Law?

​ Generally, transfer means sale, however, for the purpose of Income-tax Law transfer means the act of giving up your right on an asset. Thus, under Income-tax Law transfer includes sale, exchange or relinquishment of the asset or extinguishment of any rights therein or compulsory acquisition of asset under any law, etc.​

FAQ on Taxation of Capital Gains in India
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FAQ on Taxation of Capital Gains in India

FAQ on Taxation of Capital Gains in India

FAQ on Taxation of Capital Gains in India

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