According to Indian law, Income tax payment is mandatory for all individuals having a specific amount of income from a specific source. As a law-abiding citizen, you should pay your Income tax and file for your Income Tax returns on time.

In India, Income tax is paid according to the Income Tax slab and Income Tax Heads. Income Tax slabs specify the rates on the basis of which taxes are to be levied on the individual taxpayers. There are changes in the Income Tax slabs during every annual budget session.

According to the current Income Tax slab, there are 3 categories of individual taxpayers i.e.

• Individuals who are resident and non-residents both and are below the age of 60 years.
• Individuals who are above the age of 60 years and are residents of India. They are known as senior citizens.
• Individuals who are above the age of 80 years and are residents of India. They are known as Super senior citizens.

On the basis of these categories and the Income brackets, the tax rates are determined for each taxpayer.

Now, according to Section 14 of the Income Tax Act, 1961 there are five main income tax heads. The Government of India has classified the income which is earned from different sources under different heads so as to easily compute the Income Tax without much hassle.

• Income from salary

This Income head consists of any remuneration obtained by an individual for the services which he has provided to his employer. Salary is a term having a large number of facets and can also include wages, pension, gratuity, commission, annual bonus, etc. There are certain allowances which are included in salary of an individual and are taxable only with some exceptions which qualify for deduction such as HRA, LTA, Medical Allowance, etc. 

• Income from profits of profession or business

The income which is obtained by the profit earned from a business or any other professions is included under this head.  The difference obtained between the expenditure and revenue is taxable. Some examples of taxable profits under this head are benefits received in business, profit obtained on sale of particular license, profit obtained due to partnership in a firm, etc. 

• Income from Capital Gains

Under this category, those profits or gains earned by the sale or transfer of a capital asset are included in this category.

• Income from property

As per the Income Tax Act, 1961, there are some sections i.e. Section 22 to Section 27 which give clear understanding on the provisions that help in calculating total standard income of an individual from the property he owns. The tax rates are derived based on the land or property and not on the rent that has been received.

• Income from other sources

Any other income like income obtained from bank deposits, lottery awards, gambling, gift money card games, etc. are included under this category. This Income Head and provisions related to this are included in Section 56 of the Income Tax Act, 1961. 

Now, let us have a detailed study on what is Capital Gain.

What is Capital Gain?

Capital gain is Sale consideration of a property minus Cost of purchase of such property or in simple terms, Capital Gain is defined as the profit or gain which arises due to sale of a capital asset. These gains are made by selling the capital assets at a price which is higher than the price at which these capital assets were purchased.

Capital gain or profit is considered under the category of income and hence, tax has to be paid for the capital gain or profit obtained by an individual during a financial year. These taxes which are paid for Capital Gain are known as Capital Gains Tax. Furthermore, Capital Gain Tax is of two categories i.e. Long Term Capital Gain and Short Term Capital Gain taxes. 

Following conditions should be fulfilled for taxation of capital gain under Income Tax Act, 1961:

1. There is a capital asset;
2. Such asset is sold during a financial year by the taxpayer.

• What is Capital Asset?

Capital asset means any property owned by the taxpayer.  Any legal rights which include the rights of control or management can also be considered as Capital rights. Some of the examples of Capital assets are building, house, land, vehicles, patents, trademark, machinery, etc. However, following things shall not be treated as capital assets-

1. Stock-in-trade held for business/profession;
2. Personal belongings such as wearing apparel, car, furniture etc. which are owned by taxpayer or his family.However, considering the monetary value, certain personal belongings are treated as capital assets namely Jewellery, Archaeological Collections, Drawings, Paintings, Sculptures or Any work of art.
3. Agricultural land situated in rural areas of India;

As per the Income Tax Act, all capital assets are classified under two broad heads namely-

1. Shares & securities (i.e. shares, bonds, debentures etc.; and
2. Capital assets other than securities (i.e. Land, building, gold etc).

• Some important terms that a taxpayer must know:

Sale Consideration:

Money received by the taxpayer on sale of the capital asset is known as Sale consideration.

Selling expenses:

The expenses which are paid by the taxpayer while selling the capital asset are treated as Selling Expenses.

Eg. Selling commission to agent, advertisement cost etc.

Cost of purchase/acquisition:

The money paid by the taxpayer to purchase the capital asset is known as Cost of Acquisition.

Cost of improvement:

Cost of improvement means an amount spent by a taxpayer for making any  additions/improvement to the capital asset.

Indexation:

Indexation is a technique which is to used to consider the inflation effect on cost of purchase or the cost of improvement.

Every year Income-tax Department provides a cost-inflation index figure for that particular year. However indexation benefit is applicable only for long term capital assets.

Eg.: Mr. Abhay purchased a land in May, 2000 for Rs. 1,00,000/-. He wants to sell the land in June, 2014 for Rs. 3,00,000/-. Compute his Indexed cost of Purchase as well as capital gain on sale of land.

Cost inflation index for year 1999-2000 is 389 and for the year 2014-15 is 1024.

Indexed cost of acquisition* Inflation index for year of sale/ Inflation index for year of purchase

=Rs. 1,00,000*1024/389

=Rs. 2,63,239/-

However, sale consideration of land is Rs. 3,00,000/-

Hence, capital gain = 3,00,000 minus 3,63,239= 36,761/-.

Period of Holding:

Period of holding refers to the period between date of acquisition of the capital asset upto the date of its sale.

Eg. If shares are purchased in April 2012 and sold in April, 2015. Then it is said that they are held for three years or period of holding is three years.

Short term capital assets have a period of holding of 36 months or less which has now been reduced to 24 months in case of unlisted shares, land, house property, etc.

Capital Assets other than securities i.e. Long Term capital assets have a period of holding for more than 36 months or 24 months or 12 months whichever the case may be preceding the date of transfer.

• What is Short term capital gain?

1. Shares and securities:- If a security is held for less than or equal to 1 year, then it is treated as ‘Short term capital asset’. Short term capital gain on shares and securities is taxable at 15%, if taxpayer has paid securities transactions tax (STT) while selling the shares or securities. Whereas if STT has not been paid, then such short term capital gain is taxable as per the slab rates applicable to the taxpayer.
2. Capital assets other than securities:- If such as asset is held for less than or equal to 3 years, then it is treated as ‘Short term capital asset’. Such short term capital gain is taxable as per the slab rates applicable to the taxpayer.

• What is Long Term Capital Gain?

1. Shares and securities:- If a share or security is held for more than 1 year, it is treated as ‘Long term capital asset’. Long term capital gain on shares and securities is exempt from tax, if taxpayer has paid securities transactions tax (STT) while selling the shares or securities. Whereas if STT has not been paid, then such long term capital gain is taxable at 20%.
2. Capital assets other than securities:- If such as asset is held for more than 3 years, it is treated as ‘Long term capital asset’. Such long term capital gain is taxable at 20%.
   

   Tax on Short Term Capital Gain and Long Term Capital Gain

   Type of Tax	Condition	Applicability of tax
   Long Term Capital Gain Tax(LTCG)	While selling of equity shares or equity oriented fund’s equity	10% over and above Rs. 1 lakhs
   Long Term Capital Gain Tax(LTCG)	While no selling of equity shares or equity oriented fund’s equity	20%
   Short Term Capital Gain Tax(STCG)	When security transition taxes are applicable	15%
   Short Term Capital Gain Tax(STCG)	When security transition taxes are not applicable	Here short term capital gain is added up to the income tax return of the taxpayer and taxation occurs according to the income tax slab.

Exemptions from Capital Gains-

If the taxpayer invests the sale proceeds of one capital asset to purchase the other specified capital asset/s within the specific time, then he/she can claim the benefit of exemption.

Following are the various exemptions provided by the Income Tax Act:

Some important terms you should be aware of-

*What is Lock in period: The period during which the taxpayers are not allowed to sell the new capital asset is called as “lock in period”. If a taxpayer has sold the asset within lock in period, the exemption claimed in previous years’ shall gets cancelled. And he will have to pay capital gain in the year of default.

**Eligible business: Eligible business means taxpayer is required to start a new company with new plant & machinery using the proceeds of capital asset sold. Taxpayer should have atleast 50% shares in the new company.

Tax treatment of loss under "Capital Gains" -

Loss, in simple terms, means excess of expenses over incomes. Loss arises when income earned during the financial year by the taxpayer is less than the expenditures incurred by him during the year. There might be house property loss or capital loss or loss from business/profession/other income.

The assets which are held by the taxpayer as an investment are treated as Capital Assets under the Income Tax Act, 1961. Capital asset might be a building, land, or even shares and securities, etc. If the taxpayer sells his capital asset at a more value than its purchase price, he will gain from such capital asset. However if the sale proceeds of any capital asset are less than its purchase price, then it results in capital loss.

For the sake of brevity in taxation matters, capital Losses are classified as i) Long term capital loss and ii) short term capital loss under Income Tax Act, 1961.

1. Long term capital loss

Income Tax Act, 1961 has provided following rules for set-off and carry forward of long term capital loss:

1. A long term capital loss can be set off against long term capital gain only. That is set off of long term capital loss is not possible against other incomes.
2. If capital loss still exists then it can be carried forward to next financial year.
3. Capital Loss can be carried forward to next 8 financial years. If the capital loss still persists after 8 financial years, then such loss shall be forgone.

2. Short term capital loss

Income Tax Act, 1961 has provided following rules for set-off and carry forward of short term capital loss:

1. A short term capital loss can be set off against long term as well as short term capital gain. However, set off of short term capital loss is not possible against other heads of incomes.
2. If capital loss still exists then it can be carried forward to next financial year.
3. Capital Loss can be carried forward to next 8 financial years. If the capital loss still persists after 8 financial years, then such loss shall be forgone.

Conclusion

Hence, capital gains are an interesting Income Head under which Income tax of an individual can be calculated easily. According to the budget for Financial Year 2019-20, there have been some changes in capital gains related to residential property.  Otherwise, the taxation of capital gains is mandatory.

FAQs

1. Why do we classify capital gains into short term and long term capital gains?
   Usually, capital gains are based on their nature i.e. they can be either short term or long term capital gains. We are classifying these gains so that we can easily find out the taxable amount on each gain.
   
   
2. What is the rate of tax on long term capital gain obtained by the sale of house property?
   The rate of taxation for long term capital gain is 20% flat on the quantum of games they have made.