The gain or income from the sale of any capital asset is termed as capital gain. Capital assets are all kinds of properties (movable, immovable, tangible and so on) that generate value over time. Example: land, buildings. This profit falls in the category of “income”. Hence you will have to pay a tax on the same.
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Equity share means part-ownership in a company. An investor can purchase equity shares of a company from the stock market. The profits earned by selling these shares are termed as capital gains from equity shares.
Capital gains on equity shares can be divided into two types based on the holding period. These are:
Short Term Capital Gains (STCG): If an immovable property is held for less than 2 years, then gains earned from its sale are termed as short term capital gains. But when it comes to equity shares, it is different. Equity shares are considered as fast moving and if they are held for less than 12 months, then profits from their trading will fall under STCG. This is applicable, only if the stocks are traded via the stock exchange. Unlisted or over the counter securities will be treated same as immovable properties.
See Also: What You Must Know About Mutual Funds?
If an immovable property or unlisted equity share is held for more than 2 years, then the gains from the sale are termed as long term capital gains. In case of equity shares, this period is 12 months. Any gains realized after trading equity shares after holding it for more than a year will be termed as LTCG.
It is important to differentiate between short term and long term capital gains for the purpose of taxation. Capital gains are taxed differently according to their holding period.
According to the income tax laws, short term capital gains are taxed at 15% + cess. Long term capital gains above Rs 1 Lakh are taxed at 10% without indexation.
See Also: Understand Capital Gains Tax
In order to calculate STCG or LTCG, there are few terms to be aware of.
Cost of Acquisition: The value for which the seller acquired the asset.
Cost of Improvement: Money spent by the seller for any alterations or additions.
Full Value of Consideration: The amount received by the seller in exchange for the trade of the asset.
STCG Calculation: From the full value of consideration, the following are to be deducted.
This remaining amount is the short term capital gain.
LTCG Calculation: From the full value of consideration, the following are to be deducted
Mutual fund is an investment which collects money from various investors and then invests in bonds, stocks and other assets. These funds are managed by expert fund managers.
Taxation of mutual funds depends on the type of investment the mutual fund deals with. A brief detail on the type of mutual funds helps understand their taxation.
One important tip to be kept in mind is that, the longer you hold investments, lower is the taxation. This will fetch greater profits. For the same reason, tax on long term capital gains is lower than tax on short term gains.
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