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What is a Capital Asset? And What are Long Term and Short Term Capital Assets?

Every individual has their own kind of investment plan in different assets in their lifetime. Investment in capital assets looks like purchasing a residential or commercial property, cars, stocks, bonds. When a particular asset is sold, the capital gain or capital loss can be evaluated.

Many observe confusion while bifurcating the long term and short term capital assets because of lack of knowledge and understanding. Capital assets are also known as fixed assets, which can be tangible or intangible in nature depending on your investment choices.

Enlighten yourself about capital assets and its two types- the short term and long term capital assets.

What is Capital Asset?

 

What is capital asset

 

A capital asset is an item that you own for the investment of business or personal purposes.

According to section 2(14), a capital asset means

(a) any kind of property held by an individual, whether connected with his business or profession or not

(b) In accordance with the SEBI regulations if any securities are held by a Foreign Institutional Investor which has invested in such securities 

Capital assets do not include -

(a) Any other stock-in-trade apart from securities referred above, consumable stores or raw materials held for the business or professional use of the individual.

(b) Personal effects, that is movable property held for personal use by the individual or any member of the individual’s family dependent on him/her, but personal effects exclude jewellery, paintings, archaeological collections, artwork and sculptures. It also excludes the rural agricultural land in India.

(c) gold bonds of 6.5% (1977) or gold bonds of 7% (1980) or national defence gold bonds (1980) issued by the central government

(d) Special bearer bonds (1991)

(e) Gold deposit bond issued under the 1999 gold deposit scheme or deposit certificates issued under the Gold Monetisation Scheme, 2015

 

A capital asset can be used as an asset investment in a business sense that is anticipated to create some kind of value over a specified period of time.

For tax purposes, many individuals and businesses can hold capital assets. You must designate your gains or losses when you file your taxes. The capital gains are taxed at a special rate, and capital losses are used in many cases to reduce the amount that is taxed.

Short term Capital Asset

 

Short term Capital Asset

 

A capital asset held by an individual for not more than 36 months is the short-term capital asset. For the 

immovable properties such as land, building and house property the criteria of 36 months has been reduced to 24 months from FY 2017-18.

Unlisted shares and immovable property like land, building, residential or commercial property held for not more than 24 months immediately prior to the date of transfer will be treated as a short-term capital asset.

If an asset is impaired, the fair value of the asset decreases, for which there has to be an adjustment done by the assessee on the book value of the balance sheet. The income statement will have to mention a loss.  An impairment expense amounting to the difference is recognized in the period if the carrying amount exceeds the recoverable amount. If the carrying amount is less than the recoverable amount, there is no impairment. 

For example, if you sell your house property after holding it for a 24 months period, any income arising will be treated as long-term capital gain provided that the capital asset is sold after more than 36 months.

Tax on Short term capital asset :

Where securities transaction tax is applicable, the short-term capital gain is taxable at the rate of 15% + Surcharge and Education Cess. In other cases, according to the income tax slab rate, the short-term capital gain is taxable

Related Post- How to Save Tax on Real Estate Investment?

Long Term Capital Asset

 

Long Term Capital Asset

 

If an asset is held for more than 36 months it is considered as a long-term capital asset. The reduced period of 24 months is not applicable to the movable property such as jewellery, mutual funds etc. If held for more than 36 months as earlier these movable property will also be classified as a long-term capital asset

Tax on Long term capital asset:

Where securities transaction tax is applicable, the long-term capital gain is taxable at the rate of 10% + Surcharge and Education Cess.  Under the section 112A capital gain up to Rs.1,00,000 is not taxable. In other cases, the long-term capital gain is taxable at 20% + Surcharge and Education Cess.

In the Bottom

Capital assets are recorded as an asset on the balance sheet. Through depreciation, the useful life of the asset is expensed over. To generate revenue over the course of more than one year the capital assets are used in a company's business operations.

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