Capital Gains

Assets such as propery, stocks/mutual-funds/bonds can have capital gain (or loss) for which taxation differs compared to normal income.

There are two categories of capital gains

(1) Short term gain
(2) Long term gain

For stocks/mutual-funds/bonds which are held less than 12 months short term gain applies. Otherwise (for ones held more than 12 months) it is long term gain. For other assets (including properties) the limit is 36 months.

Typically short term gains (except for stocks and equity oriented mutual funds) are added to your income and hence liable to be paid tax on the top of your tax bracket. Long term capital gains have preferred treatment. You have three options

(1) Invest the gain in specified capital bonds and you need not pay any tax. This will typically lock your gains for few years at a low interest
(2) Invest within 6 months your gains in a property (keep it in a special capital gains account in a bank if 6 months falls across assesment years)
(3) Pay 10% flat tax on capital gain OR 20% on the gain calculated after indexation whichever is lower (plus surcharge, cess as applicable)

(Note: Indexation is a mechanism by which inflation is taken care. Let us say something is Rs.100 today and next year you sell the same thing for Rs.110. Govt. publishes inflation index every year and inflation has gone by up 4%. Then after account for inflation your cost price is 104, thus the gain after indexing for inflation is only Rs.6).

For stocks and equity oriented mutual funds (Mutual funds which invest mostly in stocks as specified by govt and typically funds disclose them, other type of funds are bond oriented funds , gilt funds etc) - the long term gain is presently Nil (no tax - free lunch from government) and short term gain is 10% (plus whatever surcharge, cess applicable).