[Economy] Capital Goods and Capital Gains: Meaning, Difference Explained

Economy, Economy: Miscellaneous & Outdated articles64 Comments

  1. What is Capital Goods?
  2. Examples of Capital goods?
  3. Why is Capital Goods important?
  4. What is capital gains?

Question from a reader: What is the difference between Capital Goods and Capital Gains?

What is Capital Goods?

  • Capital goods are the tools and machinaries used for producing consumer products.
  • They’re (usually) expensive, and they’re purchased for long-term use.
  • Raw materials are also needed for producing consumer goods (Biscuits, bread etc) but they are not capital goods.
  • Capital goods are also known as producer goods.

Examples of Capital goods?

  • Heavy equipment (such as excavators, forklifts, generators, metal-forming or metal-working machines, vehicles).
boilers, storage tanks, evaporatorsChemical factory
Mixer, grinders, refidgeratorsIce-cream factory
Dumpsters, bulldozers etc big vehiclesConstruction, mining industry.
  • In short, factory equipment are capital goods because they’re used to produce customer goods.
  • But the equipment used in an office= not capital goods for example stapler, paper shredder, pen-holder, water-cooler table, chair etc.
  • Similarly, specialized air-conditioners installed in drug/ ice-cream factories to maintain uniform temperature during production= capital goods.
  • But air-conditioners installed in that factory owner’s cabin=not capitals goods.

Why is Capital Goods important?

  • If Capital goods are expensive, then companies cannot buy them=low production= low GDP.
  • If they buy expensive capital goods, they’ll keep final product’s MRP high to keep the profit margin same.
  • Hence, Government gives tax reliefs  on purchase/import of Capital goods by businessmen.
  • When you want to import Capital goods from a foreign country (e.g. USA ), you’ll need pay them in their own currency (dollars)?
  • So where to arrange for the dollars? Recall the FCNR account article Click ME

What is capital gains?

  • Capital gains= profit made by selling your capital assets.
  • When you make profit by selling your capital assets, you’ve to pay tax to the Government on that profit. That is known as Capital Gains Tax. (CGT)
  • Examples of Capital Assets are
  1. Land (but not the agricultural land)
  2. Building Factory Plant and machinery. (except raw-material, or finished products) So when you sell capital goods discussed above, and make profit, then you’ll have to pay capital gains tax (CGT).
  3. Shares, debentures, mutual funds etc.
  4. jewelry, paintings, sculptures and other Archaeological collections. (from 2008 onward)
  • Capital gains tax are of two types: short term and long term. (depending on how long you kept the asset before selling it.)
  • Capital gains tax is a direct tax. (because direct tax=charged on your income and property).
  • For more on Capital Gains tax, check Vodafone Case article click me).

Mock Qs

Q1. Which of the following is correct

  1. Capital Gains tax, Custom duty are examples of Direct tax
  2. Agricultural land is exempted from Capital Gains tax.
  1. Only 1
  2. Only 2
  3. Both
  4. none

Q2. Which of the following are not Capital goods?

  1. Wheat stored in a granary
  2. Boiler in a chemical factory
  3. Air-conditioner in a corporate executive’s office
  1. Only 2
  2. Only 1 and 2
  3. Only 1 and 3
  4. Only 2 and 3

So far 64 Comments posted

  1. Vineeth V

    Hi Mrunal,

    Can you please elaborate about “Direct cash Transfer” scheme. Many arguments are there for and against this scheme. Also, please explain about “Multiplier effect”, since I am from engineering background. Thanks.

  2. gaurav

    @mrunal=Hey plz answer the ques. That came in csat 2012 bout capital gain…..it includes painting as capital gain…

  3. Shiva Ram

    Hey Mrunal,
    I have a doubt. So if I am selling my stock over a short term or long term then I am gaining from the transaction. But I dont have to pay for the gain I made in making the buck as I am selling it? But I have to pay tax on the stocks I bought(be it short term or long term)?

    1. Manish

      Friend, I suppose Income Tax Department can only keep a check on the stocks bought to levy tax on, the profits you made out of them, are not in direct vigilance…mrunal sir please correct me and clarify..

  4. vivekanand


    1. Shekhar Mishra

      PPP—in Post Office . PF( may call it CPF ) —-for private and PSU’s ( PSUs and some large private companies may run their own PF after getting approval from Income Tax dept. and CPF commissioner ) . GPF —for government employees ( for State government employees to State government ). Actually they do cut your GPF …you never get your pay slip !

  5. Yashpal

    Q. What is the difference between Capital Goods and Capital Gains?

    Capital gain is a profit that results from selling/disposition of a capital assets/goods. While capital goods are goods used as means of production. Capital goods are generally man-made. [Wiki]

      1. kris

        actually wheat also useful for making another product (like bread)
        so,we not consider it as a capital good?

  6. Anurag Dixit

    The Goods and Services Tax (GST) is a value added tax to be implemented in India, [1] the decision on which is pending.[2] It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services with few tax exemption.
    India is a federal republic, and the GST will thus be implemented concurrently by the central and state governments as the Central GST and the State GST respectively.[3] Exports will be zero-rated and imports will be levied the same taxes as domestic goods and services adhering to the destination principle.

  7. Dinesh Jaan

    From April 2000 to Aug 2012. INdia’s FDI INFLOWS STATEMENT:
    1.MAURITIUS 303,261 37.26%
    2.SINGAPORE 82,866 10.12%
    3.U.K 77,693 9.52%
    4.JAPAN 64,297 7.53%
    5.U.S.A 49,126 6.03%

    Etc……. Mrunal. Can you make this clear with an article?
    This may help in GS -2 for all UPSC ASPIRANTS…

    1. Mrunal

      most of that FDI coming from Mauritius (37%) money is round tripping. (Indians bringing their own money back via fake companies to evade tax.)


    would you please suggest me?, how can i prepare for upsc efficiently while working with govt. organisation?

  9. Mayank

    Thanks a lot mrunal bhai for this article.
    Customs duty is an indirect tax. Hence answer to 1 is b
    Boiler in a chemical factory falls under the capital goods, answer is c.

    by the way, APFC ka result kab aa raha hai ??

  10. Hafsa

    Hello Sir,

    Thank you for the article.

    Kindly write on ‘Banking Amendment bill’..Its benefits and losses in the market and to the common people.
    What actions need to be taken by Government to implement this bill successfully?

    Thank you once again

  11. Ravi

    in the recommendation of narasimha rao committee for banking reforms in 1991..
    one of the recommendation was “the public sector bank should attain CAPITAL ADEQUACY RATIO of 8% by 1998. so what is the capital adequacy ratio?? n also what is Asset reconstruction company??
    please if you can tell me..

  12. Mohita Agrawal

    Q.1 – (b)
    Q.2 – (c)

    Your articles are indeed a boon for all aspirants. Especially for those who are looking for concept clarity. Excellent and lucid explanations. Thank you Sir.

  13. aditya

    i wrote my fci exam 11/11/2012 the results are out.i applied for general category alone.i am oc.the cut of says 100 for unreserved there were 85 vacancies in UR category(south zone).am very sure tat i wud have got above 100.bt i am 1990 born 2012pass out,my age 22.is it because of my age tat i was pushed out of the list.i checkd the age of ppl who passed,its is mostly greater than mine.is this the reason? i cud not make the cut.

  14. amar shukla

    Mrunal sir very helpful
    I wanna ask u one thing
    just See

    If i work as an Indian citizen In SBI Branch of London Where I submit My income Tax.
    In India or London

  15. Sameer

    Hi Mrunal Sir
    As per the article Agricultural land is excluded from the list of capital asset. Is it universally applied or is a case of India to protect farmers from Capital gains tax.
    Please clarify.

  16. Siri

    MFs, Debentures and shares wont they be taxed under securities transaction tax?
    And how are jewellery etc incl under capital gains? They aren’t factors of production right?

  17. meenakshi

    hi mrunal
    plz give some concept regarding gst. how can u keep such a silence over this topic………plz help

  18. arpitha

    Mrunal sir….plz disable comments section ..they r very distracting..let comments section be put on a space exclusively for its use nd plz..not on d content site..plz understand..

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