Definition of Capital Gains
Sometimes, a company can announce a part of the dividend associated specifically with the large dividend, to be a return of capital. In this respect, the return of capital is utilized to lower the basis of the stock devoid of being taxed at the time of distribution. It formulates a larger prospective capital gain, considering that the selling price is higher as compared to the basis. As for example, if anybody purchases shares with a basis of $10 each and receives a $1 special dividend, 55 cents of which will be considered as return of capital, the taxable dividend is 45 cents, the new basis is $9.45 and capital gains tax is to be paid on that 55 cents at the time of selling all the shares later on.
On or after 2008, equities are regarded as long term capital if the holding period refers to one year or more. Long term capital gains from equities are free of tax whether shares are sold via well known stock exchange and Securities Transaction Tax, or STT, is paid on the sale. Presently STT in India varies between 0.017% and 0.125% of total amount collected on sale of securities with a reputed Indian stock exchange like the NSE or BSE. But short term capital gain from equities detained for less than one year, is sold via well known stock exchange and STT paid will not be taken into consideration and it is ratable at a flat rate of 15% along with surcharges, educational cess are imposed.
Several other capital investments (house, buildings, real estate, bank deposits) are defined as long term if the holding period is 3 or surpass it.
If the return of capital would decrease the basis below $0, the return of capital is taxed right away. As for example, if the basis is $2.50 and one gets $4 as a return of capital, the new basis is considered as $0 and one will be indebted capital gain tax on $1.50.