Capital Gains and Income from Other Sources
What this domain tests
This domain tests the difference between capital gains and other sources, the holding-period rules, the treatment of long-term and short-term gains, exemptions on reinvestment, and the residual head for interest, dividends, gifts, and winnings.
Capital gains rules
- A capital asset includes property, securities, and rights, but excludes stock-in-trade, personal effects, and specified agricultural land.
- Holding period: listed equity shares and equity-oriented mutual funds become long-term after 12 months. Immovable property and unlisted shares generally become long-term after 24 months.
- Long-term capital gains on listed equity shares are exempt up to ₹1,25,000 per year; the balance is taxed at the prescribed rate. Short-term gains on such shares are taxed at the prescribed special rate.
- For transfers after 23 July 2024, indexation has generally been withdrawn for most long-term assets, and the long-term rate is 12.5% without indexation, subject to the specific asset rules.
- Sections 54, 54B, 54EC, and 54F give exemptions for reinvestment in a residential house or specified bonds, subject to time limits and conditions.
Other sources
- Interest, dividend, rent from plant and machinery, royalty, winnings from lotteries and games, and gifts are taxed here.
- A gift from a non-relative exceeding ₹50,000 in a year is taxable as income from other sources; gifts from relatives and on specified occasions are exempt.
- Family pension has a standard deduction, and interest has deductions under sections 80TTA or 80TTB, subject to regime and eligibility.
Worked example
An investor sells listed equity shares held for 18 months. Cost = ₹1,00,000; sale price = ₹2,50,000; transfer expenses = ₹5,000. The gain is long-term. Gain = ₹2,50,000 − ₹1,00,000 − ₹5,000 = ₹1,45,000. The first ₹1,25,000 is exempt, leaving ₹20,000 taxable at the prescribed long-term rate. Reasoning: holding period decides long-term status; the annual exemption applies before the special rate.
Traps
Do not apply the 12-month holding period to unlisted shares or land. Indexation is not available for most post-23 July 2024 transfers. Section 54 exemptions are conditional, not automatic.