Difference Between Long-Term Capital Gains Tax And Short-Term Capital Gains Tax

  • Blog|Income Tax|
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  • By Taxmann
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  • Last Updated on 24 May, 2021

Capital Gains Tax: 

Capital gain is the profit earned on the sale of capital assets such as real estate, mutual funds, bonds, and stocks. Those owning the assets and earning gains from the sale of such capital assets are required to pay tax on gains. , In most cases, the tax rate on capital gains is lower than that on your regular income. The exact tax rate on capital gains is subject to a period of holding of a capital asset which bifurcates the capital asset into long-term and short-term capital asset.   Capital gains earned on long-term capital assets and short-term capital assets are taxed at different rates. Before we delve deep into the differences between short-term and long-term capital gains tax, let us first clarify what these are all about. 

Understanding two types of Capital Gains Tax: 

Capital gains tax can be classified under two heads – short-term and long-term.
Capital gains arising on sale of short-term capital asset is treated as short-term capital gains whereas capital gains arising on sale of long-term capital asset is treated as long-term capital gains.

Short Term Capital Asset: 

If a capital asset is held for a period of 36 months or less preceding the date of its transfer, it will be treated as a short-term capital asset.
However, the period of 36 months has been reduced to 24 months in case of unlisted shares and the immovable property being land, building, and house property.
Further, in the case of listed securities, a unit of the Unit Trust of India, a unit of an equity-oriented fund or a zero-coupon bond, the period of holding of a capital asset shall be taken as 12 months to treat the capital asset as short-term.
Any capital asset other than short-term capital asset is treated as long-term capital asset.
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Learning the difference between short term & Long term Capital Gains:

The investors, who have a lot of patience and pragmatism, are rewarded in accordance with the tax laws. The tax rate that you need to pay on a long-term capital gain is significantly lower than the tax rate on your regular income. On the other hand, the tax rate payable on your short-term gains is as same as the usual tax rate. However, if gain arising on the sale of securities on which securities transaction tax (STT) is paid, the short-term capital gain is taxable at the rate of 15%. 
 
The basic difference between the two types of capital gains tax makes it clear that if you hold an asset for more than prescribed periods, it would benefit you in terms of the payable amount of tax. Therefore, you should take a closer look at the calendar after deciding on selling your income-generating asset. 
 
Even if the holding period for your saleable asset is more than 1 day from the prescribed periods of holding , it will be considered a long-term asset and you will be benefitted from the lower tax rate on the capital gains from the saleable asset. 

Effect of Income on Capital Gains Taxes: 

Capital gains tax is like direct tax (such as income tax). Both are progressive, implying that the impact of capital gains tax is more on the people in the higher income bracket. 
 
The short-term capital gain tax is added to your income and taxed as per the slab rate of the taxpayer except in the case of the sale of listed securities. In case, it is a long-term capital gain, the income is taxed at a 10-20% rate. Sometimes, you are not required to pay even a single penny on your long-term capital gains, depending on your ordinary income. For example, long-term capital gains arising on the sale of listed shares are not taxable if capital gains earned are not more than Rs. 1,00,000.

Conclusion: 

The tax rates on capital gains as explained above hold true in most cases. We do hope that the above-stated clarification has dispelled your doubts about “long-term capital gain tax and short-term capital gain tax”. 

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

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