What is Capital Gains Tax – Meaning, Definition and Example

capital gains tax meaning

Capital Gains Tax Meaning and Example

Meaning of Capital Gains Tax  – Tax levied on the capital gains.

Capital gains refers to the difference between the purchasing price of an asset and selling price of an asset. The tax that is imposed on these gains is known as tax on capital gains. The tax is charged on the profit earned in the year in which the transfer of capital asset has taken place.

No tax is charged on the asset which is inherited to the person from his family or ancestors. The reason behind this is that there is no sale made that is there is no exchange of money in the transaction. However, if the same person sells the asset to a third party, then it is a capital gain and tax is levied on it.

So, according to Income Tax Act of 1962, assets which are received in the form of gifts or inheritance are exempted from tax.

The important thing to note is that, if selling of a capital asset results in loss, then no tax is charged as tax is chargeable only in the case of capital gains.

Capital Gains Formula

Capital Gains = Sale Price – Purchase Price

Types of Capital Gains

There are two types of Capital Gains –

Long term capital gains – Gains earned from holding capital assets for more than 36 months. This type of taxes are taxable @20% + surcharge and education cess.

Short term capital gains – The gains realised from holding capital assets for 36 months and less than 36 months.   Capital gains of short term nature are taxable @15 + education cess and surcharge.

Capital Gains Tax Example

Let’s assume you have 5 share of MRF  that you purchase at Rs. 10,000 each. Now after three months the price of the stock rises to Rs. 65,000. This means that the investment value has risen by Rs. 2,75,000 which is the capital gain.This is a short term type of capital gain, hence tax is chargeable @15%.

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