Income Tax vs. Capital Gains Tax: What's the Difference?

We all pay taxes in some or the other form-direct or indirect. When we buy a soap or a packet of chips from a store, we pay some tax indirectly. Our monthly salaries or income in businesses are also taxed, beyond a certain basic exemption limit. As citizens of this country, taxation is something we are all familiar with.

In India, we have a comprehensive Income Tax Act, a legislation that covers everything pertaining to taxation. We pay an income tax on our annual earnings. There is a basic exemption limit, and those earning an amount lower than this limit are exempted from paying taxes. Then again, some of us may have come across the term Capital Gains Tax. Let us take a look at both these concepts and the key differences between them.

Income Tax

Say, you are employed at an IT firm and have a fixed monthly salary. Your annual income comes under the taxable bracket amount. Under the Income Tax Act, you are liable to pay taxes on the taxable portions of the income in line with the outlined tax slabs.

At the end of each financial year, we are required to file our income tax returns and declare all our earnings. There are certain types of income sources or categories that are exempted from taxation to boost savings habit among people and help citizens build a retirement corpus. These reliefs are granted to taxpayers under several sections of this Act.

There are five main heads of income which are covered by the Income Tax Act. The incomes from salary, business or profession, house property rentals, capital gains on sale of assets, and other sources (interest income on bank deposits, lotteries, etc.) are all subject to income tax.

Capital Gains Tax

The income that you earn from sale or transfer of any capital assets- mutual funds, shares, property, etc.- comes under the ambit of capital gains. This type of income is subject to Capital Gains Tax. So, to put it simply, Capital Gains Tax is a subset of Income Tax.

Capital Gains Tax is categorised into two types: Short-Term Capital Gains (STCG) Tax and Long-Term Capital Gains (STCG) Tax. The period or duration for which a capital asset is held determines whether it falls under short-term capital assets or long-term capital assets. Thus, income from the given asset sale is accordingly taxed as STCG or LTCG. These assets are taxed at different rates as laid down by the tax department.

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