What does the term ‘Capital Gains’ signify under the Income Tax Act?

 Under the Income Tax Act, capital gains refer to the profits or gains that arise from the sale, transfer, or exchange of a capital asset. A capital asset can be any property owned by the taxpayer, such as land, building, stocks, bonds, jewelry, or any other type of asset that is not used for the purposes of business or profession.

Capital gains are classified into two types:

1. Short-term Capital Gains (STCG): If the asset is held for a period of up to 36 months (24 months for immovable property) before it is sold or transferred, any gains arising from the sale of the asset are considered as short-term capital gains.

2. Long-term Capital Gains (LTCG): If the asset is held for a period of more than 36 months (24 months for immovable property) before it is sold or transferred, any gains arising from the sale of the asset are considered as long-term capital gains.

Capital gains are taxed under the Income Tax Act, and the rate of tax depends on whether the gains are short-term or long-term. In the case of short-term capital gains, the tax rate is equal to the normal income tax rate applicable to the taxpayer. In the case of long-term capital gains, the tax rate is generally lower than the normal income tax rate, and it is calculated after taking into account the indexation benefit.

The indexation benefit allows taxpayers to adjust the cost of acquisition of the asset for inflation, thereby reducing the amount of taxable gains. The indexed cost of acquisition is calculated using the Cost Inflation Index (CII) issued by the Income Tax Department every year.

It is important to note that certain exemptions and deductions are available under the Income Tax Act for the calculation of capital gains, such as exemptions for gains arising from the sale of a residential property if the gains are invested in another residential property, and deductions for expenses incurred in the transfer or sale of the asset.

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