What is Capital Gain? Types, Calculations and How it Works

Capital gain is the profit you earn from selling an asset at a higher price than you paid for it, directly increasing your wealth. However, before celebrating your financial gain, it's important to consider other aspects like capital assets, capital gains tax, and other obligations. Any capital gains you earn are subject to taxation as per government tax rates.

In the following sections, we will cover what capital gain is, the types of capital gain, what is capital gains tax, how to calculate it, and other essential information.

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What is Capital Gain?

Every asset has a value, and every investment provides positive or negative returns. Similarly, every capital or investment offers returns. When you sell a property, mutual fund, or other capital investment in the market, and its sale price exceeds the original price, you generate a capital gain.

What is Capital Gain Tax?

Any capital gains you generate from your capital assets are taxable. Capital gains tax is a tax imposed on the profits you earn from the sale of assets like bonds, stocks, real estate, and other investments. The capital gains tax rate applies to the difference between the asset’s original purchase price and its selling price.

What is a Capital Gain Asset?

Capital assets include properties you own and can transfer, such as land, shares, buildings, patents, jewellery, trademarks, vehicles, machinery, leasehold rights, etc. An asset may or may not be related to a business or profession. Some assets that are not considered capital assets include personal goods like furniture and clothes, agricultural land in rural areas, and gold deposit bonds.

How Does Capital Gain Work?

In order to earn a capital gain, you must purchase an asset at a lower price and sell it at a higher price to make a profit. The difference between the purchase and sale price of an asset defines the capital gain. The bigger the difference, the higher your gain. However, the gain you earn is taxable according to the applicable capital gains tax rate.

Read Also: Venture Capital - Definition, Types, Advantages and Disadvantages

Types of Capital Gain

Capital gains can be of two types according to their time horizon. The two types are:

• Short-Term Capital Gain: Short-term capital gains are those that investors realise after selling their assets within 36 months of purchasing them.
• Long-Term Capital Gain: Long-term capital gains are those that investors realise by holding assets for over 36 months and selling them thereafter.

However, the time frame may vary for different types of assets. For example, the time frame for equity shares, mutual funds, and zero-coupon bonds is less than 12 months.

Importance of Capital Gain

Capital gains are extremely important for investors as they significantly impact their finances. Here is why they are important:

• Capital gains represent the profit that an asset realises, including real estate and securities.
• Capital gain plays a vital role in evaluating an investment portfolio’s overall performance.
• Calculating the capital gains is important for calculating an investor’s capital gain tax obligations.

Features and Benefits of Capital Gain

Let’s look at some features and benefits of capital gains:

• Meaning: Capital gain reflects the difference between an asset’s purchase and selling price after holding it for some time.
• Types: Capital gains can either be short-term or long term, based on their time horizon.
• Taxability: Capital gains on all assets are taxable, whether acquired through gift, will, or inheritance.

Read Also: What is Equity - Types, Features, Benefits, Formula

How to Calculate Capital Gain?

The mathematical formula to calculate capital gains is as follows:

Capital Gain = Full value of the consideration received on transfer - Cost of acquisition of a capital asset.

For instance, if you purchase 100 shares of a company on 30 November 2022 at the rate of Rs 350 per share, you spend a total of Rs 35,000. On 30 November 2024, if you sell the shares at the rate of Rs 800 each, you make a profit of Rs 45,000. Therefore, your total capital gain is Rs 45,000.

Long-Term Capital and Short-Term Capital Gains Tax Rate

According to the Budget 2024 amendment, the capital gains tax rate with effect from 23 July 2024 is as follows:

Risks of Capital Gain

While capital gains are profits, they also involve some risks. Here are a few:

• Managing capital gains may require more detailed accounting, which can complicate your finances and delay tax returns.
• Timing the sale of assets is important for optimising tax and financial outcomes.

Read Also: What is Loan Repayment and How Does It works?

How Capital Gains Help You for Personal Loan Repayment?

Capital gain is the money that you can use to cover any expense or pay off existing loans. You may use your capital gains to repay its EMIs if you already have a Personal Loan. Here is how to do that:

• Calculate your capital gains using this formula: Capital Gain = Full value of the consideration received on transfer - Cost of acquisition of a capital asset.
• Calculate your Personal Loan outstanding balance.
• Decide whether you want to pay the EMIs as per the pre-determined schedule or want to make a prepayment.
• If planning to prepay the loan, check prepayment charges and ensure they do not exceed your savings.

Read Also: How to Apply for Instant Personal Loan Online?

Steps to Apply for a Personal Loan

Follow these steps to get a Personal Loan at Hero FinCorp:

Step 1: Visit the Hero FinCorp website or download the loan app

Step 2: Go to the Personal Loan page and click ‘Apply Now’

Step 3: Enter your mobile number and verify with the OTP received

Step 4: Choose the loan amount you need

Step 5: Verify your KYC details to check income eligibility

Step 6: Click ‘Submit’ to complete your application

Once your application gets approved, you will get a loan offer. Accept the loan offer to get the amount directly in your savings account.

Conclusion

Capital gains can be highly beneficial for both individual and corporate investors. However, as with any investment, there are risks to consider. Adhering to tax regulations and making informed decisions are key to maximising returns. You can also use capital gains to repay your Personal Loan, as there are no usage restrictions.

Frequently Asked Questions

1. How much capital gain is tax-free?

Long-term capital gains up to Rs 1 Lakh are tax-free.

2. What is the period of holding for capital gains?

The holding period for capital gains varies by asset: less than 12 months for equity shares and mutual funds (STCG), and more than 24 months for real estate (LTCG).

3. How to avoid capital gain tax on property?

One way to save capital gains tax on property is to reinvest the proceeds into another property within a particular time frame.

4. How can I save income tax on capital gains?

You can save tax on capital gains by investing the profits in a new property or other eligible schemes, subject to conditions.

5. Can capital gains be used as income to qualify for a loan?

Capital gains may improve your loan eligibility. However, lenders typically require a regular monthly income of at least Rs 15,000 to approve the loan.

6. How do capital gains affect the repayment of a loan?

Capital gains can provide additional funds, making loan repayment easier.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.