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Saturday, March 22, 2014

Save Taxes on Capital Gains

Capital Gains are different from money gains. These are the biggest gains that you would ever earn in your life. Understand how to get smarter with capital gains and saving taxes arising out of such gains.. Read More.

What is a Capital?
Capital are the funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services. Real capital or economic capital comprises physical goods that assist in the production of other goods and services.

Capital Vs Money
Capital is different from money. Money is used simply to purchase goods and services for consumption. Capital is more durable and is used to generate wealth through investment. Examples of capital include brand names, stocks, gold. All of these things are inputs that can be used to create wealth. Besides being used in production, capital can be rented out for a monthly or annual fee to create wealth.

What are Capital Gains?
An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.

Assets that qualify for Capital Gains Tax
As we understood in the definition, a capital is different from money. So, not only you must understand the assets that qualify as Capital ,bit you must also understand the tax structure on those assets. Different assets have different capital gains tax levied on them. Lets go one by one:

(a) Stocks / Equity Funds
  • Any investment in stocks or Equity based funds for less than 1 year is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG). Any mutual fund which invests 65% or more of the corpus in equity is considered as a equity based mutual fund.
  • STCG is taxed at a flat 15% of the gain.
  • Any investment in stocks for 1 year or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
  • There is ZERO tax on LTCG for this asset class.

(b) Bonds / NCDs 
  • Any investment in Bonds or Corporate Deposits for less than 1 year is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG)
  • STCG is taxed as per the applicable tax slab that you are in. It could vary from 0% to 30% depending on the total income in the year. Click here to understand the current tax slab you belong to.
  • Any investment in Bonds or Corporate Deposits for 1 year or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
  • LTCG for this asset class is a flat 10% on the gain.

(c) Debt Oriented Funds / Gold ETFs / Gold Funds
  • Any investment in Debt oriented funds for less than 1 year is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG). Any mutual fund which invests less than 65% of the corpus in equity is considered as a debt based mutual fund.
  • STCG is taxed as per the applicable tax slab that you are in. It could vary from 0% to 30% depending on the total income in the year. Click here to understand the current tax slab you belong to.
  • Any investment in Debt oriented funds for 1 year or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
  • LTCG for this asset class is either 10% flat or 20% on the gain after indexation.
  • Indexation/ Double indexation is a very useful strategy to make these gains virtually tax fee. Read here.

(d) Bullion / Jewellery / Real Estate
  • Any investment in Bullion or Jewelery for less than 3 years (Three years) is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG). Remember that this involves holding the bullion / jewelery directly, and not via funds. For funds, the above section (c) is applicable.
  • STCG is taxed as per the applicable tax slab that you are in. It could vary from 0% to 30% depending on the total income in the year. Click here to understand the current tax slab you belong to.
  • Any investment in Bullion or Jewellery for 3 years or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
  • LTCG for this asset class is 20% on the gain after indexation.
  • Indexation/ Double indexation is a very useful strategy to make these gains virtually tax fee. Read more about it here.
  • You can save all your tax on Capital Gains out of real estate asset by investing the gain in another property or buying specific bonds. Understand this by an example by clicking here.

The right understanding can save immense taxes for you. Money saved is money earned. Get going.


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Cheers

Manoj Arora
Freedom can buy you what money cannot !!

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