Capital Gains Tax: Meaning & Current Government Policy

A recent speech of prime minister had started speculation that government may impose long term capital gains tax in the upcoming budget.

Capital gain refers to the gain or profit from the sale of property or an investment. Investment may be in shares, equity, gold, real estate or valuables like paintings {a prelims question was asked if investment in paintings is a capital gains tax} etc.

Difference between Capital Gains and Capital Receipts

Though they sound alike, capital gains and capital receipts are different animals and are treated differently. Capital receipt is the amount which is received from sale of capital i.e. assets, shares, debentures, land, factory, machines etc. This is different from revenue receipts which are generated by selling products and services. On the other hand, capital gains is profit made on sale of capital assets. Thus, if you make profit while selling shares, you have a capital gain.

Tax policy on Capital Gains

The general rule under the income tax act is that

  • while revenue receipts are taxable, capital receipts are exempted from tax unless there is specific provision of taxation on it. This is the reason that gifts and loans don’t attract taxes. But there is nothing which can stop the government to impose taxes on capital receipts also. The Vodafone matter is manifestation this.
  • Capital gains is profit and is taxable. Gain here means the difference of price of asset/share when purchased and when sold. The tax is levied on that gain.
Current Government Policy on Capital Gains Tax

Capital Gains tax is of two kind viz. Short term and long term. Current policy of the government is that while there is a 15% tax on short term capital gains, the long term capital gains are not taxed. This implies that if a stock traded on an exchange is held for more than a year, gains from it are exempt from capital gains tax. On the other hand, if a trader books profit in a stock held for less than a year, he has to pay short-term capital gains tax of 15%.