Capital Gains Taxation in India
In India, the taxation of capital gains is governed by the Income Tax Act, 1961. Capital gains refer to the profit or gain arising from the sale or transfer of a capital asset. Capital assets include various types of assets, such as:
- Immovable property (e.g., land, buildings)
- Shares and securities
- Jewelry and bullion
- Intangible assets (e.g., patents, trademarks)
Short-Term and Long-Term Capital Gains
Capital gains are classified into two categories based on the holding period of the asset:
- Short-term capital gains: Arising from the sale of an asset held for less than 36 months.
- Long-term capital gains: Arising from the sale of an asset held for 36 months or more.
Calculation of Taxable Capital Gains
Taxable capital gains are calculated as the difference between the sale proceeds and the cost of acquisition of the asset. The cost of acquisition includes the purchase price, any expenses incurred in acquiring the asset, and any improvements made to the asset.
Tax Rates
The tax rates applicable to capital gains vary depending on the category of the asset and the holding period.
- Short-term capital gains: Taxed at the taxpayer's income tax slab rate.
- Long-term capital gains:
- Immovable property: 20% with indexation benefit (adjustment for inflation)
- Shares and securities: 10% without indexation benefit
- Other capital assets: 20% with indexation benefit
Legal Framework
The provisions governing the taxation of capital gains are outlined in the following articles of the Income Tax Act, 1961:
- Section 2(14): Definition of capital asset
- Section 45: Computation of capital gains
- Section 48: Tax rates applicable to capital gains
Policy Objectives
The capital gains tax system in India aims to:
- Generate revenue for the government
- Encourage long-term investment by providing lower tax rates for long-term capital gains
- Promote economic growth by incentivizing investment in productive assets
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