Deciphering Capital Gains Tax: Insights into Tax Consequences and Filing Protocols in India

Deciphering Capital Gains Tax: Insights into Tax Consequences and Filing Protocols in India

A capital gain refers to the profit realized from the sale of a ‘capital asset.’ The income generated from this transaction falls under the ‘income’ category, requiring the payment of taxes. This tax is known as the capital gains tax, which is divided into two types: short-term capital gains tax (STCG) and long-term capital gains tax (LTCG).

In accordance with the provisions of the Income Tax Act in India, individuals are exempt from capital gains tax if the property is inherited, provided it is not subsequently sold. However, if an heir chooses to sell the inherited property, taxes must be paid on the resulting income. Examples of capital assets include jewelry, vehicles, leasehold rights, machinery, patents, trademarks, buildings, house properties, and land.

Types of Capital Assets

There are two distinct types of capital assets:

  1. Long-Term Capital Asset: An asset held for a duration exceeding 36 months qualifies as a long-term capital asset.
  2. Short-Term Capital Asset: Assets owned for 36 months or less are categorized as short-term capital assets.

Calculating Capital Gains

  1. Long-Term Capital Gains: To compute long-term capital gains, individuals must consider the full value of the asset.
  2. Short-Term Capital Gains: The calculation involves factoring in the full property value and deducting costs related to property improvement, acquisition, and transfer.

Income Tax Return (ITR) Filing and Capital Gains

Contrary to filing ITR 1, individuals cannot use this form if their income includes capital gains. Instead, they must report such income details in ITR 2.

Also Read

Navigating Income Tax Returns 2024: A Guide to Transitioning Between the New and Old Tax Regimes

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