What is Capital gain?

Written by : Knowledge Centre Team

2024-08-02

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What is Capital Gain

What is Capital gain? Long term and Short Term Capital

If you are an investor, then the first step required is to build an investment portfolio, in sync with your financial goals and risk appetite. You must also have a thorough understanding of the market. This requires knowing about the key concepts, like what is capital gain? Read on to know more about capital gain – an essential concept for all investors and traders.

What is capital gain?

Whenever you sell capital assets, like real estate, stocks, bonds etc. you either make a profit or a loss. If the sale price of your capital assets is more than its purchase price, the profit is known as capital gain. Conversely, a loss in such a transaction is called capital loss. To put it simply, capital gain is the profit accruing to you from the sale of your capital assets. For instance, if you purchase 100 shares of a company with the face value of Rs 10 each, you have invested a total of Rs 1,000. If the price of the share increases after some time and you sell it at Rs 20 each, you have earned Rs 1,000 as profits. This amount will be categorised as a capital gain.
Capital gains can be both realised and unrealised. When you make profits from actual sale of capital assets, it is known as realised capital gain. This, in turn, is subject to taxation. Unrealised capital gain, on the other hand, is the profit that will accrue to you in the case of a particular asset being sold at a future point of time.

Also Read: Capital gains accounts scheme

Understanding capital assets: Here is a list of the assets which come under the category of capital assets:
- Land
- Building
- House
- Jewellery
- Office property and machinery
- Vehicles
- Patents
- Trademarks
- Legal rights pertaining to management, ownership etc. of a company
- Securities (Shares, bond etc,)

Capital assets don’t include personal goods, like clothes, furniture and household items. Any raw materials or consumables held for production purposes along with agricultural land in rural pockets don’t come under the category of capital assets. Some of the gold bonds and special bearer bonds also are also outside the ambit of being defined as capital assets.

What are long term and short term capital gains

To know what capital gain is, you need to know about the types of capital assets. There are two types of capital assets, namely long-term capital assets and short-term capital assets. An capital asset held for a period of 36 months or less is a short-term capital asset. However in case of a equity share/security listed in a recognized stock exchange in India or a unit of the UTI or a unit of an equity oriented fund or a zero coupon bond, is being held not more than 12 months will be considered short capital assets and further, in the case of a share of a unlisted company, or an immovable property, being land or building or both, is being held not more than 24 months from its date of purchase will be considered short term capital asset.

And long-term capital asset" means a capital asset which is not a short-term capital asset

Tax on capital gains: For a proper answer of what is capital gain, you need to know about its taxation structure. The government has stipulated rules both for short-term and long-term capital gains. You can refer to the chart given below:

Type of capital gains tax	Taxation rate
Long-term capital gains tax on sale of capital assets, except from sale of equity shares or equity funds	20%
Long-term capital gains tax on sale of equity shares or equity funds 10%, provided the capital gain is above Rs 1 lakh in Financial year	10%, provided the capital gain is above Rs 1 lakh in Financial year
Short-term capital gains tax on sale of equity shares or equity funds where Securities Transaction Tax (STT) is applicable	15%
Short-term capital gains tax on sale of assets where Securities Transaction Tax (STT) is not applicable	Taxation as per your income tax slab
Long-term capital gains on sale of debt funds	20% along with indexation
Short-term capital gains on sale of debt funds	Taxation as per your income tax slab

Important note about capital gains tax: You must remember that if you receive a capital asset through inheritance, or as a gift, the profits accruing from it will not be within the ambit of capital gains tax.

Deductions made while calculating capital gains: According to the rules, certain deductions are allowed while calculating capital gains tax. Typically, in the case of long-term capital gains, the indexed cost of acquisition and improvement is deducted to reach the true or fair estimate of your profit. This allows you to make adjustments as per the existing inflationary trends, while taking into account the cost of improvements that you might have made in the capital asset. The expenditure of getting the asset transferred in your name is also adjusted.

Conclusion: Thus, it is important to know what capital gain is, before beginning your investment journey. Always remember to choose a viable investment plan for your hard-earned money. You can select the Invest 4G plan from Canara HSBC Life Insurance, which provides the benefit of market-linked returns along with protection of life cover. This ULIP plan adds to your savings through wealth and loyalty boosters.

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