In India, capital gains tax is governed by the Income Tax Act, 1961. The taxation of capital gains is specified in Sections 45 to 55 of the Act. Here’s an overview of the key provisions related to capital gains:
- Definition of Capital Asset (Section 2(14)):
- The term “capital asset” is broadly defined to include property of any kind, held by an assessee, whether or not connected with their business or profession. Certain exclusions, such as personal effects, agricultural land in rural India, and certain government securities, are also specified.
- Types of Capital Gains:
- Capital gains are categorized into two types:
- Short-term Capital Gains (STCG): Gains arising from the transfer of a capital asset held for a period not exceeding 36 months (24 months for immovable property and certain specified assets).
- Long-term Capital Gains (LTCG): Gains arising from the transfer of a capital asset held for a period exceeding the specified period for short-term gains.
- Computation of Capital Gains (Section 48):
- Capital gains are computed by deducting the cost of acquisition/improvement and any expenditure incurred in connection with the transfer from the full value of consideration received or accruing as a result of the transfer.
- Cost Inflation Index (Section 48 and 49):
- In the case of long-term capital gains, the cost of acquisition and improvement can be adjusted for inflation using the Cost Inflation Index published by the Income Tax Department.
- Exemptions under Section 54 to 54GB:
- Certain exemptions are available to taxpayers on the reinvestment of capital gains in specified assets, such as residential property, bonds, or a new startup, subject to specified conditions.
- Taxation of Securities Transaction Tax (STT):
- Gains arising from the transfer of listed securities on a recognized stock exchange where STT is paid are taxed at concessional rates.
- Capital Gains Tax Rates:
- As of my knowledge cutoff in January 2022, the tax rates for short-term and long-term capital gains vary. Short-term capital gains are generally taxed at the applicable slab rates, while long-term capital gains are taxed at specified rates with indexation benefits.
- Capital Loss Set-off:
- Capital losses (both short-term and long-term) can be set off against capital gains. Any unadjusted capital losses can be carried forward for future years.
It’s important to note that tax laws are subject to amendments, and it’s advisable to refer to the latest provisions and notifications. Taxpayers are encouraged to seek advice from tax professionals for accurate and up-to-date information regarding the taxation of capital gains in India.