When you sell an asset whether it’s land, stocks, gold, or even crypto, the profit you make is known as a capital gain. Like any other income, this gain is subject to tax. But not all capital gains are treated the same. Depending on how long you’ve held the asset before selling it, the gain is classified either as a short-term or long-term capital gain. And the difference between short term and long term capital gain doesn’t just lie in the holding period, it impacts how much tax you pay, the exemptions available, and the timing of your decisions.
Let’s take a deeper look into what defines short-term and long-term capital gain, how they’re taxed, and why it matters to every investor and trader.
What is Capital Gains Tax?
Capital gains tax in India is the tax levied on profits made from selling capital assets. These can include real estate, stocks, bonds, mutual funds, gold, vehicles, and even digital assets like cryptocurrencies. According to the Income Tax Act, such gains are taxable in the year in which the asset is transferred.
Capital gains are classified into two categories: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The classification is based on how long you held the asset before selling it, and it directly affects the tax rate applicable.
Understanding Short-Term Capital Gain (STCG)
Short-term capital gain arises when a capital asset is sold within a relatively short period of time. The definition of “short-term” depends on the type of asset. For properties, gold, or unlisted shares, the asset must be sold within 24 months of acquisition. For listed equity shares, mutual funds, and certain bonds, the threshold is just 12 months.
The tax treatment of STCG depends on the nature of the asset. For most short-term gains, the profits are added to your total income and taxed as per your income tax slab. However, there are exceptions. Short-term gains from listed equity shares, equity-oriented mutual funds, and units of business trusts fall under section 111A. Until 22nd July 2024, these were taxed at a flat rate of 15%. But from 23rd July 2024 onwards, they are taxed at a flat 20%, marking a significant shift in tax liability for active market participants.
What is Long-Term Capital Gain (LTCG)?
Long-term capital gain arises when capital assets are sold after a longer holding period. For assets like real estate or unlisted shares, this period is more than 24 months. For listed equity shares, mutual funds, and similar instruments, the period is more than 12 months.
Read more: What is long-term capital gains tax?
Understanding Long-Term Capital Gain (LTCG)
Budget 2024 introduced a unified tax rate for all long-term capital gains at 12.5%. This new rate applies across all categories of assets, simplifying the tax regime but also removing a major benefit - indexation. Earlier, indexation allowed taxpayers to adjust the purchase price of long-term assets to inflation, which lowered their tax liability. With that now removed, LTCG is taxed at a flat rate of 12.5%.
However, one benefit still remains. For listed equity shares, mutual funds, and business trusts, the first ₹1.25 lakh of LTCG in a financial year is exempt from tax. Only the amount exceeding this threshold is taxed at the new 12.5% rate.
How STCG and LTCG Differ
Short-term and long-term capital gains differ in several important ways, most notably in terms of the holding period, tax rate, risk, and potential for exemptions.
Short-term gains come from assets held for a shorter duration. These gains are often the result of trading decisions, where the focus is on quick profits rather than long-term value appreciation. The tax on STCG is higher for equity-related instruments now, at 20%, and for other assets, it depends on the individual’s income tax slab. Since the holding period is short, there is generally less market exposure, which also means limited growth potential.
On the other hand, long-term capital gains are associated with investments held over time. This longer horizon often allows the asset to appreciate more, increasing the overall profit. But it also involves higher risk, especially in illiquid markets like real estate. LTCG is taxed at a flat 12.5%, and certain exemptions are available under Sections 54, 54D, 54EC, 54F, and 54B, which can help reduce the tax burden significantly especially when reinvesting in specified assets like new residential properties or certain bonds.
Calculating Capital Gains After Budget 2024
To calculate long-term capital gains, you begin with the total sale value of the asset. From that, you subtract expenses directly related to the transfer and the original purchase price. You can also reduce any improvement-related costs. Once those deductions are done, apply the available exemptions, and the remaining amount is taxed at 12.5%. Indexation, which used to adjust the purchase cost for inflation, is no longer applicable under the new rules.
For short-term capital gains, the process is similar. You start with the sale value, deduct the original cost of acquisition, any related expenses, and improvements. After adjusting for applicable exemptions under sections like 54B or 54D, the final amount is taxed either at slab rates or at 20% for equity-related instruments, depending on the nature of the asset.
Why This Difference Matters
The distinction between STCG and LTCG is not just about classification—it’s about strategy. Holding on to an asset just a little longer might reduce your tax liability significantly. For instance, if you’ve held mutual fund units for 11 months, waiting one more month before selling could switch your gains from short-term to long-term, triggering a lower tax rate and exemption eligibility.
Similarly, real estate investors need to factor in the 24-month rule. Selling a property even a few days early can make a significant difference in post-tax returns, especially now that indexation has been removed. Timing, therefore, is not just about market conditions but also tax impact.
Final Thoughts
In today’s financial landscape, where investors engage with everything from equities to crypto, understanding the difference between short term and long term capital gain is essential. The STCG vs LTCG distinction shapes your tax liability, defines your investment timeline, and influences how you plan your exits.
With the Budget 2024 changes, both categories have seen tax rate hikes and regulatory shifts. But knowing the rules can help you make smart, tax-efficient decisions. Whether you’re a long-term investor looking for value or a trader chasing momentum, the clarity between STCG and LTCG will guide how you manage your gains and your taxes.
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