Capital gains are profits or gains that are realized when an individual or entity sells a capital asset for a higher price than what it was purchased for. In India, capital gains are taxed under the Income Tax Act, 1961.
There are two types of capital gains in India: short-term capital gains (STCG) and long-term capital gains (LTCG). STCG are realized from the sale of a capital asset that has been held for less than 36 months, whereas LTCG is realized from the sale of a capital asset that has been held for 36 months or more. Short-term capital gains are taxed as per the normal tax slab of the individual. For example, if an individual falls in the highest tax bracket of 30%, then their short-term capital gains will also be taxed at 30%.
Long-term capital gains exceeding Rs 1 lakh in a financial year are taxed at 20% with the benefit of indexation.
Indexation is a process of adjusting the cost of purchase of an asset to account for inflation over the years. This helps to lower the tax liability on long-term capital gains as the adjusted cost of purchase becomes higher.
It is important to note that there are several exemptions and deductions available under the Income Tax Act, 1961, which can reduce the tax liability on capital gains. Some of these exemptions include investment in bonds under Section 54EC and investments in residential property under Section 54F
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