What is Income Tax?
Income tax is a direct tax governments impose on their citizens' earnings and profits. Tax law mandates that every taxpayer file an income tax return annually, determining their total tax liability. A major revenue source for governments globally, income tax rates are based on government-regulated tax brackets and the income earned during a financial year. This revenue funds government operations and development projects. Income tax applies to individuals, salaried employees, and businesses, covering earnings from various sources like wages, salaries, interest, rent, royalties, product sales, employment income, dividends, self-employment income, and royalties.
What is Capital Gain Tax?
A capital gain occurs when the value of a capital asset increases, but is only realized when the asset is traded for a higher price. Essentially, it's the profit earned from selling an asset—like stocks, real estate, or bonds—that has appreciated in value. For example, if you buy something for ₹30,000 and sell it for ₹40,000, your capital gain is ₹10,000. Capital gains tax is imposed on this profit. This profit from selling capital assets is considered taxable income. However, capital gains on assets held until death or donated to charity are generally tax-free. The capital gains tax specifically applies to income derived from the trade or exchange of capital assets, such as stocks or property.
Difference between the Income Tax and the Capital Gains Tax
Both income tax and capital gains tax play a vital role in a nation's economy. They are of immense importance to governments seeking to collect taxes and bolster their revenue. However, despite both being taxes, it's crucial to understand that significant differences exist between income tax and capital gains tax. A comprehensive table view of these differences is necessary to understand the differences between the Income Tax and the capital gains tax.
Table view of Income Tax vs Capital Gains Tax
| Particulars |
Income Tax |
Capital Gains Tax |
| Definition |
Income tax is a direct tax imposed by the government on individuals and entities based on their earnings or profits during a financial year. |
Capital gains tax is a levy on the profit earned by an individual or a company from the sale or transfer of capital assets. |
| Determining Factor |
Income tax follows a variable structure entirely based on the applicable tax bracket. |
The capital gains tax rate is entirely based on the duration for which the asset is held. |
| Source |
Taxable earnings under income tax include sources such as wages, salaries, royalties, interest, rent, and revenue from product sales. |
Earnings subject to capital gains tax come from sources like stocks, shares, bonds, and property. Capital gains tax is a specific category within the broader income tax framework. |
| Categories |
Income tax is categorized into five main heads, which include:
- Income from salary
- Income from business or profession
- Income from house property rentals
- Income from capital gains on asset sales
- Income from other sources, such as interest on bank deposits, lottery winnings, etc.
|
Capital gains tax is classified into two main categories:
- Short-term capital gains tax
- Long-term capital gains tax
|
| Scope |
Compared to capital gains tax, income tax has a broader scope and applies to a wider range of earnings. |
Capital gains tax has a more limited scope compared to income tax. |
Why Do You Need a Tax Consultant?
- Tax Planning and Strategy
- Providing Specialized Tax Advice
- Ensures Compliance
- Helps you reply to Income Tax Notices
- Preparing and Filing Tax Returns
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