Capital gains are profits which you make on the selling of capital assets, including stocks and mutual funds. When you do so, the profits made come under the ‘income’ category for which you need to pay taxes in the year the gains are made. This article aims to simplify the concept of capital gains tax. Read on to know more.

Holding period – A key determinant

Before coming to taxes on capital gains, it’s important to understand the concept of holding period. This is because it’s this period that determines the tax percentage. Depending on the period till which you hold your stock/fund, the gains are classified as long-term and short-term, based on which you need to pay taxes. At the same time, it depends on the type of stock/security you hold.

In case of equity shares and funds, if the holding period is more than a year, the gains are subjected to long-term capital gains tax. On the other hand, if the period of holding is less than a year, the gains are subjected to short-term capital gains.

In case of debt funds, if the holding period is more than 3 years or 36 months, the gains are subjected to long-term capital gains tax. On the other hand, if the holding period is less than this period, the gains are added to your income and taxed as per the prevalent income tax slabs.

Capital gains tax on equity shares/funds

Long-term gains up to Rs. 1 lakh attract no tax. However, if the gains are more than Rs. 1 lakh than you need to pay a tax of 10% on the amount up and above Rs. 1 lakh. For instance, if the gains are Rs. 1.10 lakh, you need to pay a 10% tax on Rs. 10,000, which is Rs. 1,000.

It is important to note that long-term capital gains in case of equity shares/funds don’t get the benefit of indexation, which considers inflation during the holding period and raises the acquisition price of an asset. On the other hand, short-term capital gains are taxable at the rate of 15%.

Capital gains tax on debt funds

In case of debt funds, long-term capital gains are taxed at 20% with indexation benefit. This means that the acquisition price of the asset considers inflation during the holding period, which reduces the overall gains, thus lowering your tax liability.

Reporting capital gains in income tax returns

Calculating capital gains is important as you need to report this while filing tax returns. If you don’t, you can get a notice from the tax authorities. In case you are finding it difficult to compute your capital gains, seek help from a professional.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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