Difference between Income Tax and Capital Gains Tax

Income Tax

Income tax is defined as a direct tax that is imposed by the government on the income or profits earned by their citizens. This tax law says that every taxpayer has to file their income tax returns for every financial year, which will help to determine their total tax obligations. It is one of the major sources of revenue for governments around the world. The income tax depends on specific tax brackets that are regulated by the government of a particular country. It is based on the income that a person will make throughout a financial year. This tax helps the government to run the country and engage in expenditure for developmental projects. It is levied on the incomes of an earning individual, a salaried individual or a business. These earnings can come from multiple sources like wages and salaries, interest, rent, royalties, product sales, etc. It is also paid on the earnings from interest, employment, dividends, self-employment, or royalty.

Capital Gains Tax

A capital gain is defined as an increase in the value of any capital asset, and it is also considered as realised only when an asset is sold for a higher valuation. It is the profit that can be earned from selling an asset that has gone up in value – they include assets like stocks, real estate or bonds. If a person buys something for Rs. 30000 and sells it for Rs. 40000, the capital gain from that transaction is Rs. 10000. So the capital gains tax is implemented on the profit that is made from selling the investments. That gain or profit which is made by the selling of capital assets will come under categories of income which are taxable. The capital gains on the assets that are held till death or that are donated to charity will be free from taxation altogether. The capital gains tax will be paid on the income that is derived from the sale or exchange of assets like stock or property, which is categorised as a capital asset.

Difference between Income Tax and Capital Gains Tax

Both income tax and capital gains tax have an important place in the economy. They are of immense importance for governments who wish to collect taxes and enhance their revenue kitty. However, it is important to understand that there are significant points of difference between income tax and capital gains tax, and we need to comprehensively review these areas to get a much better idea of this topic:

Income Tax

Capital Gains Tax

Definition

The income tax is defined as a direct tax that is imposed by the government upon their citizens based on the income or profits which they earn in a financial year.

The capital gains tax, on the other hand, is defined as a tax on the profit that a person or a company earns when they decide to sell or transfer capital assets, and earn profits from them as a result.

Determining Factor

The income tax has a completely variable structure, and it is totally dependent on the specific tax bracket.

The rate for capital gains tax is completely dependent on the actual period of ownership of an asset.

Source

The source for the earnings that is taxable under the income tax includes wages, salaries, royalties, interest, rents, product sales, etc.

The source for earnings that is taxable under the capital gains tax includes stocks, shares, bonds, property, etc. The capital gains tax is a subset of the income tax.

Categories

There are five main heads of income that are covered under the income tax. They are as follows:

  • Incomes from salary
  • Income from business or profession
  • Income from house property rentals
  • Income from capital gains on sale of assets
  • Income from other sources like interest income on lotteries, bank deposits, etc.

There are two main categories under the capital gains tax. They are as follows:

  • Short term capital gains tax
  • Long term capital gains tax

Scope

Income tax has a wider scope when compared to capital gains tax.

Capital gains tax has a narrower scope when compared to income tax.

Conclusion

Both income tax and capital gains tax are required to run the economy of any country. They serve an important purpose and make sure that the government has enough reserves to spend on their development programs. In spite of several areas of difference between income tax and capital gains tax, they are both very important for the growth and development of a nation.

Frequently Asked Questions

What is the meaning of short term capital gain?

The capital gain that is accrued from transferring a capital asset (like shares or securities within a year and other properties within three years from the date of acquisition) is known as a short term capital gain.

What is the meaning of long term capital gain?

The capital gain that is accrued from transferring a capital asset (like shares or securities after a year and other properties post three years from the date of acquisition) is known as a long term capital gain.

What are the main methods to minimise the incidence of capital gain?

There are several ways to minimise the incidence of capital gain. Two of them are mentioned below:

  • By investing in capital gain bonds
  • By reinvesting in residential properties

What are the main transfer related expenditures that can be minimised from the total sale value of an asset to calculate capital gain?

The main transfer related expenditures that can be minimised from the total sale value of an asset to calculate capital gain are brokerage charges, travel expenses, stamp duty and registration fee.

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