Exploring the difference between short-term and long-term capital gains tax

Understanding the nuances of capital gains tax is crucial when you step into the world of investments. The Indian taxation system, like most others worldwide, levies a tax on the profit earned from the sale of assets such as stocks, real estate, or investments. However, the duration for which you hold these assets can significantly impact the tax you owe.

Let's understand the intricacies of short-term and long-term capital gains and how tax is levied on them in India.

• Table of contents

1. Understanding short-term capital gains
2. Understanding long-term capital gains
3. Short-term capital gains tax vs long-term capital gains tax
4. Significance of holding period
5. FAQ

Understanding short-term capital gains

Short-term capital gains are the profit earned from the sale of assets that are held for a short duration. In India, for most assets, (other than an equity-oriented fund), this short duration typically refers to a holding period of less than 36 months.

Understanding long-term capital gains

Long-term capital gains tax, on the other hand, applies to assets held for an extended period. In India, the threshold for classifying gains as long-term typically stands more than 36 months for most assets. For equity funds, the timeframe to qualify for LTCG tax is 12 months.

Short-term capital gains tax vs long-term capital gains tax

• Short-term capital gains tax on mutual funds: You must pay a flat rate of 15% (plus applicable surcharges and 4% cess) as STCG tax on equity and equity-oriented funds. In the case of debt and debt-oriented funds, STCG tax is calculated based on the individual’s income tax slab rate.
• Long-term capital gains tax on mutual funds: In the case of equity and equity-oriented funds, the tax rate on LTCG MF is 10% without indexation (plus applicable surcharges and 4% cess) if the long-term capital gain is more than Rs.1 lakh in a financial year. Any long-term capital gains on mutual funds up to Rs.1 lakh in equity and equity-oriented funds are exempt from tax. In the case of debt and debt-oriented funds, LTCG tax is calculated based on the individual’s income tax slab rate.

Significance of holding period

The holding period is the primary factor that determines whether a capital gain is classified as short-term or long-term. For most assets, (except equity funds) a holding period of fewer than 36 months results in short-term capital gains, while a holding period exceeding this duration leads to long-term capital gains. However, for listed equities and equity-oriented mutual funds, the holding period for long-term status is reduced to just 12 months.

conclusion

While short-term capital gains are subject to higher tax rates based on an individual's income tax slab, long-term capital gains enjoy lower tax rates or even complete exemption, especially in the case of listed equities. It's worth noting that tax laws and rates can change over time, so it's essential to stay updated with the latest regulations and consult with a tax professional when making significant financial decisions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as an endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.