What is Capital Gains Tax (CGT)?

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What is Capital Gains Tax (CGT)? Blog Image


Finance Minister Nirmala Sitharaman has denied reports that the Income Tax Department is planning to introduce changes in the capital gains tax structure in case the government is voted back to power in the ongoing Lok Sabha 2024 polls.

About Capital Gains Tax (CGT): 

  • The term capital gains can be defined as profits accumulated from the sale of any capital asset.
    • Land, buildings, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets.
    • This includes having rights in or in relation to an Indian company.
    • It also includes the rights of management, control, or any other legal right. 
  • Depending on the duration, capital gains can either be short-term or long-term.
  • Since profits are categorised as an ‘income’, they are liable for taxation, which is known as CGT.
  • Such taxes are levied when an asset is transferred between owners.
  • This tax applies to both individuals and businesses.
  • Taxpaying individuals can use tax-efficient financial strategies to reduce the burden of their CGT.
  • There are two types of CGT: Short-term CGT and Long-term CGT
  • Short-term CGT:
    • Any asset that is held for less than 36 months is termed as a short-term asset.
    • In the case of immovable properties, the duration is 24 months.
    • The profits generated through the sale of such an asset would be treated as short-term capital gain and would be taxed accordingly.
  • Long-term CGT:
    • Any asset that is held for over 36 months is termed as a long-term asset.
    • Assets like preference shares, equities, UTI units, securities, equity-based Mutual Funds and zero-coupon bonds are also considered as long-term capital asset if they are held for over a year.
    • The profits generated through the sale of such an asset would be treated as long-term capital gain and would attract tax accordingly.

Q1: What are preference shares?

Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.

Source: FM's clarification on capital gains tax could see markets recover on Monday