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. Capital gains tax on mutual funds
5. Latest tax rates for short-term and long-term capital gains
6. 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

Short-term capital gains tax on mutual funds (STCG)

• Equity funds (≥ 65% equity): Units sold within 12 months are taxed at 20% (plus surcharge & cess) for redemptions made on or after July 23, 2024.
• Debt / non-equity funds (< 65% equity): For units bought on or after April 1, 2023, all gains are treated as STCG and taxed as per the investor’s income tax slab rate.

Long-term capital gains tax on mutual funds (LTCG)

• Equity funds: Units held for more than 12 months—gains up to ₹1.25 lakh per financial year are exempt; gains above this are taxed at 12.5% (plus surcharge & cess).
• Debt / non-equity funds: No LTCG benefit for units bought on or after April 1, 2023; all gains are taxed as STCG per slab rate.

Capital gains tax on mutual funds

Latest tax rates for short-term and long-term capital gains

The mutual fund tax rates as of financial year 2025-’26 are as follows

Short-term capital gains (STCG):

• The rate of STCG on these equity-oriented assets is 20%.
• For debt-oriented fund units purchased after April 1, 2023, all capital gains are deemed to be STCG and are added to your total income and taxed at your applicable income tax slab rates.

Long-term capital gains (LTCG):

• Long-term capital gains from equity funds or stocks are taxed at 12.5%. There is also an exemption threshold of ₹1.25 lakh per financial year. Gains up to this amount are not taxed; only gains above this threshold are subject to 12.5% LTCG.

Note: The above rates do not include applicable surcharge and cess.

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.

Read Also: Budget 2024: Mutual Fund Capital Gains Tax Changes Explained

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.

FAQs:

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.

What are the updated tax rates for short-term and long-term capital gains after Budget 2024?

For listed equity shares and units of equity-oriented funds sold within 12 months, short-term gains (STCG) are taxed at 20%. Long-term capital gains (LTCG) on such assets (held over 12 months) are taxed at 12.5% for gains exceeding ₹1.25 lakh in a financial year. For debt funds, the gains are taxed as per the investor’s regular income-tax slab, irrespective of the holding period.

How is the short-term capital gains tax different from ordinary income tax?

For equity shares/funds, STCG is taxed at a flat 20%, not according to one’s income slab. However, for non-equity assets or other capital assets, short-term gains are taxed by adding them to total income under regular slab rates, just like ordinary income.

Are capital gains from mutual funds and stocks taxed differently?

Tax treatment is similar when the mutual fund is equity-oriented (≥ 65% invested in equity). Equity mutual fund units sold within 12 months attract STCG at 20%, and if held longer than 12 months, LTCG at 12.5% (above ₹1.25 lakh). Non-equity (debt or hybrid debt-oriented) funds follow rules applicable to other assets and are different from the tax structure for stocks.

Can I reduce my capital gains tax by holding investments longer?

Yes, holding equity shares or equity-oriented fund units for more than 12 months may qualify the gains as LTCG, taxed at 12.5% (after ₹1.25 lakh exemption). This is lower than the STCG rate of 20%.

What is the holding period for short-term vs long-term capital gains on real estate?

For immovable assets (property, land, building), the holding period to classify as LTCG is 24 months.

How do surcharges and cess apply to capital gains tax?

In addition to the base tax, applicable surcharge and cess (as per prevailing tax laws) are added to the tax liability.

Is there any exemption available on long-term capital gains tax in India?

Yes, for equity shares and equity-oriented mutual funds, LTCG up to ₹1.25 lakh per financial year is exempt from tax. For gains exceeding that threshold, the 12.5% LTCG tax applies.

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