Asset creation is a goal that most of us strive for throughout our lives, working hard to accumulate assets that will enable us to live a stable and comfortable life. Asset generation and distribution are often governed by laws in a social society, with the government maintaining track of them.
The income tax department in India keeps a close eye on assets, and asset owners must pay tax on the assets they own. The purpose of owning assets is to derive financial benefits from them, which can be obtained through sale or lease/rent.
What is a capital asset as per the law?
As per Section 2(14) of the IT Act, 1961:
Capital Assets have been defined as a property of any kind held by an assessee (Taxpayer) whether connected with his business or profession or not.
But excludes the following to be assessed as capital assets:
(i) Any stock-in-trade and raw materials held for the purposes of his business or profession
(ii) Personal effects, i.e., to say, movable property (including wearing apparel and furniture, but excluding jewellery, archaeological collections, drawings, paintings, sculptures and any work of art) held for personal use by the assessee or any member of his family dependant on him
(iii) Agricultural land in India not being situated within the jurisdiction of a municipality or within 8 km. of a municipality as may be notified
(iv) Gold bonds
(v) Special Bearer Bonds, 1991; and
(vi) Gold Deposit Bonds.
Difference between Short-Term and Long-Term Capital Gains:
As per the Income Tax Act, 1961 Capital gains arise when you sell a capital asset over and above its cost of acquisition; and Capital Gains Tax is a tax that you must pay on the profits you have made from selling these notified capital assets.
As per the law Capital gains have been divided into two categories, namely:
I. Long Term Capital Gains (LTCG)
II. Short Term Capital Gains (STCG)
Short-term capital gains are made if an owner of capital assets, sells them within 24 months (2 years) from the date of purchase and classified as Long-term capital gain if an owner sells an asset after 24 months (2 years) from the date of purchase.
The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property from FY 2017-18 onwards.
The reduced period of 24 months is not applicable to movable properties such as jewellery, debt-oriented mutual funds, etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
However, following assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is):
a. Equity or preference shares in a company listed on a recognized stock exchange in India.
b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India.
c. Units of UTI, whether quoted or not.
d. Units of equity oriented mutual fund, whether quoted or not.
e. Zero coupon bonds, whether quoted or not.
Short-term capital gains are subject to section 111A and are taxed at 15%, plus applicable cess and surcharge.
Short-term capital gains that are not covered by section 111A are taxed at slab rates applicable to an individual's total taxable income. Depending upon an Individual’s tax bracket, this might go up to 37 percents.
Long-term capital gains are subject to a 20% tax rate, plus applicable cess and surcharge. LTCG’s tax rate is reduced to 10% if the taxpayers’ meet specific eligibility criteria or have made such gains from specified transactions like:
Selling shares, UTI, mutual funds or zero-coupon bonds held for more than 12 months on a recognised stock exchange.
Benefits of Long-Term Capital Gains
In case of a notified capital asset, whose sale is liable for capital gains tax once the profit is recognised, you can increase the ROI even more by holding such assets for a longer period (as notified for that specific class of assets) and qualify for lower tax rates applicable to long term capital gains.
LTCGs’ are assessed at lower tax rates when as compared to STCGs’.
While it may be possible to get a better return by cashing out your investments regularly and reinvesting the proceeds in other investments, but in some cases a higher return from reinvestment may not be enough to offset the higher short-term capital gains tax obligations.
The tax rate on a long-term capital gain is usually always lower than the one on short-term capital gain as holding assets (entitled to capital gains) for a long-term is encouraged by the tax policy itself.
The author, Nishant Arora, is Co-founder and Director at Setup Services India. The views expressed are personal