Capital gains are profits earned from the sale or transfer of a capital asset such as shares, mutual funds, property, bonds or other investments. For income tax purposes in India, capital gains are broadly classified as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
The classification is important because the applicable tax treatment can differ depending on the type of asset, how long it was held and the date of transfer.
Understanding the difference between short-term and long-term capital gains can help investors estimate their tax liability and plan their investments more effectively.
What Are Capital Gains?
A capital gain arises when a capital asset is transferred for a price higher than its applicable cost.
A simplified formula is:
Capital Gain = Sale Consideration − Cost of Acquisition − Eligible Transfer Expenses
The actual tax calculation can be more detailed depending on the asset and applicable provisions.
For example, if an investment was purchased for ₹2 lakh and later sold for ₹3 lakh, the basic gain is ₹1 lakh before considering eligible expenses and applicable tax rules.
Capital gains are generally classified as either short-term or long-term.
What Is Short-Term Capital Gain?
A Short-Term Capital Gain (STCG) is a gain from the transfer of a capital asset that is classified as short-term under the applicable income tax rules.
The holding period required for short-term classification depends on the type of asset.
For example, listed equity shares and certain equity-oriented investments generally use a 12-month holding period for determining whether the gain is short-term or long-term.
Other assets can have different holding-period rules.
Therefore, you should not apply one holding-period rule to every investment.
What Is Long-Term Capital Gain?
A Long-Term Capital Gain (LTCG) arises when a capital asset is held for the period required for it to qualify as a long-term capital asset and is subsequently transferred.
The holding period also depends on the asset.
For many listed securities, the relevant threshold is generally more than 12 months, while certain other assets may have a longer holding-period requirement.
The classification determines which tax provisions apply to the gain.
Short-Term vs Long-Term Capital Gains
| Feature | Short-Term Capital Gain | Long-Term Capital Gain |
| Meaning | Gain from a short-term capital asset | Gain from a long-term capital asset |
| Holding period | Depends on asset type | Depends on asset type |
| Tax rate | Depends on asset and applicable section | Depends on asset and applicable section |
| Calculation | Based on applicable short-term rules | Based on applicable long-term rules |
| Common example | Sale of listed shares within the short-term period | Sale of listed shares after the long-term threshold |
The most important point is that STCG and LTCG are not taxed at one universal rate. The applicable rate depends on the asset, date of transfer and other conditions.
Tax on Short-Term Capital Gains From Equity
For eligible transactions involving listed equity shares, equity-oriented mutual funds and business trusts, a special STCG tax rate applies when the relevant securities transaction tax (STT) conditions are satisfied.
For transfers covered by the post-23 July 2024 rules, the applicable special rate is generally 20%, subject to the conditions of the law.
Other short-term capital gains may be taxed differently, including at applicable slab rates depending on the asset and circumstances.
Therefore, an investor should first identify the asset and applicable provision before calculating STCG tax.
Tax on Long-Term Capital Gains From Equity
For eligible listed equity shares, equity-oriented mutual funds and business trusts covered by the relevant provisions, the LTCG tax rate is generally 12.5% for transfers covered by the current rules.
There is also an annual exemption threshold for specified eligible long-term capital gains.
For eligible transfers on or after 23 July 2024, the aggregate LTCG covered by the relevant provision is generally exempt up to ₹1.25 lakh in a financial year, subject to applicable conditions. Gains above the threshold are generally taxed at 12.5%.
The rules can differ for other types of assets.
How Is Capital Gain Calculated?
A basic capital-gain calculation can be illustrated with an example.
Suppose an investor:
- Purchases shares for ₹2,00,000
- Sells them for ₹3,00,000
- Has eligible transfer expenses of ₹5,000
The basic gain would be:
₹3,00,000 − ₹2,00,000 − ₹5,000 = ₹95,000
Whether this gain is STCG or LTCG depends on the holding period and the nature of the shares.
The applicable tax then depends on the relevant capital-gains provision.
STCG vs LTCG: Example
Consider two investors who purchase eligible listed equity shares for ₹2 lakh.
Investor A
The shares are sold before crossing the applicable long-term holding period.
The resulting gain is treated as STCG, assuming the relevant conditions are met.
Investor B
The shares are sold after crossing the applicable long-term holding period.
The gain can qualify as LTCG, subject to the applicable conditions.
Thus, even if the purchase price and sale price are identical, the tax treatment can differ because of the holding period.
Capital Gains on Property
Real estate has separate holding-period rules and tax provisions.
For transfers under the current framework, immovable property generally qualifies as a long-term capital asset when held for more than 24 months.
Short-term gains on property and long-term gains on property are subject to different tax treatment.
The calculation may also involve stamp-duty value, transfer expenses, cost of acquisition and other applicable provisions.
Therefore, property gains should not be calculated using the same rules as listed equity.
Capital Gains on Mutual Funds
The tax treatment of mutual fund gains depends on the type of mutual fund and the applicable classification.
For example, equity-oriented mutual funds meeting the prescribed conditions generally follow the special equity capital-gains provisions.
Debt-oriented and other mutual funds can have different tax treatment.
Investors should therefore identify the exact mutual fund category before determining whether a gain is short-term or long-term and which tax rate applies.
What Is the Difference Between Holding Period and Tax Rate?
The holding period determines whether the asset is short-term or long-term, while the nature of the asset and applicable tax provisions determine how the resulting gain is taxed.
This distinction is important because a longer holding period does not automatically mean that every investment receives the same LTCG rate.
For example, equity shares, property and different types of funds can have different rules.
Can Capital Losses Be Adjusted Against Capital Gains?
Capital losses can potentially be set off against eligible capital gains, subject to the rules governing short-term and long-term capital losses.
Broadly:
- Short-term capital loss can generally be set off against both STCG and LTCG, subject to applicable conditions.
- Long-term capital loss can generally be set off against LTCG, subject to applicable conditions.
Eligible unabsorbed capital losses can also be carried forward for the permitted period when the relevant return-filing conditions are satisfied.
STCG vs LTCG: Which One Is Better for Tax?
There is no universal answer because tax treatment depends on the asset, holding period, transaction date and applicable provisions.
An investment should not be bought or sold solely on the assumption that it will receive a particular capital-gains tax rate.
Investors should first understand the investment’s risk, objectives, costs and applicable tax treatment.
Common Mistakes While Calculating Capital Gains
Investors should avoid these common mistakes:
- Using the same holding period for every asset.
- Applying the equity tax rate to property or other assets.
- Ignoring the date of transfer.
- Not considering eligible transfer expenses.
- Failing to account for capital losses.
- Assuming every mutual fund has the same tax treatment.
- Ignoring the applicable exemption threshold.
- Reporting capital gains incorrectly in the ITR.
Maintaining purchase statements, sale statements, contract notes and other transaction records can make tax reporting easier.
Frequently Asked Questions
What is the main difference between STCG and LTCG?
STCG arises from the transfer of a short-term capital asset, while LTCG arises from the transfer of a long-term capital asset. The required holding period depends on the type of asset.
Is LTCG always taxed at 12.5%?
No. The 12.5% rate applies to specified categories of long-term capital gains under the applicable provisions. Different assets can have different tax treatment.
Is STCG always taxed at 20%?
No. The 20% special rate applies to specified eligible equity-related transactions under the applicable conditions. Other STCG can have different tax treatment.
How long do I need to hold shares for LTCG?
For eligible listed equity shares, the long-term threshold is generally more than 12 months. Specific conditions and the applicable rules should be checked for the transaction.
Can capital losses reduce my tax liability?
Eligible capital losses can generally be set off against specified capital gains, subject to the applicable rules. Long-term and short-term losses have different set-off provisions.
Conclusion
Short-Term Capital Gains and Long-Term Capital Gains are two important categories under India’s capital-gains tax system. The key difference is the classification of the asset based on its applicable holding period.
However, the tax rate cannot be determined from the holding period alone. Investors should consider the type of asset, date of transfer, applicable exemptions, transaction conditions and capital-loss rules before calculating their final tax liability.