Holding Period for Capital Gains Tax

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Holding Period for Capital Gains Tax

Capital gains are profits that arise from the sale of a capital asset. The difference between long-term and short-term capital gains is decided based on specific time frames or holding periods for which the assets are held, which vary according to the type of asset involved.

As a taxpayer or an investor, it is essential to understand the concept of capital gains, the holding period for long-term capital gain and short-term capital gain, the differences between tax rates, and the calculation of each type of capital gain.

This guide covers all of them in a simple and precise manner.

What are Capital Gains as per Income Tax?

As defined by the Income Tax Act, capital gains refer to the profit earned from the sale of assets or investments when the selling price exceeds the original purchase price.

These assets can include shares, bonds, property, and other investments. The difference between the sale price and the purchase price is the profit earned by the assesee (person who has invested and is liable to pay tax) in the financial year.

Capital gains are a type of earning and are considered taxable income in India. However, the specific tax liability can vary significantly with factors such as the duration of asset holding and the type of asset influencing the tax rate applied.

Primarily, there are two types of capital gains:

Long-term capital gain and

Short-term capital gain.

Below are the specifications provided for both types.

What is the Holding Period for Capital Gains?

The capital gain period of holding is defined as the duration for which an individual or entity holds an asset before being sold.

The holding period is a critical factor in determining whether a gain is considered long-term or short-term. This period varies based on the type of asset.

Holding Long-term Capital Gain Time Period

12 months for shares and securities listed on a recognised stock exchange, mutual fund units and listed securities like debentures and government securities.

Other assets held for more than 36 months.

Holding period for Short-term Capital Gains

Assets held for 36 months or less

12 months or less for shares and securities listed on a recognised stock exchange, mutual fund units and listed securities like debentures and government securities.

Long Term Vs Short Term Capital Gain

Under the Income Tax Act, capital gains are classified based on the duration of holding the asset before its sale: long-term capital gains (LTCG) and short-term capital gains (STCG).

The distinction between these two types of gains is crucial as it affects the tax rate applied and the tax treatment of the gains.

Criteria Long-Term Capital Gain (LTCG) Short-Term Capital Gain (STCG)
Tax Rate 10% for Equity Mutual Funds and securities 20% for Gold, debt funds, land, flats, real estate and other assets. 15% for equity listed and unlisted shares, business trust units and gold ETFs Income tax slab rates for other assets
Indexation Benefit/ Grandfathering of capital gains Available for certain assets, allowing adjustment of the purchase price for inflation, which can reduce the taxable gain. No Indexation benefit is available for short-term capital gain.
The Formula for Calculating Capital Gain Long-Term Capital Gain = Final Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer) Short Term Capital Gain = Final Sale Price – (Cost of Acquisition + Home Improvement Cost + Cost of Transfer)
Exemption Availability Several exemptions under sections 54 to 54F are available if reinvested under certain conditions. Limited exemptions are available compared to LTCG.

Note: The above tax provisions are applicable to the assessment year 2024-2025. The holding period and tax rates can be altered with further notification of tax rules or with budget announcements.

Calculation of Capital Gains Long-Term and Short-Term

Let’s understand the calculation of both long-term and short-term capital gains with an example:

Description Long-Term Capital Gain Example Short-Term Capital Gain Example
Type of Asset Equity shares Equity shares
Purchase Price of Asset ₹2,00,000 ₹2,00,000
Selling Price of Asset ₹3,50,000 ₹3,00,000
Holding Period More than 12 months Less than 12 months
Capital Gain (Selling Price - Purchase Price) ₹1,50,000 ₹1,00,000
Tax Rate 10% on gains exceeding ₹1 lakh Flat 15%
Taxable Capital Gain ₹50,000 (After ₹1 lakh exemption) ₹1,00,000 (No exemption)

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Understanding short-term and long-term capital gain period of holding and the associated tax implications as per the Income Tax Act is crucial for effective financial planning and tax efficiency.

Moreover, the Income Tax Act offers several avenues for tax saving and exemptions under different sections beyond the scope of capital gains.

Efficient tax planning involves exploring options such as investments under Section 80C, health insurance premiums under Section 80D, and interest on home loans under Section 24, among others. Balancing these investments with capital gains planning can significantly reduce your taxable income, leading to substantial tax savings.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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Can capital loss be set off against capital gains?


Yes, a capital loss can be set off against capital gains. Short-term capital losses can be set off against both short-term and long-term capital gains. However, long-term capital losses can only be set off against long-term capital gains.

Are capital gains from the sale of agricultural land taxable?


Capital gains from the sale of agricultural land in rural areas are not taxable under the Income Tax Act. However, agricultural land in urban areas may be subject to capital gains tax, depending on certain conditions and exemptions applicable.