Investment word of the day: Capital gains—how they are classified, tax exemptions and more

Capital gains are the profits generated by an investor after selling a capital asset. These profits are the difference between the selling price and the original purchase price of a capital asset. Capital gains play a key role in determining how an investment has performed over a period of time.

Types of capital gains

Short-term capital gains (STCG): Profits generated from the sale of listed assets held for less than 12 months are known as STCG. In case of listed securities, including stocks, a Securities Transaction Tax (STT) on STCG is levied at 20 per cent. Other assets, such as real estate, with a holding period of 24 months or less, qualify as short-term capital gains.

Long-term capital gains (LTCG): Profits generated by listed assets held for more than 12 months are known as LTCG. No tax will be levied on gains up to ₹1.25 lakh in a financial year. For gains above ₹1.25 lakh, the additional amount is taxed at 12.5 per cent without the benefit of indexation. In case of other assets, including real estate, the holding period must be more than 24 months to qualify as long-term capital gains.

Taxpayers can choose either a 12.5 per cent long-term capital gains tax rate without indexation or a 20 per cent rate with indexation for property bought before July 23, 2024.

Why are capital gains defined as short-term and long-term?

According to the Income Tax Department, “the taxability of capital gain depends on the nature of the gain, i.e. whether short-term or long-term. Hence, capital gains are classified into short-term and long-term capital gains to determine the taxability. In other words, the tax rates for long-term and short-term capital gains differ. Similarly, computation provisions differ for long-term and short-term capital gains.”

Tax exemptions on capital gains

The Indian Income Tax Act offers several exemptions on capital gains tax. Some of the exemptions are listed below – 

• Section 54 - Tax on long-term capital gains is exempted on selling a residential property if gains are reinvested in another residential property.
• Section 54 EC- Tax exemption on long-term capital gains by investing the proceeds in specific bonds within six months.
• Section 54F - Tax exemption on long-term capital gains from selling any asset, apart from the residential house, if the sale amount is invested in a residential house.

• Section 54B - Tax exemption on agricultural land.
• Section 54D - An exemption can be claimed if land or a building is compulsorily acquired for industrial use.
• Section 54EA- Capital gains on transfer of long-term capital assets not to be levied for investment in specified securities.
• Section 54EB -  Gains on the transfer of long-term capital assets are not levied in certain cases.
• Section 54ED-  Tax exemption on capital gain on transfer of certain listed securities in certain cases.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a qualified financial advisor before making any financial decisions.