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What is capital fund?
Capital fund is the net amount of assets available to a company after deducting liabilities. It is a measure of the company's financial strength and stability. Capital fund is also known as net worth or shareholders' equity.
How is capital fund calculated?
Capital fund is calculated by subtracting the company's liabilities from its assets. Liabilities include debt, such as loans and bonds, accounts payable as well as accrued expenses. Assets include cash, inventory, property, plant, and equipment.
The following formula is used to calculate capital fund:
Capital fund = Assets - Liabilities
Example:
A company has the following assets and liabilities:
- Assets: ₹100 crore
- Liabilities: ₹50 crore
- The company's capital fund is ₹50 crore.
Importance of capital fund
Capital fund is important for a number of reasons, including:
- It provides a cushion against unexpected losses.
- It allows the company to invest in new opportunities and grow its business.
- It attracts investors and lenders, as it is a sign of the company's financial health.
Taxation of capital fund in India
Capital fund is not taxed directly in India. However, it is indirectly taxed through the taxation of dividends and capital gains.
Dividends
Dividends paid to shareholders are taxed at a flat rate of 15%.
Capital gains
Taxes on capital gains depend on the type of asset sold and the holding period and vary accordingly.
Short-term capital gains (STCG) are taxed at a flat rate of 15% for all asset classes. STCG are capital gains that arise on the sale of an asset held for less than one year.
Long-term capital gains (LTCG) is 10 % on equity shares and equity-oriented mutual funds without indexation benefit. There is a slab tax rate for LTCG on debt mutual funds, with the benefit of indexation.
Indexation is simply a method of adjusting the cost of an asset for inflation. This means that the capital gains tax is calculated on the real capital gain, which is the difference between the sale price of the asset and its indexed cost price.
