Differences Between Taxes On Long-Term and Short-Term Capital Gains
Long-term capital gains (LTCG) are profits earned from long-term investments (more than 12 months). Short-term capital gains (STCG) are profits earned from short-term (less than a year) investments. Short and long-term capital gains are taxed as per the Income Tax Regulations. The tax implications on such gains depend on your income and holding period of investments. This post takes you through the key differences between short-term and long-term capital gains tax and why it matters. Read on!
Difference Between Long-Term and Short-Term Capital Gains Tax
| Long-Term Capital Gains Tax | Short-Term Capital Gains Tax |
| Short-term capital gains tax is applicable on equities and equity funds when the shares or units are held for less than a year. This holding period is 24 months and 36 months for house properties and other assets, respectively. | Long-term capital gains tax is applicable on equities and equity funds when the shares or units are held for more than a year. Other long-term capital assets include immovable properties held for over 2 years and debt-oriented funds held for over 3 years. |
| STCG tax, which falls under Section 111A, is subject to a tax rate of 15%, excluding surcharge and cess. This includes assets like stocks and equity funds where STT (Securities Transaction Tax) is applicable. | LTCG tax, which falls under Section 112A, is subject to a tax rate of 10%. Capital gains up to Rs. 1,00,000 is tax exemption. |
| STCG taxes on assets not covered under Section 111A are added to your taxable income and taxed as per the applicable tax slab. | For assets other than equities and equity-oriented funds, LTCG is applicable at a 20% rate with the benefit of indexation. |
Short-Term and Long-Term Capital Gains Taxes for Mutual Funds
Equity funds are those that invest 65% of their assets in equities, while debt funds have a debt exposure in excess of 65%. For hybrid funds, the rules of equity and debt taxation apply depending on the underlying assets.
The following table shows STCG and LTCG tax rates for mutual funds:
| Type of Mutual Funds | STCG Tax | LTCG Tax |
| Equity funds | 15% | Gains above Rs. 1,00,000 are taxed at a rate of 10% |
| Debt funds | As per the tax slab applicable for the investor | 20% (with indexation benefit) |
| Hybrid equity-oriented funds | Flat 15% | Gains above Rs. 1,00,000 taxed at 10% |
| Hybrid debt-oriented funds | As per the investor’s applicable tax slab | 20% (with the benefit of indexation) |
Also Read: Capital Gains Tax: Meaning, Types, Rates And How To Calculate
What are Short Term and Long Term Capital Gains?
When you sell capital assets like stocks, bonds, mutual funds, houses, debentures, etc., you may make a loss/gain. Capital gains are profits from the transfer of such assets. The difference between LTCG and STCG is that the former is applicable for long-term investments while the latter is for short-term investments.
Gains from equity funds and listed shares redeemed after 12 months count as LTCG. When you redeem such shares or units within a year of investment, you get STCG from them. For long-term assets, a holding period of less than 36 months results in STCG, whereas a holding period of more than 3 years results in LTCG.
The following are the holding periods for STCG and LTCG in the case of different investments:
| Capital Asset | Holding Period for STCG | Holding Period for LTCG |
| Listed shares | <12 months | >12 months |
| Unlisted shares | <24 months | >24 months |
| Equity mutual funds | <12 months | >12 months |
| Real estate | <24 months | >24 months |
| Gold | <36 months | >36 months |
| Debt mutual funds | <36 months | >36 months |
| Other assets | <36 months | <36 months |
What Are Long Term and Short Term Capital Assets?
Things like securities, land, buildings, machinery, vehicles, trademarks, patents and leasehold rights are capital assets. Any property having relations/rights with an Indian company and securities defined by the SEBI Act 1992 are classified as capital assets.
Thus, capital assets are properties or securities that you can own and transfer to another person for making capital gains. You can make such a transfer in the form of selling, converting, or exchanging the capital asset. Depending on the holding period of investments, there are certain capital gains taxes applicable on these assets.
Note that there are two types of capital assets, which include the following:
- Short Term Capital Assets: These are assets held for a duration shorter than a predefined holding period.
- Long Term Capital Assets: Assets that you hold for a longer period than the pre-defined holding period are known as long term capital assets.
Also read: Capital Gains Calculator: Process, Uses And Taxation Rates
What Is the Capital Gains Tax?
Capital gains are classed as income under Section 45 of the Income Tax Act and are subject to taxes. It states that profits and gains from the transfer of capital assets in the previous year will be chargeable to income tax. There are two types of capital gains tax applicable- a) long-term capital gains tax and b) short-term capital gains tax.
Such taxes will be applicable when assets are transferred between owners in the year of transfer. They are not applicable for inherited property or gifts due to an absence of sale. However, when a person sells an inherited property, he/she is liable to pay capital gains taxes.
Points To Note
- Under Section 54EC, long-term capital gains from physical gold, gold ETF, gold funds or digital gold, can be tax exempted. In the case of physical gold, added GST of 3% is levied.
- If the gains are earned from real estate, Under Section 54EC, real estate LTCG are tax exempted or if you choose to reinvest in residential property. However, STCG is not tax exempted.
Final Word
There are a number of differences between LTCG and STCG tax, depending on the asset type and holding period of investment. Investors must take a look at the taxation rules with regard to their investments to create a prudent tax-saving strategy.
FAQs on Difference between Long-Term and Short-Term Capital Gains Tax
Ans: SIP investments are taxed differently compared to lump-sum investments. As you make investments in multiple instalments, each instalment is considered a separate investment. LTCG and STCG tax apply separately depending on the type of investments and their holding period. Thus, the taxation rules of SIPs are on a first-in, first-out basis.
Ans: You can calculate LTCG by following these steps:
Step 1: Write down the full value consideration from the sale.
Step 2: Deduct the expenses for transfer, indexed cost of acquisition and the indexed cost of the improvement.
Step 3: Deduct applicable exemptions under Section 54, Section 54B, Section 54EC and Section 54F.
Ans: You have to follow the given steps to calculate STCG:
Step 1: Write down the full value consideration from the transfer of assets.
Step 2: Deduct the expenditure, cost of acquisition and cost of improvement of such assets to get the STCG.
Ans: Indexation involves adjusting the cost of acquisition and improvement of assets against the effects of inflation. Taxpayers can use this benefit to reduce their taxable income so that they do not incur a loss due to an increase in prices over a long time. You can use this benefit only for long-term investments.
Ans: Yes, there are several tax exemptions for capital gains tax. Some of these are as follows:
Section 54: For reinvesting gains from the sale of one residential property to buy another one
Section 54B: On capital gains earned from the transfer of agricultural land
Section 54EC: For sale of house property to buy certain bonds
Section 54F: For sale of long-term assets other than house property
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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