INCOMES such as salary, rent and business income are regular and recurring. However, these do not cover all sources of income.
Income can arise out of the sale of capital assets such as shares and mutual funds. You will have to pay a capital gains tax on the profits made on the sale of shares/ mutual funds.
What is short term capital gain and long term capital gain? If you sell a share or a mutual fund within one year of buying it, the profit is called short term capital gain. If you sell it after one year, it is long term capital gain. This distinction is necessary because the tax treatment is different for each of these.
Tax laws are usually stricter for short term capital gains because the government wants to encourage you to stay invested in equities and mutual funds for the long term.
How are the gains taxed? -- Short-term capital gains tax In case of equity shares and equity mutual funds, short-term capital gains are taxed at a flat rate of 15 per cent.
In case of debt mutual funds, the short term capital gain is added to your total income and tax is calculated on that total.
Long-term capital gains -- In its bid to encourage long term investments in equities, the government has abolished long term capital gain tax on equity shares and equity mutual funds.
-- In case of debt mutual funds, long-term capital gains are taxed at a flat rate of 20 per cent irrespective of your income slab. You also have an option to forego the benefit of indexation and pay long-term capital gain tax at 10 per cent instead of 20 per cent. The option that is more beneficial can be determined on a case-to-case basis.
What is indexation? Indexation is nothing but adjusting the cost of purchase of units to the cost inflation index as on the date of sale.
Indexed cost is calculated with the help of a table of cost inflation index that is provided by a notification in the official gazette each year. These are the latest indices.
Financial year
Cost Inflation Index
1981-82
100
1982-83
109
1983-84
116
1984-85
125
1985-86
133
1986-87
140
1987-88
150
1988-89
161
1989-90
172
1990-91
182
1991-92
199
1992-93
223
1993-94
244
1994-95
259
1995-96
281
1996-97
305
1997-98
331
1998-99
351
1999-00
389
2000-01
406
2001-02
426
2002-03
447
2003-04
463
2004-05
480
2005-06
497
2006-07
519
2007-08
551
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