What is capital gains tax?

Capital gains tax is a tax imposed on gains derived from the disposition of capital assets. It means an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. It is the increase in the market value of an asset or set of assets, between two dates.

Capital assets mean properties of any kind held by a person. Usually, capital gain is income derived from the sale of an investment. For example, suppose we purchased some asset at Rs 100 in the past and sold it at Rs 150 today; the capital gain is Rs 50.

The tax rate depends upon whether long term or short term. Gains are considered long term if the assets are held for more than 36 months. This period may be reduced to more than 12 months in the case of shares, specified securities/bonds and units of mutual funds. The minimum holding period for long term capital gains in respect of shares of a company that is not listed on a recognized stock exchange or units of a mutual fund is more than 36 moths.

Long Term and Short Term capital assets
Capital assets are classified as Long Term or Short Term with reference to the period of holding of the assets till it is transferred. The classification is made on the following basis:-

Nature of Asset

Short Term Capital Asset

Long Term Capital Asset

(i) Shares in a company or any other security listed in a recognised stock exchange in India or a unit of a Unit Trust of India or a  unit of a mutual fund specified under section 10(23D).

Held for not more than 12 months.

Held for more than 12 months.

(ii) Assets other than assets mentioned in (i) above. 

Held for not more than 36 months.

Held for more than 36 months.

Tax rates: Short term capital gains are taxed at the same manner of income under other heads. Long term capital gains are taxed at a flat rate of 20%.

Short term capital gains on listed shares and units of an equity-oriented mutual fund where STT is paid are at a rate of 15% (plus cess and surcharge). Long term capital gains (on listed shares and units of equity oriented mutual funds held for at least one year) where STT is paid are exempt.