What Is A Capital Asset?
A capital asset is an asset that is anticipated to be owned by a firm or
individual for a lengthy period of time, generally more than a year and is
utilised for income generation rather than for selling. Capital assets include
land, buildings, home property, automobiles, patents, trademarks, leasehold
rights, machinery, and jewellery.
Types Of Capital Assets
- Short-term Capital Assets:
Short-term capital assets are assets owned by an individual or a business
for a duration of fewer than 36 months in India. Stocks, bonds, mutual
funds, and other sorts of investments that are acquired and sold in a short
period of time are examples of these assets. Any profits or losses incurred
when an individual or corporation sells a short-term capital asset in India
are classified as short-term capital gains or losses. Long-term capital
gains are subject to taxes more heavily than short-term capital gains.
Short-term capital gains on listed stock shares and equity-oriented mutual
funds are taxed at 15% as of the fiscal year 2021-22, while non-equity
assets are taxed at the person's corresponding income tax slab rate.
- Long-term Capital Assets:
Long-term capital assets are stocks, bonds, mutual funds, and other sorts of
long-term investments that have been owned by an individual or a firm for
longer than 36 months. When a person or company sells a long-term capital
asset in India, all profits or losses are termed long-term capital gains or
losses. Short-term capital gains are taxed more heavily than long-term
capital gains. Long-term capital gains on listed equity shares and
equity-oriented mutual funds are taxed at 10% for earnings exceeding Rs. 1
lakh in the financial year 2021-22, whereas non-equity investments get
levied at 20% after indexation.
Indexation is the process of adjusting the asset's purchase price for
inflation, which can reduce taxable capital gains. This is especially useful
for long-term capital assets, which are frequently kept for many years and
are susceptible to inflation.
Defining Capital Gains And Capital Gain Tax
Capital gains are referred to the profits emanating from the sale of capital
assets. Capital gains occur when you sell a capital asset for a higher price
than you paid for it. Likewise, a capital loss occurs when the asset's worth
falls below its purchasing price. Only when you sell an asset for more than its
initial purchase price can you earn a capital gain? Capital gains can't be
applied to inherited property. This is because an inherited property is just a
transfer of title rather than a sale. The two types of capital earnings are
long-term capital gains and short-term capital gains.
Capital Gain Tax
Profits accumulated from the sale of any capital asset are referred to as
capital gains. Such profits might be realized by selling investments or real
Since profits are categorized as an 'income', they are liable for taxation. This
is known as capital gains tax.
Tax Calculation Over Capital Gains
"Calculation of tax on short-term capital gains is simpler than that on
long-term gains. For short-term gains, the gain is added to the total income and
then the Income Tax is calculated based on the tax bracket that you fall in.
Calculation of tax on long-term capital gains is a slightly trickier business.
Since long-term capital assets are held for longer periods, inflation also
factors in while computing tax on long-term capital gains"
Tax on short-term capital gains: The following is how short-term capital
gains tax is calculated:
Tax on long-term capital gains: The tax on long-term capital gains is
determined as follows:
- The short-term capital gains tax rate for listed equity shares and
equities-oriented mutual funds is 15%.
- The short-term capital gains tax rate for non-equity assets is the
individual's applicable income tax slab rate.
- For profits surpassing Rs. 1 lakh, the long-term capital gains tax rate
for listed equity capital and equity-oriented mutual funds is 10%. Gains of
less than Rs. 1 lakh are tax-free. Furthermore, if long-term capital gains
are achieved before February 1, 2018, they will be tax-free.
- The long-term capital gains tax rate for non-equity assets is 20% after
inflation adjustment using the cost inflation index.
(The cost inflation index (CII) is an inflation indicator that is used to
modify the cost of acquiring or improving an asset for the purpose of computing
long-term capital gains tax. The Central Board of Direct Taxes (CBDT) publishes
the CII every year, and it is used to adjust the purchase price of an asset for
To calculate the taxable capital gain, the following formula can be used:
- For short-term capital gain
Short-term capital gain= full value consideration - (cost of acquisition +
cost of improvement + cost of transfer)
- For long-term capital gain
Long-term capital gain = total consideration received or accrued minus
(indexed cost of purchase + indexed cost of improvement + cost of transfer).
- Indexed cost of acquisition = cost of acquisition x cost inflation index
of transfer year/cost inflation index of acquisition year.
- Indexed cost of improvement = cost of improvement x cost inflation index
of transfer year/cost inflation index of improvement year.
(The indexed cost of acquisition is the asset's initial cost adjusted for
inflation using the CII of the year it was acquired, whereas the indexed cost of
the improvement is the cost of any improvements made to the asset adjusted for
inflation using the CII of the year the improvements were made.)