Understanding taxes on investment income
Investment income is generally taxable, including capital gains, dividends and interest, with rates depending on the type of income and how long you hold the investment.
Capital gains tax in India is the tax levied on profits earned from selling capital assets such as shares, mutual funds, gold etc.
There are 2 types of Capital gains based on the holding time period:
- Short Term Capital gains
- Long Term Capital gains
| Particulars | Short Term Capital Gains | Long Term Capital Gains |
|---|---|---|
| Tax rates | 20% (according to budget 2024) | 12.5% (above gains of Rs 1.25 lakh) (according to budget 2024) |
| Holding period | Less than 12 months | More than 12 months |
| Risk level | High due to market volatility | Lower risk over time |
| Applicable on | Equity, mutual funds, property, gold | Equity, mutual funds, property, gold |
Why does the government tax investment gains?
Because investing profits are considered as a form of income/wealth. They are similar to Salary tax.
You usually pay taxes only when assets are sold. If the stock price rises but you haven’t sold:
- That is known as unrealized gain.
- One does not have to pay taxes till they have sold the asset.
How the rules have changed
Taxes on investment gains have changed significantly over the years.
- The LTCG tax rate was increased from 10% to 12.5% post Union Budget 2024.
- There was also a change in the annual exemption which increased to ₹1.25 lakh from ₹1 lakh.
- The definition of long term was also changed from 36 months to 24 months in 2024.
- The tax rate on STCG was also increased from 15% to 20% in Union Budget 2024.
In 2004 the government eliminated LTCG tax on listed shares to stimulate stock market participation. But it was reintroduced in 2018 on equity assets at a 10% flat rate on gains exceeding ₹1 lakh per year.