CAPITAL GAIN TAX (CGT)

Types of Capital Gains:

• Short-Term Capital Gains: Gains from assets held for a short period, typically less than one year. These gains are usually taxed at the individual's regular income tax rate.
• Long-Term Capital Gains: Gains from assets held for more than one year. These gains are often taxed at a lower rate than short-term gains, as an incentive for long-term investment.

• Capital gains tax provides a significant source of revenue for governments, which can be used to fund public services such as healthcare, education, infrastructure, and social programs
• It helps in balancing budgets and reducing deficits by tapping into the wealth generated from investments
• Capital gains tax can be structured to be progressive, meaning higher-income individuals who are more likely to benefit from substantial capital gains pay a higher rate, promoting income equality
• Ensures that individuals who gain from the appreciation of their investments contribute a fair share to public finances, as opposed to relying solely on wage earners for tax revenue
• By taxing short-term gains at a higher rate, it can discourage speculative trading and promote more stable, long-term investment behavior
• Reducing excessive speculation can lead to more stable and efficient markets, with prices more accurately reflecting underlying values
• Differential rates for short-term and long-term capital gains can incentivize investors to hold assets for longer periods, potentially leading to more sustainable and thoughtful investment decisions
• Encourages investment in businesses, as individuals may prefer to hold onto their stocks or other investments longer to benefit from lower long-term capital gains rates

• Calculating capital gains can be complex, requiring detailed record-keeping and familiarity with tax laws. This complexity can lead to increased administrative burdens for taxpayers
• Individuals and businesses may incur additional costs for tax preparation and professional advice to ensure compliance with CGT regulations
• Investors may be reluctant to sell assets to avoid triggering CGT, leading to inefficient allocation of capital. This "lock-in" effect can prevent the reallocation of resources to more productive investments
• ax considerations can distort investment decisions, leading investors to prioritize tax-efficient strategies over economically optimal ones
• CGT can disproportionately affect entrepreneurs and small business owners, who often rely on the sale of their businesses as a significant source of retirement funds.

• It adjusts the purchase price of an asset to account for inflation over time
• Calculating long-term capital gains tax, particularly in countries like Indi
• Reduces tax burden by adjusting the original purchase price of an asset to its present-day value
• Purchase price is multiplied by (CII of sale year / CII of purchase year)
• Introduced to make capital gains tax calculations fairer in inflationary economies
• Most commonly used in India, though similar concepts exist elsewhere