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What is Capital Gains Tax?

 

As described in Wikipedia,  Capital Gains Tax (CGT) is a tax on capital gain, the profit realized on the sale of a non-inventory asset that was greater than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metal, or property.  In Nepali, we call it Labhaansh Kar (लाभांश कर). Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

In a simpler phrase, Capital Gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price. Capital Gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.

How to calculate Capital Gains Tax?

 

Formula: Sale Price – Purchase Price = Capital Gains Amount

Note: This formula assumes the sale price is higher than the purchase price. If an investor sells an asset for less than he or she paid, this is called a capital loss, and no tax is owed.

If the land and building is owned for a period less than 5 years – 5%

If the if the land and building is owned for a period more than 5 years – 2.5%

(If the building is owned and resided for a period more than 10yrs., it does not fall within the definition of Non-Business Chargeable Assets hence, It’s not taxable.)

Example Of Capital Gains Tax:

 

Mr. Ram purchased a house for Rs Fifty lakhs on 2070/01/01.

He sold the same house on 2074/01/01 for Rs Seventy lakhs.

Capital Gains tax on such house shall be calculated as per below:

Sale Price – Purchase Price = Capital Gains Amount

70,00,000 – 50,00,000 =20,00,000

Since the house was owned for less than five years, capital gains tax @  5% Rate on such gain amounting Rs. 1,00,000 (5/100 * Capital Gains Amount) should be deducted by land registration office. This is the advance tax and Mr. Ram should adjust this with the total tax liability by submitting the income tax return.

Note: If the house was owned by Mr. Ram for more than 10 years and stayed in there for continuously or intermittently, then it would not be categorized as a non-business chargeable asset and capital gains tax would not be levied.

If the house was owned for more than 5 years and came under the definition of non-business chargeable assets than the capital gains tax would have been levied @ 2.5% Rate which will be Rs. 50,000 (2.5/100 * Capital Gains Amount).

To know more about capital gains tax, Visit Inland Revenue Department website

 

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