Definition and Nature of Capital Gains

• Capital gains arise when a capital asset is sold or transferred at a profit.
  
• The profit is classified as income and is taxed under the head “Capital Gains.”
  
• Capital assets include property, stocks, bonds, mutual funds, gold, and land.
  
• Gains are calculated as the difference between sale price and cost of acquisition (adjusted for certain factors).
  
• Taxation depends on whether the gain is short-term or long-term.
  

Short-Term Capital Gains (STCG)

• Applies when an asset is sold within a specified short holding period.
  
• For listed shares and equity mutual funds: holding period less than 12 months.
  
• For immovable property and other assets: holding period less than 24 or 36 months.
  
• Tax rate for STCG on listed equity (Section 111A) is 15% plus surcharge and cess.
  
• For other assets, STCG is added to total income and taxed as per slab rates.
  

Long-Term Capital Gains (LTCG)

• Applies when the asset is held beyond the minimum holding period.
  
• For listed shares and equity mutual funds: more than 12 months.
  
• For property and other assets: more than 24 or 36 months, depending on type.
  
• LTCG on listed equity shares and equity mutual funds exceeding ₹1 lakh is taxed at 10% without indexation.
  
• LTCG on other assets is taxed at 20% with indexation benefit.
  

Exemptions on Capital Gains

• Section 54: Exemption for LTCG on sale of residential property if reinvested in another house.
  
• Section 54F: Exemption for LTCG on other assets if invested in a residential house.
  
• Section 54EC: Exemption if LTCG is invested in specified bonds within 6 months.
  
• Conditions must be met to retain the exemption and avoid future tax liability.
  
• Exemptions are available only for long-term capital gains, not short-term.
  

Indexation Benefit and Cost Adjustments

• For long-term assets (except equity), indexation adjusts the purchase cost for inflation.
  
• Indexed cost = original cost × (CII in year of sale ÷ CII in year of purchase).
  
• This reduces taxable capital gains and lowers tax liability.
  
• Brokerage, improvement cost, and transfer expenses are also deductible.
  
• Proper records and documents are necessary to support indexation and costs.
  

Filing and Compliance

• Capital gains must be reported in Schedule CG of the income tax return.
  
• TDS may apply on sale of property (1% under Section 194-IA).
  
• Advance tax must be paid if liability exceeds ₹10,000.
  
• Accurate computation, documentation, and timely filing are essential.
  
• Special ITR forms like ITR-2 or ITR-3 are required for reporting capital gains.