Meaning of Capital Assets/Capital Gain/Capital Loss

Capital Assets

Capital Assets include shares, securities, immovable property etc. owned by an individual for personal or investment purposes.

Long Term capital asset

An asset that is held

·         for more than 12 months, in case of shares, securities, debentures, units of UTI, zero coupon bonds and specified mutual funds (prior to the date of transfer) OR ·         for more than 36 months incase of immovable property and any other capital asset than the one mentioned above

Short Term Capital asset

An asset held for not more than 36 months (before the date of transfer of the asset) is a short term capital asset. However if you hold shares, securities, debentures, units of UTI, zero coupon bonds and specified mutual funds for more than 12 months then they are classified as long term capital assets. Specified mutual funds are those that are equity oriented mutual funds where more than 65% funds are invested in equities. Others are debt oriented mutual funds where more than 35% funds are invested in international and other funds (other than equities).

Capital Gains

Different tax rates are applicable on short term or long term capital gains.

Taxation of STCG i.e. Short term capital gains - Short term capital gains are taxed at the slab rates applicable for immovable properties and unlisted securities as they are added to your income. STCG rates for listed securities is 15% (where STT is paid).

Taxation of LTCG i.e. Long term capital gains - Long term capital gains are taxed @20% on the amount of capital gains earned where indexation is considered and @10% where indexation is not considered.

Capital gains are exempt from tax if the amount earned from these transactions is invested in specified capital assets. There are broadly two types of capital gains taxes in Securities transactions. Short term capital gains tax: If the holding period of the stock is not more than 12 months, then the gains attract a tax rate of 15% Long term capital gains tax: If the holding period of the stock is more than 12 months, then the gains do not attract any tax Let's take a look at an example which will explain the capital gains taxes in details. Let us say Mr. Sharma has purchased securities A and B both on April 11, 2014 for a total price of 1,00,000 each. As on December 5, 2014, value of his investments is as follows: Securities Purchase Value  (As on April 11, 2014) Current Value  (As on December 5, 2014) Stock A 1,00,000 1,30,000 Stock B 1,00,000 50,000 In stock A, Mr. Sharma has profit of 30,000 and in stock B, Mr. Sharma has a loss of 50,000. Now he has the following 4 options to choose from taxation perspective: Scenario Outcome Scenario 1 He can hold both stocks for more than 12 months; in anticipation of price appreciation No long term capital gains tax Scenario 2 He can book profit in stock A and hold stock B which is in loss On the profit position in stock A he pays short term capital gains tax of 15% Scenario 3 He can sell stock A; book profits and sell stock B; book losses Profit of 30,000 in stock A - Loss of 50,000 in stock B = Net Loss of 20,000. This loss can be carried forward for 8 years. No short term capital gain tax on profits Scenario 4 Hold stock A for more than 12 months and book losses in stock B No long term capital gains tax in stock A and short term capital loss of50,000. This loss of50,000 can be carried forward for 8 years. So take a look at your portfolio and understand the possibilities of leveraging any potential capital gain/loss scenario for your benefit in consultation with your Tax Advisor.