Capital Gains Tax: Definition, Rates, Rules, Working Process & More

What Is Capital Gains Tax?

Any profit made from the sale of a “capital asset” is referred to as a capital gain. The profit you made by selling the asset will fall under the income category. As a result, taxation on received income is required as per the norms. The tax levied in such cases is known as Capital Gains Tax

Capital gain refers to the profit made from the sale of capital assets, such as stock, houses, cars, or other types of investments.

Types Of Capital Gains Tax

Depending on the timeframe, there are two types of Capital Gains Tax. These are Long-term and short-term capital gains.

Calculation Of Capital Gain Tax :

Assets held for a shorter time and assets held for a longer time are subject to differing computations of capital gain tax. A crypto tax softwares ease the task of calculation the tax. You must become familiar with the following essential process before you can comprehend the calculations:

1. Full Value Consideration:

 We can understand it as the market value of an asset at the moment of transfer. This is the total amount you get at that time. 

2. Cost Of Improvement: 

The cost of the improvement is the total of all costs incurred by the sellers when they add to or modify the capital asset after or from April 1, 2023. 

3. Cost Of Transfer:

 It is a type of brokerage or advertising cost.

4. Cost of Inflation Index: 

Since the Government of India altered the base year used to calculate the inflation rate, the CII has also changed.

5. Long-Term Capital Gains Tax Rate

Going further,  the tax rate that is levied on long-term capital gains is usually lesser. But there are a few exceptions because of the asset type. For instance, LTCG on equity shares and units of equity-oriented mutual funds held for more than a year is subject to a 10 percent tax on gains beyond Rs. 1 lakh.

Reducing Capital Gains Taxes

If your income comes under the capital gains tax, a significant percentage of an individual’s capital earnings will be paid as tax. That’s why every tax-paying person wishes to see the burden of these taxes get reduced.

Strategies That Can Be Followed To Reduce Capital Gains Taxes Are:

There is no one-size solution for this. However, by implementing the following strategies, individuals can lower their taxes.

1.Long-Term Holdings:

As long-term capital gains are subject to a lower capital gain tax, keeping the assets for a longer time is one of the easiest ways to lower the tax burden.

2. Park Earnings Into Capital Gains Account:

People strategically lower their earnings into a capital gains account to lower the capital gains taxes

3. Reinvests Profits Into New Asset:

When individuals reinvest their income into new assets within a specified timeframe, they might lower their capital gains tax liability on the property.

4. Tax Deferred Retirement Plans:

Investing in retirement plans, such as 403(b), 401(k), or individual retirement account (IRA), allows you to grow your money without paying taxes on it right away.

5. Use Capital Losses To Equalise Gain:

You can benefit from a loss on an investment by lowering the tax on your earnings from other investments.

What Are The Assets Which Come Under Capital Gains

Capital assets are valuable possessions held for the purpose of long-term use or investment rather than for resale. For Example: Land, House property, Building, Trademark, Vehicles, Leasehold rights, Machinery, Patents, Jewellery.

What Are The Assets Which Do Not Come Under Capital Gains?

The following items do not fit under the capital asset category: Any inventory, supplies, or raw materials kept for a commercial or professional purpose, personal items kept for one’s own use, such as clothing and furniture.

Capital Gains Tax in Different Countries

Capital Gains Tax Rate differs country-by-country. The rates for individuals and corporations are also different. At 42 percent, Denmark has the highest top capital gains tax rate among all the countries we looked at. At 37.8 percent, Norway has the second-highest capital gains tax rate. At 34 percent apiece, Finland and France come next. 

Not every nation levies a capital gains tax, and the majority of them tax people at rates that differ from those charged to businesses. Bahrain, Barbados, Belize, the Cayman Islands, the Isle of Man, Jamaica,  New Zealand, Sri Lanka, UAE, Singapore, Switzerland and other nations are among those that do not have capital gains taxes.

Exemptions and Deductions

It is crucial for people to implement tax-saving techniques to lower their tax bill since capital gains tax often erodes a sizable amount of earnings. The government offers a list of capital gains exemptions to help people minimize their capital gains tax liability. Capital gains exemptions are the name given to these tax breaks.

Exemption Under Section 54

Under this section, a taxpayer is eligible for the exemption on up to two residential properties once in their lifetime, as long as their capital gains remain below Rs. 2 crore.

Exemption Under Section 54F

When there are capital gains from the sale of a long-term asset other than real estate, Section 54F provides an exemption. To be eligible for this deduction, you must spend the wholesale consideration—not just the capital gain—to purchase a new residential property.

Exemption Under Section 54EC

When capital gains from the sale of the first property are put into designated bonds, you are eligible for exemption under Section 54EC.