Capital Gains for Beginners

Assets like stocks, bonds, property, mutual fund units, property etc., are great investment options that generate capital gains when sold/redeemed. Thus, they are called capital assets, and the profits generated from their sale are liable for taxation under the head capital gains.  

What is Capital Gains Tax?

As mentioned above, when you gain profits from the sale of capital assets, there are tax implications. This is called capital gains tax. Now, based on the holding period of the assets, there can be two types of applicable capital gains tax:

• Short-term capital gains tax or
• Long-term capital gains tax

Short-Term Capital Gains Tax

When you sell your capital assets after holding them for a period of less than or equal to 24 months, it would be considered a short-term asset. Thus, profits from its sale are liable for short-term capital gains (STCG) tax. This is applicable to both movable properties and immovable ones and for listed securities and equity-oriented funds the holding period threshold is 12 months.

The applicable tax rate can vary as per the asset class. 

Long-Term Capital Gains Tax

Now, when you sell assets after holding them for a tenure of more than 24 months, they fall under long-term assets. Thus, profits from their sale attract long-term capital gains (LTCG) tax. In this case as well, the tax rate would depend on the asset class. 

It is also to be noted that the holding period threshold for some assets may differ such as for immovable properties the holding period should exceed 24 months and for listed securities and equity-oriented funds it should exceed 12 months.

The holding period threshold is given in the following table:

Capital Gains Tax Rates

The tax rate for capital gains is determined based on the nature of the asset i.e., short-term capital gain or long-term capital gain. 

The following table gives details regarding the tax rate for capital gains arising due to the sale of capital assets other than listed securities, units of unit trust of India and units of equity-oriented funds :

What are the Tax Exemptions on Capital Gains?

You can avail tax benefits on capital gains under the following sections of the IT Act:

Section 54

Under Section 54 of the IT Act, when you sell a residential property and invest the proceeds for buying another house, it is exempt from taxation. However, there are certain conditions. You have to buy the new property within 1 year before the transfer is complete or 2 years after. Moreover, you can avail this benefit if the new residential property’s construction finishes within 3 years from the date of sale of the old one.  

Section 54EC

If you reinvest the profits from the sale of a long-term asset into securities of the National Highways Authority of India (NHAI) or Rural Electrification Company (REC), it is liable for tax exemption under Section 54EC. But, the reinvestment must take place within 6 months of the sale and a maximum investment upto Rs.50 lakhs only can be made during a financial year.

Section 54EE

Investing capital gains in funds specified by the central government can also help you avail tax deductions. You have to complete the investment within 6 months from the sale of your capital asset and the amount must not exceed Rs.50 lakh. 

You can read more about such exemptions in our article here.

Set-Off And Carry Forward Of Loss

Investing in capital assets is usually risky and may sometimes give rise to capital losses. However, the Income Tax Act has provided provisions that allow the taxpayer to set off such losses with gains or even carry forward excess losses to the next assessment year. 

Short-term capital losses can be set off against both short-term capital gains and long-term capital gains. However, long-term capital losses can only be set off against long-term capital gains. Excess or unadjusted losses can also be carried forward upto 8 years. 

The following table summarizes the provision of set off and carry forward:  

Final Word

Please note that, as per updates announced in the 2023 Budget speech, all debt mutual fund investments after 1 April 2023 will not receive the tax benefit associated with LTCG. Only short-term capital gains tax will be applicable as per the investor’s applicable tax slab. Further with the changes in tax rates from FY 2024-25 it is now important for investors to be familiar with the new rates and limits and plan accordingly.