What is capital gains Long-Term and Short-Term How to Classify Your Income Correctly

When trading or investing, it is important to classify your income according to one of the following categories. Generally speaking, these are:

1. Long term capital gain (LTCG)
2. Short term capital gain (STCG)
3. Speculative business income
4. Non-speculative business income

Let us understand what each of these means.

Long term capital gain (LTCG)

Long-term capital gains (LTCG) refer to the profits earned from the sale or transfer of certain specified assets held for a specific duration. The assets typically include real estate, stocks, mutual funds, and other investments. The duration required to qualify for long-term capital gains varies based on the asset type.

Profits from the sale of assets held for more than the specified holding period are considered long-term capital gains. These gains are subject to different tax rates and treatment compared to short-term capital gains, which are generated from the sale of assets held for a shorter period.

For equity-oriented assets such as listed shares and equity mutual funds, the holding period required for LTCG qualification is more than one year. On the other hand, for non-equity-oriented assets such as real estate, gold, and debt mutual funds, the holding period for LTCG qualification is more than two years.

The applicable tax rate for long-term capital gains on equity-oriented assets is 10% if the gains exceed INR 1 lakh in a financial year. However, for non-equity-oriented assets, the tax rate is 20% after indexation benefit. Indexation accounts for inflation during the holding period and adjusts the asset’s acquisition cost accordingly.

Let’s consider an example to illustrate long-term capital gains in India:

Suppose Mr. Sharma purchased shares of XYZ Company on January 1, 2017, for INR 100 per share. He sold these shares on June 1, 2022, for INR 200 per share. In this case, Mr. Sharma has held the shares for more than one year, satisfying the holding period requirement for equity-oriented assets.

The capital gain per share is INR 200 – INR 100 = INR 100. Since the gains exceed INR 1 lakh, Mr. Sharma is subject to long-term capital gains tax at a rate of 10% on the gains. Thus, he would be liable to pay INR 10 per share as long-term capital gains tax.

Short term capital gain (STCG)

Short-term capital gains (STCG) refer to the profits earned from the sale or transfer of certain specified assets held for a relatively short duration. These assets can include stocks, mutual funds, real estate, and other investments.

Short-term capital gains are generated when the assets are sold or transferred before completing the specified holding period required for long-term capital gains. The holding period for assets to qualify as short-term capital gains varies based on the asset type.

For equity-oriented assets such as listed shares and equity mutual funds, the holding period required for STCG qualification is one year or less. For non-equity-oriented assets such as real estate, gold, and debt mutual funds, the holding period for STCG qualification is two years or less.

Short-term capital gains are subject to different tax rates and treatment compared to long-term capital gains. The tax rates for short-term capital gains are typically based on the individual’s income tax slab, and they are added to the individual’s overall income for tax calculation purposes.

Let’s consider an example to illustrate short-term capital gains in India:

Suppose Ms. Patel purchased shares of ABC Company on January 1, 2022, for INR 200 per share. She sold these shares on June 1, 2022, for INR 250 per share. Since the holding period is less than one year for equity-oriented assets, the gains would be considered short-term capital gains.

The capital gain per share is INR 250 – INR 200 = INR 50. This short-term capital gain would be added to Ms. Patel’s overall income for the financial year and taxed at her applicable income tax slab rate.