Budget 2025 Updates
As per Budget 2025, the income tax rebate u/s 87A has been increased to Rs.60,000, making an income up to Rs.12 lakhs as tax-free under the new tax regime. However, this increased rebate is not applicable on special grade incomes such as ‘Capital Gains’.
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.
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 -
| Basis of Comparison |
Short-Term Capital Gain (STCG) |
Long-Term Capital Gain (LTCG) |
| Definition |
Profit earned from the sale of short-term capital assets. |
Profit earned from the sale of long-term capital assets. |
| Holding Period |
- Unlisted shares, land, and buildings held for 24 months or less before transfer. |
- Unlisted shares, land, and buildings held for more than 24 months before transfer. |
|
- Listed securities, zero-coupon bonds, and equity-oriented mutual funds held for less than 12 months. |
- Listed securities, zero-coupon bonds, and equity-oriented mutual funds held for more than 12 months. |
| Market Perspective |
Short-term focus: Traders seek quicker profits over a short duration. |
Long-term focus: Investors aim for higher returns by holding assets for an extended period. |
| Profit Potential |
Typically lower, as the shorter holding period may limit market appreciation. |
Generally higher, as longer holding periods allow assets to grow in value and become more established. |
| Risk Involvement |
Lower risk: Shorter holding period reduces exposure to market volatility. |
Higher risk: Longer holding period increases exposure to uncertainties like market conditions or liquidity issues. |
| Taxability |
- 20% tax under Section 111A (excluding surcharge and cess) for specific assets like equity shares and mutual funds. |
- 12.5% tax on long-term capital gains (excluding cess and surcharge). |
|
- Gains not covered under Section 111A are taxed at normal slab rates. |
- As per Budget 2024, indexation benefits have been removed for long-term gains. |
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).
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.
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:
Short term capital gains = Selling Price of Asset - Cost of Acquisition - Allowable Expenses
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.
Important points to remember:
Holding Period: Remember, STCG applies only to assets held for less than 24 months. Assets held longer become long-term capital assets and are taxed differently.
Securities Transaction Tax (STT): If the asset was traded on an identified stock exchange in India, the Securities Transaction Tax (STT) paid at the time of sale is not deductible from the cost of acquisition. It's considered a separate expense.
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.
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:
LTCG = Selling Price of Asset - Cost of Acquisition (adjusted for indexation, if applicable) - Allowable Expenses
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).
Important points to Remember:
Holding Period: Remember, LTCG applies only to assets held for more than 24 months.
Tax Rates: LTCG tax rates differ based on the asset type:
Equity shares/units of equity-oriented mutual funds: 12.5% without indexation.
Debt instruments, gold, etc.: 20% with indexation (if applicable).
Residential property: 20% (with exemptions or deduction of cost of acquisition and improvement).
Surcharge and Cess: Depending on your total income (including LTCG), you may need to pay additional surcharges and cess on your LTCG.
The applicable surcharge and cess rates depend on your total income slab:
| Income Slab (Total Income including LTCG) |
Surcharge Rate |
Cess Rate |
| Up to Rs. 50 lakhs |
Nil |
4% |
| Rs. 50 lakhs to Rs. 1 crore |
10% |
4% |
| Above Rs. 1 crore |
25% |
4% |
How to Save Tax on Capital Gains Tax?
While there are various exemptions you can claim to save tax on capital gains, Tax2win’s tax experts have curated a list of some amazing tax-saving hacks to help you achieve maximum savings.
Experts Suggest -
Holding Equity Investments for a longer period - If you hold your equity investments for a longer period of time, you can save tax on capital gains. The tax rate on long-term capital gains is lower. Moreover, you can also claim various deductions and exemptions under sections 54 to 54F on long-term capital gains.
Tax loss Harvesting: Selling an old, unprofitable property at a loss and buying a new profitable asset can help you offset the capital gains from profitable trades.
Opting for Dividend Re-investment Scheme: If an individual does not want to take the dividend payout, he/she can invest the dividend amount to purchase additional shares.
Carefully Selecting Mutual Fund - To save maximum tax on capital gains, you need to choose mutual funds with longer durations, higher credit risks, and credit opportunities.
Indexation for Long-term Debt Mutual Funds investment - Indexation is a method of calculating an asset’s cost after accounting for inflation to reduce the overall tax liability.
Don’t know how ot maximize your tax savings on capital gains or find taxes intimidating? Don’t worry! Our tax experts have got you covered. From tax planning to tax filing, our tax experts provide end-to-end tax solutions for your needs. Simply connect with us, tell us your concern and let our CAs handle the rest. Book an Online CA now!
