Understanding the Difference Between Short-Term and Long-Term Capital Gains in India
Navigating the complexities of capital gains taxation is essential for accurate tax filing and financial planning. The Income Tax Act of India provides detailed guidelines to classify and tax capital gains. Let’s explore the distinctions between short-term and long-term capital gains in detail.
What Are Capital Gains?
Capital gains are the profits earned from selling capital assets, which include:
- Real estate (land, houses, etc.)
- Stocks or mutual funds
- Gold, jewellery, and other valuables
- Bonds or financial instruments
Based on the holding period of these assets, capital gains are categorized into two types:
Short-Term Capital Gains (STCG):
Holding Period:
- Listed Equity Shares, Equity-Oriented Mutual Funds, or Units of Business Trust: Held for less than 12 months.
- Other Assets: Held for less than 24 months.
Taxability:
According to the Finance Act, 2024, effective from July 23, 2024, the tax rates on short-term capital gains have been revised:
- Listed Equity Shares, Equity-Oriented Mutual Funds, or Units of Business Trust:The tax rate has increased from 15% to 20%.
- Other Assets:STCG is added to your total income and taxed according to your income tax slab.
Example:
Raj’s Investments in January 2024:
- Shares:Purchased for Rs. 1,00,000.
- Artwork:Purchased for Rs. 1,50,000.
Sales in August 2024:
- Shares:Sold for Rs. 1,50,000. Since held for less than 12 months, the profit of Rs. 50,000 is taxed at 20%, resulting in a tax of Rs. 10,000.
- Artwork:Sold for Rs. 2,00,000. Held for less than 24 months, the profit of Rs. 50,000 is added to Raj’s total income and taxed at 30%, leading to Rs. 15,000 in tax.
Total Tax on STCG: Rs. 25,000.
Long-Term Capital Gains (LTCG):
Holding Period:
- Equity Shares, Equity-Oriented Mutual Funds, or Units of Business Trust:Held for 12 months or more.
- Other Assets:Held for 24 months or more.
Taxability:
The Finance Act, 2024, introduced significant changes, effective from July 23, 2024:
- Listed Equity Shares, Equity-Oriented Mutual Funds, or Units of Business Trust:
- The exemption limit has increased from Rs. 1 lakh to Rs. 1.25 lakh.
- The tax rate has increased from 10% to 12.5%.
- Other Assets:The tax rate has been reduced from 20% to 12.5%.
Special Provision for Real Estate Owners:
For properties purchased before the amendment date, owners can choose to:
- Pay 20% tax with the benefit of indexation, or
- Pay 12.5% tax without indexation.
Example:
Maya’s Investment Portfolio:
- Equity Shares:Invested Rs. 2,00,000 in January 2022.
- Real Estate:Purchased an apartment for Rs. 50,00,000 in January 2022.
Sales in 2025:
- Equity Shares:Sold in February 2025 for Rs. 3,00,000 after holding for over 36 months.
- Profit: 1,00,000.
- Tax:The gain is exempt since it falls under the Rs. 1.25 lakh exemption limit.
- Real Estate:Sold in March 2025 for Rs. 75,00,000 after more than 36 months.
- Profit: 25,00,000.
- Tax Options:
- 5% without indexation:Tax of Rs. 3,12,500.
- 20% with indexation:Assuming an indexed cost of Rs. 60,00,000, the taxable gain is Rs. 15,00,000, leading to Rs. 3,00,000 in tax.
Maya chooses the second option to leverage the indexation benefit, reducing her tax liability.
Conclusion:
Properly categorizing and reporting your capital gains in your Income Tax Return (ITR) not only ensures compliance but also helps in strategic financial planning. By understanding the tax implications of different assets and holding periods, you can optimize your tax liability.
Staying updated with tax laws and consulting a qualified financial advisor can further aid in accurate reporting and efficient tax management.
Disclaimer:
The views expressed in this article are personal to the author and are intended for educational purposes only. They do not constitute financial advice or product recommendations.
