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Capital Gain Tax In India

India's Capital Gains Tax is marked with unfairness. However, before a person can understand why that is so, they need to understand what a capital gain is.

So, what is a capital gain? Well, to use a simplify definition - a capital gain is any income that comes from a sale of an investment. This can include but is not limited to: monies, real estate properties, stocks and bonds. A capital gain is really the difference between the money earned from the sold assets and the cost that the asset was originally brought for. In many ways, the term 'capital gain' tax is a great misnomer and some have even suggested that it be called a 'capital formation' tax because this tax is seen as a penalty on success. Capital gains are generally made on investments like a farm, a ranch, a family business, or a personal home.

In India, the capital gains tax is very different from various forms of taxation because it is a voluntary tax. Since this tax must only be paid when an asset is sold, taxpayers try to hold on to their assets and this occurrence is called the 'lock-in effect'. This is mainly because there is a lot of unfairness surrounding the capital gains tax. One of the unfair regulations is that the capital gain is not indexed for inflation. This means that the seller must pay for the real gain of the asset and also any deceptive gain that might be attributed to the inflation of the sold asset.

Another bias is that the taxpayer is only allowed to deduct a portion of any capital losses they may have received in the business year. To put it bluntly - the taxpayer must pay a high tax when he or she makes a beneficial deal but if that deal becomes an injurious they are only allowed a small reprieve. This gross unfairness creates a bias in the tax code against those who like to take risks.

The last point to make in regard to the capital gains tax is that it is a form of double taxation on capital formation. When great profit is made, the profits are taxed twice and thus when individuals or companies break even with the gain income and taxation - that company may end up with zero earnings.

These three reasons are what cause the majority of gains tax taxpayers a lot of trouble. A person could argue that the fairest way to deal with the capital tax in India is for there to be no capital gain tax.

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