What is Capital Gain?|Types and Capital Gains Tax Exemption

An appreciation in the price of any asset or investment from which the market value of the asset or investment is increased is known as Capital Gain. In India, tax is only levied on the capital gain when capital assets are sold, i.e., realised gain. It is levied when such an asset is transferred from one owner to another. Tax is not levied on unrealised gain, i.e. when the purchase price of the assets or investment becomes lower than the current market value of the assets or investment, but the assets or investment is still unsold. Also, assets received as gifts or by inheritance are not considered capital gains and are exempted from the calculation of income tax for any individual. Property, plant and equipment as well as stocks, bonds, goodwill, etc., are all examples of capital assets.

Types of Capital Gain

Capital gains are basically of two types depending upon the tenure of holding an asset:

1. Short-term Capital Assets (STCA): Short-term assets can be defined as an asset that is held for less than 36 months. For immovable properties such as land, building, and house property, the duration is 24 months. Short-term capital gain tax is charged on profit generated from the sale of those short-term capital assets. 

2. Long-term Capital Assets (LTCA): Long-term assets can be defined as an asset that is held for over 36 months. Long-term capital gain tax is charged on profit generated from the sale of those long-term capital assets. All capital gains are liable for taxation but the approach for long-term and short-term capital gain is different.

Income Tax Rate for Income on Sale of Assets

Note: A surcharge of 10% on income between ₹50 Lakh to ₹1 Crore and 15% on income above ₹1 Crore is also levied above the tax rate.

Capital Gains Tax Exemption

1. Any gain from capital assets or investments falling below the prescribed limit according to the Income Tax Slab Rates.

2. Section 54E, 54EA and 54EB 

Under sections 54E, 54EA and 54EB, any individual can claim exemption by investing in some specific securities such as UTI units, Government Securities, Targeted Debentures, Government Bonds, etc. Any income earned by investing in these specific securities is exempted to pay income tax.

3. Section 54EC

Under this section, exemption on income earned can be availed by individuals if they choose to reinvest the proceeds earned through the sale of long-term assets into some specified long-term assets. 

4. Section 54EE

Under section 54EE, exemption can be claimed on the proceeds earned through the transfer of investments.

5. Section 54

Under section 54E, exemption can be claimed on the proceeds earned through the sale of residential housing property.

6. Section 54F

Under section 54F, exemption can be claimed on the proceeds earned through the sale of capital assets besides a residential housing property.