Capital Assets & Capital Tax

Capital Asset

A capital asset refers to asset or property of any kind held by a person irrespective of whether it is connected to the person’s business or profession. This would include land, immovable property like residential and commercial buildings or spaces, shares and stocks, securities and bonds, mutual funds, vehicles, trademarks, patents, machinery, jewellery, archeological items, works of art like paintings, sculptures etc. The following items do not constitute capital assets for the purpose of tax in India:

• Stock-in-trade, consumable stores and raw materials used for business or profession
• Items of personal used such as furniture and apparel.
• Agricultural Land in rural area
• 6.5% gold bonds, national defence gold bonds and special bearer bonds, defence gold bonds and special bearer bonds
• Gold deposit bonds under the Gold Deposit Scheme 1999.

Taxability of Capital Gain

When you sell any capital asset, the profit/loss you make on it is termed as a capital gain or capital loss as the case may be. Such incomes are liable to tax in India as ‘Capital Gain tax’ in the year of sale. At the time of a sale, based on the period for which the capital asset has been owned by the assessee, the capital gain/ loss may be ‘Long Term’ or ‘Short Term’. A snapshot of the rules regarding this is provided below:

Long term capital gains (LTCG) are charged to tax at 20% with an adjustment to the acquisition cost of the asset in lines with its present value using a ‘Cost Inflation Index’. The Act also provides a number of tax-exempt re-investment options in the case of LTCG to help reduce the burden of tax.

Short term capital gains (STCG) are taxed either at 15% or at the applicable slab rates depending on the type of asset being sold.