Capital Gains Tax
A tax levied on the profit realized from the sale of a non-inventory asset that was purchased at a lower price.
Capital Gains Tax (CGT) is the tax you pay to the government on the profit you make when you sell an asset (like stocks, mutual funds, real estate, or businesses) that has increased in value.
It is important to note that the tax is only applied to the gain (the profit), not the total amount of money you receive from the sale. Furthermore, capital gains tax is only triggered when the asset is actually sold (realized). If your stock portfolio doubles in value but you haven't sold any shares, you owe no capital gains tax on that "unrealized" paper profit.
Short-Term vs. Long-Term
Most tax systems (including the US and India) divide capital gains into two categories based on how long you held the asset before selling it:
- Short-Term Capital Gains (STCG): Assets held for a short duration (usually less than 1 year). These are typically taxed at a higher rate, often equal to your standard income tax bracket, to discourage rapid speculative trading.
- Long-Term Capital Gains (LTCG): Assets held for a longer duration (usually greater than 1 year). Governments heavily incentivize long-term investing by taxing these gains at a significantly lower, preferential rate.
Understanding the mathematical threshold between short-term and long-term holding periods is critical for optimizing your post-tax investment returns.