When you sell or transfer any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds) and you make a profit on the sale, it is known as capital gain. The tax you pay on this profit is called the capital gains tax. If you make a loss (you sell at a lower price than you bought it), you incur a capital loss.

TYPES OF CAPITAL GAIN: Depending on how long you held the asset, the capital gain is classified either as short-term or long-term.

Short-term capital gain: If you sell the asset within 36 months from the date of purchase (12 months for shares or mutual funds)

Long-term capital gain: If you sell the asset after 36 months from the date of purchase (12 months for shares or mutual funds)

Section -1 Property and Others  

Short-term capital gain: A short-term capital gain is added to your total income. Depending on which tax bracket you fall under, you will be taxed.

Long Term Capital Gain: Long-term capital gains are taxed at a flat rate of 20% irrespective of your income slab. Long-term capital gains is computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer, the indexed cost of acquisition, and the indexed cost of improvement.  However, tax benefits are available under Section 54 of the IT Act. This tax can be avoided by re-investing the profits in a residential property if either of these conditions are satisfied - a fully constructed residential property is purchased within a period of one year before the sale or two years after the sale, or if you construct a residential property on your own within a period of three years after the sale.  

Section-2 Shares and Mutual funds

CASE-1 Sale purchase through a Recognized stock exchange where STT is deducted:  Long Term Capital gain is exempt from tax and Short term Gain is taxed at a flat rate of 10%.

CASE-2 Sale purchase through a recognized/un-recognized exchange where STT is not deducted:

Short-term capital gain: A short-term capital gain is added to your total income. Depending on which tax bracket you fall under, you will be taxed.

Long-term capital gain taxed on shares and mutual funds: You can pay the tax on long term capital gains on shares and mutual funds either at the rate of 20% with indexation of the initial cost price or 10% without indexation which ever method the tax burden is less.  

Capital loss: Sometimes, you do not make a profit. You sell at a lower rate than at what you bought. This is a capital loss. The tax in this case would be Nil but it can help reduce tax burden on other gains as you can set off capital loss as follows:  

• Long-term capital loss can be set off only against a long-term capital gain.  
  
• Short-term capital loss can be set off against any type of capital gain, long-term or short-term.  
  

You need not incur the loss and gain in one single year. A long-term capital loss can be carried forward for eight years to be set off against a long-term capital gain. A short-term capital loss can be set off against any income under the head capital gains whether short-term or long-term) and can also be carried forward for eight years. In both cases, these eight years start after the financial year when the loss is incurred.