Capital gain is the profit you make when selling stocks, property, or gold. But did you know that not all kinds of gains are taxed the same way? The way profit is taxed is mainly determined by how long you have held your assets.
Just how long you hold an asset determines if it’s a short-term or long-term capital gain. With short-term, you have your asset for a shorter period, while long-term means that you hold it for a longer period. Every form of income is taxed at different rates. Knowing this can help you retain more of your earnings. In this blog post, we will explain the difference between long-term and short-term capital gains.
Long Term and Short Term Capital Gains
Property, gold, stocks, bonds, valuable metals, and real estate are all examples of capital assets. The capital gain tax you’ll have to pay is proportional to how long you had the asset before selling it. You are charged based on whether the capital gain is long-term or short-term.
When selling something, remember to consider capital gains taxes. This is especially crucial if you day trade online. To begin with, you have to pay taxes on any income you make. Secondly, contrary to popular belief, capital gains are not always subject to a lower tax rate than other forms of income. Your timeline for holding those assets before the sale determines the outcome.
Assets owned for over a year before being sold bring long-term capital gains. The tax rate on long-term capital gains is determined by a graded income level: 0%, 15%, or 20%. For most people who record long-term capital gains, the tax rate is 15% or less.
Short-term capital gain is treated the same way as other income. Based on your tax level, that rate can go as high as 37%.
Key Differences
You get a short-term capital gain when you sell assets you’ve owned for less than a year. Long-term capital gains usually face a lower tax rate than wages or salaries. However, the tax rate on short-term gains remains unchanged. They tax it the same way as others.
You must pay the tax rate right for your marginal income tax band on short-term gains because they are regular taxable income.
To determine your net capital gains, you need to figure out your adjusted basis in the asset. You paid this amount for the asset, deducting its lost value over time. It also includes any costs you had to pay to sell the asset and the costs of any changes you made. You take on their base if someone gives you something as a gift.
It is almost always less taxing to have a long-term capital gain than a short-term capital gain. By owning assets for longer than a year, you may reduce your capital gains tax due to this taxation differential.
Read More: Long Term Capital Gains (LTCG) tax in India 2024: Exemptions
Long-Term Capital Gains Tax Rates
From July 23, 2024, a flat 12.5% tax rate applies to long-term capital gains (LTCG) irrespective of the asset class. Before this, LTCG on equity mutual funds and listed shares amounted to 12.5% if capital gains exceeded Rs. 1.25 lakh and other assets were being taxed at the rate of 20% with indexation and 10% without indexation.
Short-Term Capital Gains Tax Rates
Short-term capital gains are profits you make from selling assets that are held for a year or less. And the tax rate ranges from 10% to 37%. However, the STCG has been raised from 15% to 20% for listed equities.
You are subject to taxation on your ordinary income at rates that rise in proportion to your income. A short-term capital gain, or at least a portion of it, might be subject to a greater rate of taxation than your normal wages.
Read More: What are capital gains, and why should we talk about it?
Capital Gains and State Taxes
Special Rates and Exceptions
Here is a list of transactions that qualify for capital gains exemption as per the Income Tax Act.
| Capital Gains Exemption | Asset Type | Eligible Assessee | Applicability |
| Section 54 of IT Act | Gains on sale of residential property | Individual or HUF | Gain to be re-invested in purchase or construction of one residential house property in India. Exemption amount is up to Rs. 10 crore |
| Section 54B | Gain on sale or transfer of land for agricultural purposes | Individual or HUF, applicable to LTCG and STCG | Cost of the new asset or long-term capital gain, whichever is lesser |
| Section 54EC | Long-term capital gain arising on transfer of land or building or both | Any person | Gain to be re-invested in purchase of bonds specified under Section 54EC |
| Section 54EE | Long-term capital gain arising on transfer of any capital asset | Any person | Gain to be re-invested in long-term specified assets to be notified by the government to finance startups |
| Section 54F | Long-term capital gain arising on transfer of any asset other than residential house property (with caveat) | Individual/HUF | Net sale consideration to be reinvested in purchase or construction of only one residential property in India. If the cost of the new asset exceeds Rs. 10 crore, only Rs. 10 crore will be considered |
| Section 54G | Long-term or short-term gain from transfer of land, building, plant, or machinery to shift to an industrial undertaking from an urban area to rural area. | Any person | Gain to be reinvested to acquire land, building, plant or machinery in order to shift an industrial undertaking to a rural area. |
Content source: Income Tax Website (The list is not exhaustive)
Benefits of Long-Term Gains
Long-term capital gain has several advantages, including the potential to improve financial security significantly over time.
- Less Volatility: Keeping investments for a long time lessens the effect of short-term changes in the market. According to the data, the chance of negative returns decreases as the spending window increases.
- Emotional Discipline: Investors who take a long-term approach are more likely to stick with their plans and not make hasty decisions in a volatile market. This practice can help things go more smoothly and positively.
- Tax Efficiency: Capital gains held for more than a year are taxed at lower rates than gains held for less than a year.
- Savings on Costs: By selling less often, buyers can cut down on transaction fees and other costs that come with trading, which increases their total profits.
- Compound Growth: Reinvesting earnings facilitates compound growth, which means that returns make more returns over time, making the investment much more valuable.
The Bottom Line
A long-term capital gain often has a lower tax rate than a short-term gain from the sale of the same asset. Most taxpayers do not need to pay the highest long-term rate. A tax policy that encourages you to retain assets that are susceptible to capital gains for some time longer than one year.
FAQs
1. Is it better to pay short-term or long-term capital gains?
Paying long-term capital gains tax is usually better than paying short-term gains tax, which is taxed as ordinary income. This is because long-term capital gains tax rates are lower.
2. What is the difference between short-term capital and long-term capital?
Assets held for a year or less generate short-term capital gains, which are subject to regular income tax. When you hold on to an asset for more than a year, you benefit from lower, more favorable rates on long-term capital gains.
3. Is it better to take capital losses as short-term or long-term?
Generally, treating capital losses as short-term is more advantageous. This approach effectively reduces your overall tax burden by offsetting short-term profits, which face higher tax rates than long-term gains.
4. Is LTCG tax-free up to 1 lakh?
Long-term capital gains (LTCG) of up to 1.25 lakh rupees per financial year are not taxed for listed equity shares and equity-oriented mutual funds, according to the Union Budget 2024-25. Earnings exceeding this amount face a 12.5% tax and do not receive any indexation benefits.
