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Holding Period for Capital Gain Tax

You must pay a capital gain tax* on the profit you earn after holding capital assets for a prescribed duration. The capital gain income on various capital assets is classified as long-term and short-term capital gain based on the asset’s holding period.
 

Investment in various categories of assets, such as property and gold, is common within Indian households. Families procure these assets and may sell them off to meet urgent financial requirements like educational fees, medical treatment expenses, or a wedding in the house.
 

However, do you know that there are tax* implications on the sale of such assets in our country based on the duration of their holding? Moreover, you may be surprised to know that you can get tax exemptions by reinvesting your capital gains in a capital gains account scheme.

Adhering to tax implications is essential for all law-abiding citizens. Therefore, let us delve deeper into the concept of capital gain taxation.

What is Capital Gains Income?
 

Capital gains income is the profit you earn when you sell a capital asset at a price exceeding its purchase price. Shares, mutual funds, houses, lands, vehicles, gold, etc., are examples of capital assets. However, income generated from the sale of an inherited capital asset is not considered capital gains income for the purpose of taxation.

Capital gains are further classified as long-term capital gains and short-term capital gains. The asset's holding period determines whether a capital asset should be taxed as a long-term or a short-term capital gain.
 

The holding period for capital gains is the duration between acquiring and selling a capital asset. An asset’s holding period determines its taxability, and various assets have different holding period thresholds for the purpose of taxation.

Now, let us understand long-term and short-term capital gains on the basis of the holding period:

What are Long-Term Capital Gains?
  

If you hold an asset for more than the prescribed period from the date of its acquisition, long-term capital gains are applicable to it. Here is the holding period for various types of capital assets to classify them as long-term capital gains:
 

  • Sale of a real estate property after 24 months of acquiring it.
  • Sale of mutual funds/stocks and other securities listed on a stock exchange 12 months after acquiring them.
  • Sale of debt funds and other capital assets after 36 months of acquiring them.

What are Short-Term Capital Gains?
 

Short-term capital gains are generated when you hold a period for less than the prescribed period and sell it off for a profit. Here is the holding period for various types of capital assets to classify them as short-term capital gains:
 

  • Sale of a real estate property within 24 months of acquiring it.
  • Sale of mutual funds/stocks and other securities listed on a stock exchange within 12 months of acquiring them.
  • Sale of debt funds and other capital assets after 36 months of acquiring them.
  •  

Capital Gain Tax Rate for Sale of an Asset Based on Their Holding Period
 

Type of Asset

Holding Period of the Asset

Applicable Tax Rate

 

Short-Term

Long-Term

Short-Term

Long-Term

Immovable Assets like land, buildings, etc.

< 2 Years

> 2 Years

As per the income tax slab rate.

20.8% (with indexation)

Movable Assets like gold and Debt Oriented Mutual Funds

< 3 Years

> 3 Years

As per the income tax slab rate.

20.8% (with indexation)

Listed Shares and Equity Oriented Mutual Funds

< 1 Year

> 1 Year

15.60%

Tax-exempted


Here are a few things to note:
 

  • Only those shares will be taxed under capital gain tax, which have been sold on a registered stock exchange in India, and the security transaction tax has been paid on these shares.

     

  • The tax rates represented above do not include the 10% surcharge you will have to pay for an income between ₹50 lakhs and ₹1 crore. The surcharge is 15% for an income above ₹1 crore.

     

Capital Gain Taxation





Here are the various formulas for the calculation of capital gain tax based on the asset’s holding period:

  • Short-Term Capital Gain

     

    Short-Term Capital Gain = Sale Value of Asset - (Cost of Acquisition + Cost of Improvement + Cost of Expenses Incurred on Transfer)

  •  

  • Long-Term Capital Gain

     

    Long-Term Capital Gains = Full Value of Consideration Received -  (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Expenses Incurred on Transfer)


    The indexed cost of acquisition and improvement can be calculated as follows:
     

    Indexed Cost of Acquisition = Cost of Acquisition * (Cost of Indexation of the Year of Transfer / Cost of Indexation of the Year of Acquisition)
     

    Indexed Cost of Improvement = Cost of Improvement * (Cost of Improvement of the Year of Transfer / Cost of Improvement of the Year of Improvement)

Conclusion
 

The capital gain tax is applicable on the profit you earn from the sale of a capital asset, like land, building, jewellery, stocks, mutual funds, etc. Various assets are taxed differently based on their holding period. You get tax exemptions under some situations on your capital gains income.

Moreover, you can invest in a capital gains account scheme to reinvest your capital gains.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What are capital gains tax exemptions?

You can avail capital gains tax exemptions under the following sections:
 

  • Section 54: Applicable when the sale proceeds of a residential property are used to buy another residential property>
  • Section 54F: Applicable when you purchase a residential property from the proceeds of the sale of an asset other than residential property, like agricultural land, debt funds, gold, etc.
  • Section 54EC: This section provides exemptions of up to ₹50 lakhs on capital gain bonds issued by NHAI and REC.


Since tax laws change from time to time, it is advisable to consult a tax professional to know the current tax exemptions available to you.

What is a long-term capital gain period for a residential property?

A holding period of more than 2 years between acquiring and selling a residential property makes your profits from the sale eligible for long-term capital gains and will be taxed accordingly.

What are some examples of assets not considered capital assets?

Various assets like clothing and furniture used by the taxpayer or their family members and raw materials and stock-in-trade for businessmen are considered as capital assets.

Disclaimer

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.