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Income Tax Rules For Dividends and Capital Gains in India
Question: What are the tax rules for capital gains and dividend? If I am right, then capital gain is when somebody invests for more than one year in an equity fund.
Answer: In simple words, a capital gain is a profit that results from selling and/or transferring of a capital asset over its previous purchase price. Capital assets include all kinds of financial assets like mutual funds, bonds, shares, and movable and immovable property excluding small saving instruments. Also, capital assets do not include articles like apparel, furniture, motor vehicles meant for personal use, but again jewelry is a capital asset. Capital gains on agricultural land is exempted but if agricultural land falls within 8 kilometers of municipal limit or notified area, it will also be treated as a capital asset, so a land can only be considered as agricultural if some type of agriculture is actually being carried out on that land. Capital assets are investment and not meant for trading and/or business purposes.
Also to be more precise, capital gains are classified into short term capital gains and long term capital gains based on the period for which the capital asset is being held. In case of an immovable asset if the property has been at hold by the assessee for more than three years, then it will be considered as long term capital gain. In case of shares, bonds, mutual fund unit investments, the period of holding has to be only 12 months and after this, they will also be considered as long term capital gains.
For your information, short-term capital gains arising from transfer of shares or mutual funds where you are paying securities transaction tax are taxable at 10%.
Long Term Capital Gains
For equity mutual funds investment, equity oriented mutual fund units transfer of which attracts securities transaction tax is exempted from long term capital gains tax u/s 10(38).
In case of other asset class while computing long-term capital gains, the cost inflation index can be applied and the gains are taxed at a flat rate of 20 per cent only. Without cost inflation index, benefit tax is 10% flat.
In case real estate used for residential purposes is sold, exemption from capital gains tax can be claimed if new real estate is bought from the same money within a period of 12 months before or 24 months after the date of transfer or a new flat has been constructed within three years. Capital gains tax exemption can also be claimed with investment in special bonds mentioned under section 54EC of the Income Tax Act 1961.