What is a Capital Asset? Meaning, Types & Taxation Explained
A capital asset is basically any property or investment you own that can generate income or appreciate in value over time. When you sell such an asset for profit, that profit is called capital gain, and it is taxable under the head Capital Gains.
Examples of capital assets include:
Land or building (house, plot, or commercial property)
Shares and stocks
Mutual funds
Gold and jewellery
Bonds or debentures
Vehicles (in certain cases)
Art, antiques, or valuable collections
Types of Capital Assets
Capital assets can be classified based on their nature, usage, and financial significance. These include:
Tangible capital assets
Intangible capital assets
Fixed capital assets
Financial capital assets
Personal capital assets
Business capital assets
Depreciable capital assets
Meaning of Certain Financial Capital Assets
i. Shares
A share represents a unit of ownership in a company. By purchasing shares, individuals or institutions become shareholders, gaining part ownership in the company.
ii. Mutual Funds
A mutual fund pools money from multiple investors to invest in diversified securities, creating a balanced portfolio.
From a taxation perspective, mutual funds are divided into two categories:
(a) Equity Mutual Funds – Funds allocating 65% or more of their assets to stocks.
(b) Debt Mutual Funds – Funds primarily investing in fixed-income securities like bonds, treasury bills, or commercial papers.
iii. Cryptocurrency
A cryptocurrency is a digital currency operating on decentralized computer networks, without any central authority. Transactions exist purely as digital entries.
iv. Derivatives
Derivatives are financial contracts whose value depends on underlying assets such as stocks, bonds, currencies, commodities, or market indices.
v. Intraday Trading
Intraday trading means buying and selling stocks within the same day. All positions are squared off before market closing.
Transfer of Capital Asset (Financial Assets Point of View)
Transfer includes:
i. Sale, exchange, or relinquishment of the asset
ii. Extinguishment of any rights therein
iii. Conversion/treatment into stock-in-trade
Example:
If an investor in shares starts a trading business and converts their investments into business stock, this conversion is considered a transfer for capital gains purposes.
Gains from Sale of Financial Assets
i. Capital Gains
Profits from the transfer of a capital asset are taxable under the head Capital Gains.
Types of Capital Gains
ii. Business Gain/Loss
Trading income is treated as business income and reported under Profits and Gains from Business or Profession (PGBP).
F&O (Futures & Options) income is classified as non-speculative business income and taxed accordingly.
Period of Holding
The holding period is counted from the date of acquisition.
Computation of Capital Gains
Formula:
Full Value of Consideration
– Cost of Acquisition
– Expenses related to transfer
= Capital Gain
Example:
No deduction is allowed for STT (Securities Transaction Tax) while calculating capital gains.
Rate of Taxation
i. Sections 111A & 112A (Concessional Rates)
Applicable to:
Equity shares in a company
Units of equity-oriented funds
Units of business trusts
ii. Section 112 – Long-Term Capital Gains on Other Assets
From April 1, 2023, indexation benefits were removed for debt mutual funds investing less than 35% in equities. Such funds are now taxed as per your income-tax slab.
iii. Trading & F&O Income
Profits from trading and F&O are taxed at normal slab rates (up to 30%, depending on income).
Examples
1. Capital Gains on Sale of Debt Mutual Funds
2. Long-Term Capital Gains on Sale of Equity Shares
3. Short-Term Capital Gains on Sale of Equity Shares
Cess is 4% on total tax payable.
Conclusion
Understanding capital assets and their tax implications is vital for investors and traders. The classification between short-term and long-term assets, along with recent tax rate revisions (effective from 23 July 2024), significantly affects post-tax returns.
Stay updated with the latest Income Tax provisions to plan your investments efficiently and legally minimize your tax liability.
FAQs on Capital Assets and Taxation
1. What is a capital gain?
It’s the profit earned when you sell a capital asset for more than its purchase price.
2. How are debt mutual funds taxed now?
Debt mutual funds with less than 35% equity exposure are taxed as per your income slab, with no indexation benefit.
3. What is the difference between short-term and long-term capital gains?
The difference lies in the holding period — assets held for longer durations attract lower tax rates.
4. Are cryptocurrencies considered capital assets?
Yes, cryptocurrencies are treated as digital capital assets, and profits from their sale are taxable.