Difference between short-term and long-term capital gains
When you sell a capital asset like your house, investment properties, stocks, debentures, Mutual Funds, etc., the gains arising from the sale are called capital gains. Capital gains are a form of income and, therefore, taxed per the Income Tax Act, 1961. The gains are classified into short and long-term capital gains, depending on the duration of the investment and subsequent redemption. In this article, we talk about the difference between short-term and long-term capital gains.
Any gains arising from the sale of a capital asset held by taxpayers for not more than 12 months or 36 months before the date of its sale are short term capital gains (STCG).
For long term capital gains (LTCG), the taxpayer must hold the capital asset for more than 12 months or 36 months before the date of the sale.
The holding period for Short Term Vs Long Term Capital Gains is a crucial point of comparison. Gains earned from selling shares, ELSS and other mutual funds, debentures and government securities, units of UTI and Zero-Coupon bonds are STCG when held for less than 12 months. If these assets are held for more than 12 months, the gains accrued are LTCG.
The STCG is added to your taxable income and is taxed per your income tax slab. If the gains fall under section 111A, they are taxed at 15%, not including cess.
LTCG on equity shares and units of an equity-oriented fund exceeding INR 1 Lakh are taxed at 10%. For all other asset sales, the gains are taxed at 20%.
Say you bought residential house property in 2020 and sold it in 2020. The capital gain on selling the property was INR 8,00,000. Here, the residential house property is a long-term capital asset, and a long-term capital gains tax of 20% would be levied on INR 8,00,000.
Similarly, you bought Equity Mutual Funds in March 2019 and sold them in April 2020. You earn INR 50,000 as a capital gain. Here, LTCG would be applicable since you sold the mutual fund after 12 months. However, the gains do not exceed INR 1 Lakh; therefore, the LTCG tax would be NIL.
Lastly, if you purchased Debt Mutual Funds in April 2017 and sold them in April 2020, earning INR 45,000 in capital gains, you would attract STCG tax per your income tax slab rate. If you sell the funds after April 2020, you will attract an LTCG of 20%.
Whether you earn short term vs long term capital gains will depend on the investment holding period. Either way, taxes would be applicable as such gains are categorised as income. Ensure you know your tax implications while filing returns.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.