Long And Short-term Capital Gains Tax Rates: What You Need To Know

• The tax rate on your investment profits depends on how long you hold an asset

• Short-term capital gains (STCG) apply to assets held for a shorter period (less than 12 months for equities, less than 24 or 36 months for other assets), while long-term capital gains (LTCG) apply to assets held for longer durations

• STCG on listed equities and equity-oriented funds is taxed at a flat 15%, while STCG on other assets is taxed as per your income tax slab

• LTCG on equities and equity-oriented funds is taxed at 10% on gains exceeding ₹1 lakh without indexation benefits

• LTCG on other assets is taxed at 20% with indexation, allowing inflation adjustments to reduce taxable gains

Any proceeds that you receive from the sale of a capital asset is considered as a capital gain and is subject to taxes based on the nature of the capital gain. Here we look into the difference between long-term and short-term capital gains, the way they are treated and strategies to save on taxes.

When selling an investment, the tax you pay on your profits depends largely on how long you held the asset. The distinction between long-term and short-term capital gains is crucial, as each is taxed at different rates. Check out their differences below:

If held for less than a year, listed securities and equity-oriented funds are regarded as short-term. This includes mutual funds that have at least 65% of their assets in stocks and stocks that are listed on reputable stock exchanges. 

Short-term assets are defined as those with a holding period of 24 months or less, such as debt mutual funds, gold, real estate, etc.

If the securities transaction tax (STT) is paid at the time of sale, short-term capital gains on listed equity shares, equity-oriented funds, and business trusts are subject to a flat 15% tax rate. From July 23rd, 2024, the tax on STCG has increased on certain financial assets from 15% to 20%.

If held for more than a year, listed securities and equity-oriented funds are regarded as long-term investments. The holding duration for assets such as debt mutual funds, gold, real estate, etc. must be longer than 24 months in order to qualify as long-term.

If STT has been paid at the time of sale, long-term capital gains on equity shares, equity-oriented funds, and business trusts are subject to 10% tax on gains over ₹1 lakh in a fiscal year. These gains do not benefit from indexation or inflation adjustment. 

With the advantage of indexation, long-term capital gains on other assets are subject to 20% taxation. This lowers the taxable gain by allowing you to account for inflation in the asset's acquisition price. The tax rate on these gains is 12.5% as of July 23rd, 2024.

Various exemptions, deductions, and reinvestment options are available under tax laws to help investors legally reduce their LTCG tax. Here are the strategies you can utilise to minimise your tax burden:

• Section 54

When you sell a residential property, this section is applicable. You can reinvest the capital gains in another residential property to reduce your capital gains tax. You have two years from the date of sale to buy the new property or build a new property within three years. 

You may be eligible for a capital gains tax exemption if you fulfill these requirements. For instance, you can avoid paying tax on a profit of ₹50 lakh from the sale of a house if you purchase another home within the allotted time.

• Section 54F

When you sell any long-term capital asset—like shares, bonds, or land—that isn't a residential property, this section is applicable. You must invest all of the sale proceeds—not just the capital gains—in a residential property in order to qualify for an exemption. 

Either the construction must be finished within three years of the sale date or the purchase must be made within two years. For example, to claim the exemption, you must spend the full ₹1 crore in residential real estate if you sell a piece of land for ₹1 crore and the capital gain is ₹40 lakh.

• Section 54EC

Any sale of a long-term capital asset is covered under this section. If you invest your capital gains (up to ₹50 lakh) in certain bonds issued by the Rural Electrification Corporation (REC) or the National Highways Authority of India (NHAI), you can avoid paying capital gains tax. 

These bonds have a five-year lock-in term and the investment needs to be made within six months following the sale. For instance, you can claim the exemption by investing ₹30 lakh in REC or NHAI bonds if you generate a capital gain from the sale of a property.

• Capital Gains Account Scheme (CGAS)

If you are unable to reinvest the capital gains in the designated assets prior to the deadline for filing your income tax return, this plan may be helpful. Before the deadline for filing your return, you can deposit the capital gains into a Capital Gains Account Scheme (CGAS). 

This offers you more time to reinvest the money and enables you to claim the exemption. For instance, you can put the proceeds from the sale of a property in March into a CGAS account and use them to subsequently purchase or build a property if you are unable to reinvest the gains before the end of the fiscal year.

• Use the Indexation

Long-term capital gains on assets other than listed securities and equity-oriented funds are eligible for this benefit. By using indexation, you can lower the taxable gain by adjusting the asset's acquisition price for inflation. 

For instance, you can use the Cost Inflation Index (CII) to modify the purchase price to account for inflation if you purchased a piece of land for ₹10 lakh ten years ago and sold it for ₹50 lakh today. This lowers the taxable gain and the resulting tax bill.

Short-term capital gains (STCG) are typically taxed at higher rates, often aligned with your income tax slab or a fixed percentage, depending on the type of asset. However, with smart tax-saving strategies, you can minimise your STCG tax burden.

You can use your short-term capital profits to offset any short-term capital losses you may have incurred from other investments. Your total taxable income and consequent tax liability are decreased as a result. 

For instance, you can deduct the short-term loss of ₹2 lakh from another investment from the short-term gain of ₹5 lakh from the sale of shares. This will lower your taxable gain to ₹3 lakh.

To be eligible for the reduced long-term capital gains tax rates, try to hold assets for longer than the short-term holding period. Your tax liability may be greatly decreased as a result. 

For instance, instead of the short-term rate of 15-20%, the profits from holding shares for more than 12 months will be taxed at 10% (for gains exceeding ₹1 lakh).

Think about making investments in tax-saving products such as mutual funds or Equity-Linked Savings Schemes (ELSS). These investments can lower your total tax obligation through Section 80C deductions, even if they might not immediately offset short-term capital gains. For instance, investment in ELSS can lower your taxable income by up to ₹1.5 lakh under Section 80C.

Engage with a tax professional to explore other tax-saving opportunities and ensure compliance with the latest tax laws and regulations. They can provide personalised advice based on your financial situation, helping you optimise your long-term and short-term capital gain tax savings.

Understanding the difference between long-term and short-term capital gains, strategically planning your investments and utilising the available exemptions and deductions, you can effectively manage and reduce your capital gains tax liability.

The main factor for differentiation between STCG and LTCG on real estate is the holding period. You must sell the STCG within 1 year of purchase whereas you must hold the asset for more than 1 year in LTCG. STCG is taxed at around 15% for equity whereas LTCG is taxed for around 10% for equity gains above ₹1 lakh and 20% for more than that. 

Short-Term Capital Gains are taxed at around 15% for equity whereas Long-Term Capital Gains are taxed for around 10% for equity gains above ₹1 lakh and 20% for more than that. 

The holding period for long-term capital gains tax is 1 year or more for equity-oriented funds and 3 years or more for other than equity oriented funds. 

Yes. Long-term capital gains of up to ₹1.25 lakh per year are exempt from capital gains taxation. 

To minimise your short-term capital gains tax liability, you can hold investments longer, use tax-advantage accounts, plan your sales, and offset gains with losses. 

Immovable assets such as land or house, movable assets such as gold, silver and paintings listed and unlisted equity shares and equity-oriented mutual fund units are subject to short-term or long-term capital gains tax. 

LTCG taxes are reduced with specific strategies such as tax-loss harvesting, investing in tax-advantaged retirement accounts and tax-efficient investment strategies. You can benefit from these tax benefits by using the right strategy.

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