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. What are short-term capital gains?
2. What are long-term capital gains?
3. Difference between long-term and short-term capital gains tax
4. Significance of holding period

What are 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 several assets, this duration refers to a holding period of less than 36 months. In the context of equity mutual funds, however, this period is 12 months.

What are long-term capital gains?

Long-term capital gains apply 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.

Read Also: Long Term Capital Gain (LTCG) Tax on Mutual Funds

Difference between long-term and short-term capital gains tax

STCG and LTCG are taxed as per rates specified by the income tax department in the Income Tax Act. Here’s a look at the differences between the two categories:

Short-term capital gains tax on mutual funds: STCG tax is levied on capital gains from equity and equity-oriented fund units held for under a year. The STCG tax rate is 15% (plus applicable surcharges and 4% cess). However, investors only need to pay capital gains tax when they redeem mutual fund units, and the tax liability depends on the redemption amount. As long as you stay invested, you are not taxed.

In the case of debt and debt-oriented funds, tax is calculated based on the individual’s income tax slab rate.

Long-term capital gains tax on mutual funds: The LTCG rate for equity and equity-oriented funds is 10% (plus applicable surcharges and 4% cess) if the capital gains are more than Rs.1 lakh in a financial year. Gains of up to Rs. 1 lakh are tax-exempt. Again, only capital gains of redeemed units are considered for taxation purposes. In the case of debt and debt-oriented funds, tax is calculated based on the individual’s income tax slab rate.

Capital Gains Tax on Mutual Funds

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 exemptions, 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.

Are capital gains taxable in India?
Yes, capital gains are taxable in India. A capital gain is the profit or gains realised from the sale of a capital asset. This can include gold, real estate, vehicles, shares, and mutual funds. Capital gains are categorised as short-term and long-term, each with different tax rates and holding periods.

How to calculate short-term capital gains tax?
A short-term capital gain is the difference between the sales price and purchase price of an asset. This difference is taxed at 15% for equities and equity-oriented mutual funds and as per the individual’s income tax slab for other assets.

What is the difference between the holding period of financial assets in STCG and LTCG?
The holding period is as follows:
For equities and equity-oriented mutual funds: Less than 12 months for STCG tax and more than 12 months for LTCG tax.
For real estate: Less than 24 months for STCG tax and more than 24 months for LTCG.
For other assets: Less than 36 months for STCG tax and more than 36 months for LTCG.

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