Capital Gains Tax: Understanding Short-Term and Long-Term Gains

Capital gains tax applies to profits made when you sell a capital asset such as property, stocks, or mutual funds at a higher price than you bought it for. These gains are classified as short-term or long-term depending on how long the asset is held. Knowing the difference helps taxpayers plan better and reduce tax liabilities through exemptions and investment strategies.

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Corporate Income Tax

What Are Capital Gains?

Before diving into short-term and long-term taxation, it’s essential to understand what capital gains mean and which assets are covered.

Definition of Capital Gains

A capital gain is the profit realized when a capital asset is sold for more than its purchase price. The Income Tax Act, 1961 defines it as the difference between the sale consideration and the cost of acquisition or improvement of the asset. Capital gains are considered “income” and are taxable in the year the asset is sold.

Assets Covered Under Capital Gains

Capital assets include land, buildings, securities, mutual funds, jewelry, trademarks, and goodwill. Certain items like personal effects, agricultural land in rural areas, and specific bonds are not considered capital assets, and hence their sale does not attract capital gains tax.

Short-Term Capital Gains (STCG)

Short-term capital gains arise when assets are held for a shorter duration before being sold. They attract higher tax rates compared to long-term gains.

Definition and Holding Period

An asset is considered short-term if it is sold within:

12 months for equity shares or equity mutual funds.
24 months for immovable property (land or building).
36 months for debt mutual funds, gold, and other assets.

Any profit earned on the sale within these holding periods is classified as short-term capital gain.

STCG Tax Rates for FY 2025-26

The STCG tax rate depends on the type of asset:

Equity shares & equity-oriented mutual funds: Taxed at 15% under Section 111A if Securities Transaction Tax (STT) is paid.
Other assets (like property, gold, debt funds): Taxed as per the individual’s income-tax slab rate.

Example: If an investor sells shares within 10 months at a profit of ₹1,00,000, STCG tax of ₹15,000 (plus cess and surcharge) will apply.

Calculation of Short-Term Capital Gains

STCG = Sale Price – (Purchase Price + Transfer Expenses + Cost of Improvement)
For equity investments, brokerage and STT are deducted before computing gains. Tax is then calculated based on applicable rates.

Long-Term Capital Gains (LTCG)

Long-term capital gains arise from the sale of assets held for a longer duration. They are usually taxed at a lower rate to encourage long-term investment.

Definition and Holding Period

An asset is considered long-term if it is held for:

More than 12 months in case of equity shares or equity mutual funds.
More than 24 months for property.
More than 36 months for debt funds, bonds, or other capital assets.

LTCG Tax Rates for FY 2025-26

The LTCG tax rate differs by asset category:

Equity shares & equity mutual funds: 10% on gains exceeding ₹1 lakh (without indexation).
Property, debt mutual funds, and other assets: 20% with indexation benefit.
Listed securities (not shares/mutual funds): 10% without indexation.

Calculation of Long-Term Capital Gains

LTCG = Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
Indexation adjusts the cost of acquisition to account for inflation, reducing taxable gains. The government publishes a Cost Inflation Index (CII) each year to compute this adjustment.

Exemptions and Benefits of LTCG

Taxpayers can claim exemptions under:

Section 54: Reinvestment of sale proceeds from property into another residential property.
Section 54EC: Investment in specified bonds (NHAI, REC) within 6 months.

Section 54F: Reinvestment of proceeds from any long-term asset into residential property.
These exemptions can help reduce or eliminate capital gains tax liability.

Key Differences Between STCG and LTCG

While both relate to profits from the sale of capital assets, their tax treatment, holding periods, and exemptions vary significantly.

Tax Rates Comparison

STCG: 15% for equities and as per slab rates for other assets.
LTCG: 10% or 20% depending on asset type and indexation eligibility.

Holding Period Requirements

Short-term and long-term classifications depend on how long the asset is held. For equity, the cut-off is 12 months; for property, 24 months; and for other assets, 36 months.

Applicability to Different Assets

STCG applies to quick trades or short-term holdings, while LTCG benefits investors holding assets longer. LTCG enjoys lower tax rates and exemptions encouraging long-term investment.

Capital Gains Tax on Mutual Funds and Property

Both mutual funds and real estate investments are common sources of capital gains. Knowing their specific tax implications helps optimize returns.

Equity vs. Debt Mutual Funds

Equity Mutual Funds:
- STCG (≤12 months): 15% tax.
- LTCG (>12 months): 10% on gains exceeding ₹1 lakh.
Debt Mutual Funds:
- STCG: Taxed as per income-tax slab.
- LTCG: 20% with indexation (if held >36 months).

Capital Gains on Property Sales

Profits from selling property within 24 months attract STCG and are taxed as per slab rates. Selling after 24 months leads to LTCG taxed at 20% with indexation. You can claim exemptions under Sections 54, 54EC, and 54F to save tax.

Tax Planning Strategies to Reduce Liability

Invest LTCG proceeds in 54EC bonds within 6 months.
Reinvest in a new residential property to claim Section 54/54F exemption.
Use capital gains accounts scheme (CGAS) to temporarily park proceeds until reinvestment.

Time your asset sale strategically to maximize indexation benefits .

Common Misconceptions About Capital Gains Tax

Many taxpayers misunderstand how capital gains apply to insurance, ULIPs, or reinvestments. Let’s clear up a few myths.

Life Insurance and Capital Gains Tax

Payouts from life insurance policies are not subject to capital gains tax if they meet Section 10(10D) conditions. However, if the premium exceeds specified limits, the maturity proceeds may become taxable under new rules introduced in recent budgets.

ULIPs and Tax Exemption Myths

Earlier, Unit Linked Insurance Plans (ULIPs) were fully exempt from capital gains tax. Now, if annual premiums exceed ₹2.5 lakh (for policies issued after 1 February 2021), the gains are treated as capital gains, taxable under STCG or LTCG depending on the holding period.

Conclusion

Capital gains tax plays a major role in shaping investment decisions . By understanding the distinction between short-term capital gains (STCG) and long-term capital gains (LTCG), investors can plan asset sales strategically and make use of exemptions to lower their liability.

For FY 2025-26, keeping track of STCG tax rate (15%) and LTCG tax rate (10% or 20%) helps in smart portfolio planning. With proper timing, reinvestment, and awareness of exemptions, you can significantly reduce your overall tax burden while staying fully compliant.

Fazeel Zaidi

Chartered Accountant

MRN No.: 469741

City: Prayagraj

I’m Fazeel Zaidi, a Chartered Accountant based in Prayagraj with 8 years of experience. I specialize in GST and Audits, helping businesses stay compliant and audit-ready. With a B.Com background, I focus on practical, clear guidance that simplifies regulations and supports better decision-making.

Frequently Asked Questions

What is the difference between STCG and LTCG?

STCG arises from selling assets within the short-term holding period (12–36 months), while LTCG applies to assets held longer.
How is capital gains tax calculated in India?

Capital gains tax = Sale Price – (Cost of Acquisition + Improvement + Transfer Expenses), adjusted for indexation in case of LTCG.
Are mutual fund gains taxable under STCG/LTCG?

Yes. Equity funds held ≤12 months attract 15% STCG, while those held >12 months attract 10% LTCG on gains over ₹1 lakh.
What exemptions are available under LTCG?

You can claim exemptions under Sections 54, 54EC, and 54F by reinvesting proceeds in property or specified bonds.
How can I plan to reduce capital gains tax liability?

Use exemptions, reinvest proceeds within deadlines, and leverage indexation to reduce taxable gains effectively.

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