Capital gains refer to the profit or gain that arises when a capital asset is transferred by an assessee. Under Indian tax laws, such gains are taxable in the year in which the transfer takes place. Capital assets include property of any kind, whether connected with a business or profession, including shares, securities, real estate, and jewellery. The Income Tax Act classifies capital gains into short-term and long-term, depending on the holding period of the asset. For instance, shares held for less than 12 months and immovable property held for less than 24 months are treated as short-term. Gains from assets held beyond these periods are considered long-term and may benefit from indexation and reduced tax rates.
According to Section 45 to Section 55A of the Income Tax Act, 1961, the taxation of capital gains is detailed comprehensively. Section 45(1) lays the foundation by stating that any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 prescribes the mode of computation, allowing deduction of expenditure incurred wholly and exclusively in connection with such transfer and cost of acquisition/improvement. Section 54 to 54F provide exemptions from capital gains tax if the proceeds are reinvested in specified assets like residential property or specified bonds.
The rate of taxation for capital gains varies. Short-term capital gains (STCG) on listed securities (where STT is paid) are taxed at 15% under Section 111A, whereas other short-term gains are taxed at slab rates. Long-term capital gains (LTCG) on listed securities exceeding ₹1 lakh are taxed at 10% without indexation under Section 112A, and other LTCG are taxed at 20% with indexation under Section 112. Exemptions under Sections 54, 54EC, and 54F help taxpayers reduce or eliminate their tax burden by reinvesting gains in specific avenues like residential property or government bonds.
Mnemonic to Remember: “5C-LENS”
- 5 – Sections 45 to 55A (Legal provisions)
- C – Classification: Short-term vs Long-term
- L – Listed securities: 111A, 112A
- E – Exemptions: 54, 54EC, 54F
- N – Nature of asset: Property, Shares, Gold
- S – Sections for computation: Section 48
