Income tax: What is the  Capital Gains under the Income Tax act

What are the Capital Assets?

A Capital asset either movable or immovable nature is defined to be assessed under the Income Tax Act,1961. Capital Asset is intended to be held for Earning Future Economic Benefits either in Monetary Or Non-Monetary Terms. Capital gains are applicable to capital assets such as stocks, bonds, jewelry, and real estate property 

Capital Gains under the Income Tax act

 The capital assets must be transferred in the relevant financial year in order to be eligible for taxation during the current year so that Appropriate Capital Gain Rates can be properly applied and calculated.

Three Important Element for Capital Gain Tax:

Capital Gain Tax is determined while considering the following  below mentioned three Crucial elements :

  • A capital asset such as property, gold, etc.
  • The transfer of such capital asset
  • A profit earned as a result of this transfer.

What is the Capital Gain Tax Under the Income Tax Act?

When the Capital Asset is sold then the difference between the Sale Value and Cost of its Acquisition is taken for the Calculation of  Capital Gain Tax under the Income Tax Act,1961.

Capital Gain Tax may be of Two Types:-

  • Short Term Capital Gain
  • Long Term Capital Gain

Short Term Capital Gain

Short-term gains on investments that are held as an investment for a period of fewer than 12 months period…  Short-term capital gains tax applies to assets held for a year or less and is taxed as ordinary income.

The profit on an asset sold after less than a year of ownership is generally treated for tax purposes as if it were wages or salary. Such gains are added to your earned income or ordinary income. You’re taxed on the short-term capital gain at the same rate as for your regular earnings. An exception is when the amount of the gain happens to push you into a higher marginal tax bracket.

Long Term Capital Gain (LTCG)

LTCG covers the majority category of Assets that meet the definition of Long Term Nature. LTCG rates are determined under section 112A. Example for LTCG,

For the Real estate for a holding period of more than 2 years

For the Debt funds for a holding period of more than 3 years and

For the stocks/equity mutual funds for the holding period should be of more than 1 year.

Treatment for Short Term and Long Term Losses 

When the Capital Gains is calculated and when the sale receipts from a Capital Asset is less than the cost of acquisition either indexed or not including all expenses on transfer on Capital Asset – instead of a Capital Gain you incur a Capital Loss. Type of asset is seen While Capital Gains are taxed according to the tax rate for the purpose of Taxability either they are long term or short term Assets.

Set-off of Capital Losses:

As per  Income Tax Laws capital gains are not to be allowed to be set off against any income from other heads –This implied that Capital gain cant is used for the gain of any other head losses. It is to be noted that only Long Term Capital Loss can be set off only against only Long Term Capital Gains even not Short Term Capital Losses are allowed. However, Short Term Capital Loss is allowed to be set off against both Long Term Gains and Short Term Gains both in any terms.

Carry Forward of Losses: 

It is meant by Losses can be carried forward if in the particular year Losses could not be set off due to certain reason namely, No head of capital gain income left or The income eligible to be set off is insufficient to be set off for the fixed losses.

Accordingly, if Losses couldn’t be set off of an entire capital loss in the same year, either Short Term Or/and Long Term loss then it can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was first computed. 

Income Tax Return filing

Mandatory Filing of a Return:

For the purpose of claiming a set-off of losses under any Head except House property Losses, Income Tax return(ITR) mandatorily required to be filed. Even if no income or only Losses are ascertained in a particular year, still ITR is required to be filed for the purpose of carrying forward of losses for the prescribed period under the Act.

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