When do You have to Pay Capital Gains Tax?

Let's answer this basic question: when do you have to pay capital gains tax?

In India, capital gains tax is applicable when you make a profit from the sale of certain assets, such as property, stocks, mutual funds, and other investments. The timing of when you need to pay capital gains tax depends on the type of asset being sold and the holding period. 

There are two main categories of capital gains tax.

If you sell an asset within a short period after acquiring it, any profit made from the sale is considered short-term capital gains. The holding periods for different assets are as follows:

• Equity Shares (listed on a recognized stock exchange):

  If held for less than 1 year, it's considered short-term.

• Equity Mutual Funds (with more than 65% investment in equity):

  If held for less than 1 year, it's considered short-term.

• Debt Mutual Funds:

  If held for less than 3 years, it's considered short-term.

• Other Assets (such as property):

  If held for less than 2 years, it's considered short-term.

STCG is typically taxed at your applicable income tax slab rate.

Let understand this with an example: suppose you hold a property less than 12 months and now you are selling it.

Selling Price: Rs. 1.2 crore Purchase Price: Rs. 50 lakh

Short-Term Capital Gain = Selling Price - Purchase Price Short-Term Capital Gain = Rs. 1.2 crore - Rs. 50 lakh = Rs. 70 lakh

Now you have to pay tax on this 70 lakh. This would fall in 30% income tax slab rate.

1. Long-Term Capital Gains (LTCG):

   If you hold an asset for a longer period before selling it, any profit made from the sale is considered long-term capital gains. The holding periods for different assets are as follows:

   • Equity Shares (listed on a recognized stock exchange):

     If held for 1 year or more, it's considered long-term.

   • Equity Mutual Funds (with more than 65% investment in equity):

     If held for 1 year or more, it's considered long-term.

   • Debt Mutual Funds:

     If held for 3 years or more, it's considered long-term.

   • Other Assets (such as property):

     If held for 2 years or more, it's considered long-term.

Let's understand this with an example: suppose you have bought a property 2 years ago and now you want to sell it.

Selling Price: Rs. 1.2 crore Purchase Price: Rs. 50 lakh

Long-Term Capital Gain = Selling Price - Purchase Price Long-Term Capital Gain = Rs. 1.2 crore - Rs. 50 lakh = Rs. 70 lakh 

In case of Long Term Capital Gains you are eligible for indexation benefits.

The tax rate for LTCG on real estate is usually 20%, with indexation benefits applied.

It is all about when you have to pay capital gain tax. You can also have the benefit of Indexation but cess and surcharge are also applicable. It's important to note that tax laws can change, so I recommend consulting with a tax professional or financial advisor for the most up-to-date and accurate information regarding capital gains tax in India.