The long-term capital gains tax has been under the spotlight of late after Prime Minister Narendra Modi's comments that taxes from stock markets were low revived worries that the government might introduce it in the upcoming Budget. ET explains to you all about long-term capital gains

What are capital gains?
Capital gains are profits that an investor has made from selling asset 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.

What is the difference between long-term and short term capital gains?
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 per cent 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 per cent with indexation. However, there are rules that help investors avoid paying capital gains tax on prof its from real estate.

Why are capital gains tax levied?
The government levies this tax to raise revenues for spending.

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.

Why has capital gains tax become relevant suddenly?
Prime Minister Narendra Modi had recently last week that tax collection from the capital market participants was low. This was interpreted by market participants as a sign that that a long term capital gains tax on shares could be introduced by the government in the upcoming budget in February . However finance minister Arun Jaitley clarified that there would be no such tax. But, market participants are anticipating that the government will tax stock markets in some form.Some market participants believe that the allowed holding period of a share stock would be extended from one to three years. This means that if a trader books a profit in a stock he has held for less than three years, he may have to pay some tax. There is also some speculation that short-term capital gains tax could be increased to 20 per cent from the current 15 per cent.