A capital gain generally arises when a capital asset is transferred for more than its cost of acquisition, after accounting for eligible expenses and adjustments. Shares, mutual fund units, property, gold and bonds are common examples of capital assets.
The asset type and holding period determine whether the gain is short-term or long-term. This classification affects the tax rate, available threshold and treatment of capital losses.
This article explains the difference between short-term and long-term capital gains, with a focus on mutual fund taxation.
Key Takeaways
- The holding period required for long-term classification depends on the type of capital asset.
- Listed equity shares and equity-oriented mutual fund units generally become long-term after more than 12 months.
- Qualifying short-term gains from listed equity shares and equity-oriented funds are generally taxed at 20%.
- Eligible long-term equity gains exceeding an aggregate annual threshold of ₹1.25 lakh are generally taxed at 12.5%.
- Mutual fund taxation depends on the scheme’s portfolio, acquisition date, holding period and tax classification.
What are short-term and long-term capital gains?
A short-term capital gain, or STCG, arises when an asset is transferred within the holding period prescribed for short-term classification. A long-term capital gain, or LTCG, arises when the asset is transferred after exceeding that period.
For listed equity shares and equity-oriented mutual fund units, a holding period of 12 months or less generally results in STCG. Units held for more than 12 months generally qualify as long-term assets.
Many other capital assets follow a 24-month threshold. Special provisions apply to certain instruments, including specified mutual funds, market-linked debentures and unlisted bonds or debentures.
Holding periods for common capital assets
The following table presents the broad holding-period rules applicable to commonly held assets:
| Capital asset | Short-term classification | Long-term classification |
| Listed equity shares | 12 months or less | More than 12 months |
| Equity-oriented mutual fund units | 12 months or less | More than 12 months |
| Units of listed business trusts | 12 months or less | More than 12 months |
| Other listed securities | Generally 12 months or less | Generally more than 12 months |
| Immovable property | 24 months or less | More than 24 months |
| Unlisted shares | 24 months or less | More than 24 months |
| Gold and several other capital assets | Generally 24 months or less | Generally more than 24 months |
| Specified mutual fund units acquired on or after April 1, 2023 | Deemed short-term irrespective of the holding period | Long-term treatment is generally unavailable |
These are broad rules. The acquisition date and provisions applicable to the particular asset should be checked before calculating the tax liability.
Source: Income-tax Act, 2025, as amended by the Finance Act, 2026, Central Board of Direct Taxes, Government of India.
Difference between long-term and short-term capital gains tax
The main difference between long-term and short-term capital gains is the holding period and the tax treatment that follows from it.
| Basis | Short-term capital gains | Long-term capital gains |
| Classification | Asset is transferred within the applicable short-term holding period | Asset is transferred after exceeding the prescribed holding period |
| Listed equity shares and equity-oriented funds | Generally taxed at 20% when the prescribed securities transaction tax conditions are met | Generally taxed at 12.5% on aggregate eligible gains exceeding ₹1.25 lakh in a financial year |
| Other capital assets | Usually taxed at the applicable slab rate unless a special rate applies | Generally taxed at 12.5%, subject to asset-specific and transitional provisions |
| Indexation | Not available | Generally unavailable under the current 12.5% framework, although limited transitional relief may apply to certain land and building transactions |
| Set-off of losses | Short-term capital losses can generally be set off against both short-term and long-term capital gains | Long-term capital losses can generally be set off only against long-term capital gains |
Applicable surcharge and 4% health and education cess may increase the final tax payable. Tax treatment can also vary according to the taxpayer’s residential status, total income and the nature of the transaction.
Source: Income-tax Act, 2025, as amended by the Finance Act, 2026, Central Board of Direct Taxes, Government of India.
How are capital gains calculated?
The basic calculation is:
Capital gain = Sale consideration – Cost of acquisition – Eligible transfer expenses
Depending on the asset, the calculation may also involve the cost of improvement, grandfathering provisions, deemed consideration or other prescribed adjustments.
Short-term capital gain example
Suppose an investor purchases units of an equity-oriented mutual fund for ₹5 lakh and redeems them eight months later for ₹7 lakh.
- Sale consideration: ₹7 lakh
- Cost of acquisition: ₹5 lakh
- Short-term capital gain: ₹2 lakh
- Tax at 20%: ₹40,000
Surcharge and cess would be additional. The example assumes that the fund and transaction satisfy the conditions for the special equity STCG rate.
The figures shown are for illustrative purpose only.
Long-term capital gain example
Suppose the units are redeemed after more than 12 months and the gain is ₹2 lakh. If the investor has no other eligible long-term equity gains during the financial year:
- Long-term capital gain: ₹2 lakh
- Less aggregate annual threshold: ₹1.25 lakh
- Taxable long-term capital gain: ₹75,000
- Tax at 12.5%: ₹9,375
Surcharge and cess would be additional. The ₹1.25 lakh threshold applies collectively to eligible gains during the financial year, not separately to every investment or transaction.
The figures shown are for illustrative purpose only.
Capital gains tax on mutual funds
The long-term and short-term capital gains tax treatment of a mutual fund depends on its tax classification, portfolio composition, acquisition date and holding period. The scheme’s marketing category alone may not establish how its gains will be taxed.
Equity-oriented mutual funds
Units of an equity-oriented mutual fund held for 12 months or less generally generate STCG. Where the prescribed securities transaction tax conditions are met, the gain is taxed at 20%, plus applicable surcharge and cess.
Units held for more than 12 months generally qualify for LTCG treatment. Eligible aggregate gains exceeding ₹1.25 lakh in a financial year are taxed at 12.5%, plus surcharge and cess.
The ₹1.25 lakh threshold applies collectively to eligible long-term gains covered by the relevant equity taxation provision, including qualifying listed equity shares and equity-oriented mutual fund units.
Specified mutual funds
Gains from units of a specified mutual fund acquired on or after April 1, 2023, are generally deemed to arise from a short-term capital asset, irrespective of the holding period. Such gains are generally taxed at the investor’s applicable slab rate.
For the financial year beginning April 1, 2025, the definition broadly covers:
- A mutual fund that invests more than 65% of its total proceeds in debt and money-market instruments.
- A fund that invests 65% or more of its total proceeds in units of such a fund.
Not every non-equity or hybrid fund automatically falls within this definition. International funds, gold funds, hybrid funds and other non-equity schemes may follow different rules depending on their portfolios and acquisition dates.
Source: Income-tax Act, 2025, as amended by the Finance Act, 2026, Central Board of Direct Taxes, Government of India.
The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
Why the holding period matters
For equity-oriented funds, crossing the 12-month threshold can move a gain from the 20% STCG framework to the LTCG framework, under which eligible aggregate gains up to ₹1.25 lakh in a financial year are not taxed.
Tax should not be the sole reason for retaining or redeeming an investment. Liquidity requirements, asset allocation, investment objectives, scheme performance and portfolio risk should also inform the decision.
A longer holding period does not assure a gain or favourable tax treatment. Specified mutual fund units acquired on or after April 1, 2023, for example, are generally deemed short-term regardless of how long they are held.
Conclusion
Understanding the capital gain short-term and long-term classification helps investors estimate the post-tax value of a sale or redemption. The applicable rules depend on the asset type, holding period, acquisition date and any special provisions governing the investment.
For mutual funds, labels such as equity, debt, hybrid, gold or international are not always enough to determine the tax treatment. Investors should check the scheme’s tax classification and the prevailing provisions before redeeming units.
Are capital gains taxable in India?
Capital gains are generally taxable unless a specific exemption or exclusion applies. The rate depends on the asset, holding period and relevant tax provisions.
How is short-term capital gains tax calculated?
Calculate the gain by deducting the cost of acquisition and eligible transfer expenses from the sale consideration. Qualifying STCG from listed equity shares and equity-oriented mutual funds is generally taxed at 20%. Many other short-term gains are taxed at the applicable slab rate.
Are mutual funds and listed shares taxed in the same way?
Equity-oriented mutual funds and listed equity shares have broadly similar STCG and LTCG rates when the prescribed conditions are satisfied. Other mutual funds may follow different rules based on portfolio composition and acquisition date.
Can holding an investment longer reduce capital gains tax?
A longer holding period may allow an asset to qualify for LTCG treatment, but this depends on the asset. Specified mutual fund units acquired on or after April 1, 2023, are generally deemed short-term irrespective of the holding period.
What is the holding period for capital gains on property?
Immovable property is generally considered a long-term capital asset when held for more than 24 months. Property held for 24 months or less is generally treated as a short-term capital asset.
Is any threshold available for long-term capital gains from equity investments?
Eligible aggregate LTCG from listed equity shares, equity-oriented mutual funds and units of business trusts is taxed at 12.5% only to the extent that it exceeds ₹1.25 lakh in a financial year, subject to the prescribed conditions.
Can capital losses be carried forward?
An eligible capital loss that cannot be fully set off in the same year may generally be carried forward for up to eight assessment years, provided the income-tax return is filed within the prescribed time. Short-term capital losses may generally be set off against either type of capital gain, while long-term capital losses may be set off only against LTCG.
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