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What is capital Gains Tax

23 Feb 2023 0 COMMENT

In this article, the topics covered are:

▪         Explain: The concept of Capital Gain Tax

▪         How much are capital gains taxed?

▪         Does long-term capital gain count as income?

▪         What are Capital Losses?

▪         How is capital gain tax calculated?

▪         When is the capital gain tax payable?

▪         Conclusion

One of the main ways to profit from investing is to buy assets at one price, after which you can then sell them at a greater price. These types of profits are known as capital gains. As with most kinds of profits, they are subject to taxes. Taxes can influence the growth of your portfolio, so it is essential to learn the concept of capital gain taxes and some strategies to potentially minimize them.

Capital gains are profits made when the investment is finally sold. It may be realized in the very short term, after hours or days of investment or in the long term, decades after the original investment was made. It is not the income you earn as an employee or from your own business, but rather is due to the increase in value of your investment. For this reason, capital gains are taxed differently than regular income.

This article shall give you a brief idea of the concept of capital gains.

Explain: The concept of Capital Gain Tax

Capital gain tax is a tax levied on the profit made from the sale of an asset. The asset could be a piece of land, a building, shares, or any other investment. In India, under section 80C of Income Tax Act, capital gain tax is levied at 20% on long-term gains and 15% on short-term gains.

The difference between the sale price and purchase price of the asset is used to calculate the capital gain tax. If an asset is sold out at a loss, then the capital gain tax will not be applicable. Capital losses can be carried forward for up to eight financial years.

How much are capital gains taxed?

It depends on two factors: how long you hold the investment and your income level. Capital gains taxes are of different types, each with its rules and regulations. Capital gains can be classified into, short-term and long-term taxes. 

Short-term capital gains are any gains made from an investment which was held for less than three years. For example, you purchased stock in a corporation, held it for nine months, and then sold it for a profit. Your profit would be considered a short-term capital gain. In some cases, when securities transaction tax is not liable on the capital, the short-term gain is added to the income tax and returns and tax is applied accordingly. Whereas, when securities transaction tax is liable on the capital, a 15% short-term capital gain tax is applied. Compared to long-term capital gains, short-term gains are taxed at a higher rate. 

Long-term capital gains are those derived from an investment held for more than three years. If you had held the same stock for four years before selling it, your profit would be regarded as a long-term capital gain, which is normally taxed at a lower rate. when the sale is done for equity-oriented funds or shares, over 10% of long-term capital gain tax pertains on and above Rs. 1 lakh. Whereas, when the sale happens for assets except for equity-oriented funds or shares, 20% tax is liable without adjusting for indexation.   

Does long-term capital gain count as income?

Long-term capital gain tax is considered unearned income by the IRS. Unearned income is derived from dividends, capital gains and other forms of income not directly related to our paycheck. Unearned income is different from earned income which is different from money you have earned from your employment. 

What are Capital Losses?

Capital losses occur when the value of an investment is less than the original purchase price and are realized when the investment is sold. Investors may offset taxes owed on capital gains by factoring in their capital losses.

How is capital gain tax calculated?

When it comes to taxes, capital gains are often one of the most confusing topics. If you are not cautious, you could pay more tax than you need. So, how is capital gain tax calculated?

The first thing where to consider is the "cost basis". This is basically what you have paid for the asset, in addition to any improvements you made to it. Capital gains are calculated by subtracting the basis (your original investment) from the final sale price. 

Once you know your cost basis, calculating your capital gain (or loss) is pretty simple. If you sell the asset at a higher price, for more than your cost basis, you are entitled to have a capital gain and will owe taxes on that gain. 

When is capital gain tax payable?

People are responsible for paying a few different types of taxes. One of these is income tax, paid on the money that you earn from working. 

Capital gains tax is only payable on the profit you make from the sale of the asset, and not on the total amount you receive from the sale. Capital gain tax is payable at different rates depending on how long you owned the asset before selling it. If you have owned the asset for 36 months or less, your capital gain will be taxed at your marginal income tax rate. 

Conclusion

As the debate over capital gains taxes continues, it is essential to learn the concept of capital gain tax and how they work.

Capital gains taxes are like sales tax on things you own. If you vend something for more than you spent, you are entitled to pay taxes on the difference of capital gains. The amount of taxes you owe shall depend on how long you've owned the thing you sold and how much money you make.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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