Who am I?
I am the gains or the profit made from the sale of any capital asset that you have owned. In other words, I am the difference you earn by selling this asset from the price you paid to buy it. A capital asset can be either an immovable (such as property) or movable (investments in shares, mutual funds and so on) asset or even jewellery. Capital gains tax is the tax imposed on this gain.
Long- and short-term capital gains
As I said above, I attract a tax. Income-tax authorities will tax according to how large I am (quantum of capital gain) and on when I come to you. In simple words, if you’ve held the asset for less than 36 months before you sold and earned me, such gains are classified as long-term capital gains (LTCG). Assets such as property attract LTCG tax after three years. For assets such as equity shares, debentures and mutual funds, the threshold period is one year. If you sell any of these after holding them for a year, then LTCG tax kicks in, else short-term capital gains (STCG) tax gets imposed.
How to compute me
I am pretty simple to calculate if you wish to calculate my shorter version (STCG). In this case, I am the difference between the selling price (the price at which you sold an asset) and the cost price (the price at which you bought the asset). For my longer version (LTCG), there is a process. Because the cost of an item goes up over the years, purely on account of inflation, it’s unfair that you pay the tax on the entire difference of sale price and cost price. Therefore, through a system called indexation, the government of India allows you to inflate the cost of an asset to adjust for inflation. The government of India maintains—and updates once a year—the cost inflation index that gives you an indication of what an asset should be priced at today’s value. This index should then be applied to the cost price of your asset to ascertain the approximate price you would have paid had you bought that asset today.
How am I taxed
LTCG arising from the sale of equity shares and mutual funds is not taxed. For debt mutual funds, STCG is taxed at your income tax rates, while LTCG is taxed at 10% without indexation benefits and 20% with indexation. The threshold of one year is meant only for equity shares, debentures and mutual funds. For other assets such as property and physical gold, the threshold is three years. LTCG in cases of property and gold is 30%.