Short-Term vs. Long-Term Capital Gains (2025) – Tax Rules & Exemptions

Understanding Capital Assets and Capital Gains

What is a Capital Asset?

Capital Assets: As per Section 2(14) of the Income Tax Act, 1961, capital assets include any form of property held by an individual, regardless of its association with their business or profession. This category includes different assets such as land and buildings (comprising residential, commercial, and agricultural properties), investments like shares, stocks, bonds, mutual funds, gold, intangible assets like goodwill, copyrights, patents, trademarks, and specific personal assets like jewelry exceeding ₹2 lakhs and artwork.

What are Capital Gains?

Capital Gains: The profit or gain resulting from the transfer of a capital asset falls under the purview of capital gains. This is subject to taxation under the "Capital Gains" section in the income tax return. Capital gains are classified into two categories:

• Short-term capital gains (STCG): These gains arise from the sale of assets held for less than 12 months, and 24 months. The tax is levied at the individual's income slab rate.
  The sale of assets held for more than 12 months, or 24 months. The tax rates vary depending on the type of asset.
• Long-term capital gains: The gains from assets held for more than 12 months, or 24 months, depending on the asset category, are known as long term capital gains. These gains are taxed at 12.5% only if the capital gains during the year exceed Rs.1.25 lakh.

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Short-Term vs. Long-Term Capital Gains: Key Differences

Given below are the main points of difference between long term capital gains and short term capital gains -

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Understanding How Short-Term and Long-Term Capital Gains (STCG and LTCG) are Determined

• Nature of Asset
  Capital Assets: Includes property, stocks, mutual funds, bonds, land, jewelry, etc., owned by an individual or entity. Gains are categorized based on the holding period of these assets.
• Holding Period for Classification
  • Short-Term Capital Gains (STCG):
    • For listed equities and equity-oriented mutual funds: Held ≤ 12 months.
    • For unlisted shares and immovable property (e.g., land, building): Held ≤ 24 months.
    • For other assets (e.g., debt mutual funds, jewelry): Held ≤ 24 months.
  • Long-Term Capital Gains (LTCG):
    • For listed equities and equity-oriented mutual funds: Held > 12 months.
    • For unlisted shares and immovable property: Held > 24 months.
    • For other assets: Held > 24 months.
• Computation of Gains
  Short-Term Capital Gains (STCG):
  • Formula:
    STCG = Sale Price - (Purchase Price + Cost of Improvement + Transfer Expenses)
  • Taxation:
    • Equity/Equity-oriented funds: Taxed at 15% (plus surcharge and cess).
    • Other assets: Taxed as per the individual's income tax slab.
• Long-Term Capital Gains (LTCG):
  • Formula:
    LTCG = Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
  • Taxation:
    • Equity/Equity-oriented funds: Exempt up to ₹1.25 lakh per year, excess taxed at 12.5% (without indexation).
    • Other assets: Taxed at 20% with indexation benefits.
• Indexation for LTCGIndexed Cost: Adjusts the purchase cost to inflation using the Cost Inflation Index (CII) issued annually by the Income Tax Department.
  Formula:
  Indexed Cost = Purchase Price × (CII of Sale Year / CII of Purchase Year)
• Exemptions on LTCG
  Certain exemptions are available if gains are reinvested in specified assets within the prescribed time limits:
  • Section 54: Exemption on LTCG from selling a residential property, if reinvested in another residential property.
  • Section 54F: For capital gains from assets other than a residential property, reinvested in residential property.
  • Section 54EC: For LTCG reinvested in bonds issued by NHAI or REC (within ₹50 lakhs).
• Offsetting Capital Losses
  • Short-term Losses: Can offset STCG or LTCG.
  • Long-term Losses: Can offset only LTCG.

Losses can also be carried forward for up to 8 assessment years.

Note: The benefit of indexation has been removed across all asset classes except those acquired before 23rd July 2024. This amendment was announced by the Central Government in Budget 2024.

For assets acquired before 23rd July 2024, the taxpayer will have the option to choose between a 12.5% tax rate (without indexation) and a 20% tax rate (with indexation).

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Difference Between Short-Term and Long-Term Capital Gains and Assets

The major difference between short-term and long-term capital gains and assets depends on the holding period (the duration an asset is held before being sold) and the subsequent tax treatment:

Holding Period:

For short-term capital assets, the holding period in India is less than 24 months. In contrast, long-term capital assets are those held for more than 24 months in India.

Tax Treatment:

Short-term capital gains (STCG) are subject to taxation at your income slab rate, similar to regular income. This has the potential to push you into a higher tax bracket, significantly impacting your investment returns.

Long-term capital gains (LTCG), on the other hand, enjoy more favorable tax rates, contingent on the type of asset. Long term capital gains are taxed at 12.5% over and above capital gains exceeding Rs.1.25 lakh.

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How to Calculate Short-Term Capital Gain

Calculating short-term capital gains (STCG) involves a relatively simple formula, but understanding the nuances is crucial for accurate tax reporting. Here's a breakdown:
Formula:

Selling Price of Asset: This is the amount you received when you sold the asset. Remember, it should include any brokerage charges or transaction fees paid at the time of sale.

Cost of Acquisition: This is the original price you paid for the asset when you bought it. Include any incidental expenses incurred at the time of purchase, like stamp duty or registration charges.

Allowable Expenses: These are additional expenses you may have incurred during the holding period of the asset, directly related to its sale. Examples include brokerage charges paid for selling the asset, advertising costs to attract buyers and transfer fees.

Note: Always check the updated Cost Inflation Index (CII) table before calculating short term and long term capital gains.

Here are some additional points to keep in mind:

• STCG Tax rate: Short-term capital gains (STCG) are not taxed separately based on income brackets. Instead, they are simply added to your other income and taxed at your regular income slab rate. This means the applicable tax rate for your STCG will depend on your total taxable income for the year.
  For example, if your total income before considering the STCG is Rs. 8 lakhs and you make an STCG of Rs. 2 lakhs, your total taxable income becomes Rs. 10 lakhs. As this falls within the Rs. 10 lakhs to Rs. 20 lakhs income slab, your STCG will be taxed at a rate of 30%.
• Surcharge and Cess: In addition to the income tax rate, you may also need to pay surcharges and cess on your STCG, depending on your income level. Consult the Income Tax Department website for details.
• Exceptions: Some specific types of short-term capital gains may be subject to different tax rates or even exempt from tax altogether. These exemptions are usually related to specific investments or government schemes.

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How to Calculate Long-Term Capital Gain

Calculating long-term capital gains (LTCG) in India involves some key steps and different approaches depending on the asset type. Here's a breakdown:

General Formula:

Where;

Selling Price of Asset: Same as for STCG, including any transaction fees or charges.

Cost of Acquisition: Similar to STCG, but with potential adjustments:

Indexation: Indexation benefits have been removed across all asset classes. However, for assets acquired before 23rd July 2024, taxpayers will have the option to choose between tax rates of 12.5% (without indexation) and 20% (with indexation). Also, the benefit of indexation is only available on long-term capital gains and not on short-term capital gains.

Acquisition expenses: Include any related expenses incurred at purchase, like stamp duty or registration charges.

Allowable Expenses: Same as for STCG, covering expenses directly related to selling the asset (brokerage, advertising, transfer fees).

The applicable surcharge and cess rates depend on your total income slab:

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