Capital gains are profits that an investor has made from selling assets like stocks and real estate. Capital gains are differentiated as long-term and short-term for taxation purposes. In India, the definition of capital gains for various asset classes is different.
In stocks and equity mutual funds, profits booked within one year of purchase come under short-term for taxation.Here, the investor has to pay 15% capital gains tax. If she holds stocks or mutual funds for more than a year, it will be termed as long-term capital gains for which tax is zero. For real estate, rules are different and more complicated.
Capital gains made on profits from sale of property is taxed at 20% with indexation. However, there are rules that help investors avoid paying capital gains tax on prof its from real estate.
The tax also encourages investors to hold assets such as stocks and mutual funds for a longer period rather than get involved in speculative trading.