What Are the Differences between Short Term & Long Term Capital Gains?

nvestments such as cryptocurrencies, stocks, real estate, commodities, etc., are popular as they help people grow their wealth by investing in avenues backed by proper research. Investors are likely to make substantial and consistent returns by investing  money into these passive sources of income from time to time.

Speaking of returns, we often come across terms like capital gains such as short-term and long-term gains. So, what are these, and how do they affect our taxation?

Keep reading to know the differences between short-term and long-term capital gains.

What Are Capital Gains?

Capital gains are the earnings an individual makes after selling their assets. These assets can include equities, mutual funds, debt securities, real estate, commodities, etc. Such assets are called capital assets. When an individual earns profit by selling such assets, such profits are termed as capital gains.

The Income Tax Act of 1961 considers these capital gains taxable and taxes them according to their holding period. A capital gain is eligible for taxation only when the wealth transfer occurs in the previous fiscal year.

Based on their holding periods, we can classify capital gains into two types – short-term  capital gains and long-term gains.

What Are Short Term Capital Gains?

When one sells capital assets before the end of the holding period, they are considered as short-term capital gains. 

Capital gains for movable assets and debt securities are categorised as short-term when one sells them within 3 years. Immovable assets bring short-term capital gains when one sells them in less than 2 years. Additionally, the holding period for equity assets for short-term capital gains is less than 1 year.

In the case of bonds or debt funds, small-term capital gains can be more for individuals belonging to the highest tax bracket. Here, the effective tax rate would be approximately 30%. Their small-term capital gain from selling equity and equity related assets would be 15%.

Formula for calculating Short Term Capital Gains?

The formula to calculate small-term capital gains (STCG) is as follows:

STCG = Sale Consideration – (Summation of cost of acquisition + cost of improvement + transfer)

Here, the sale consideration is the total amount received from selling an asset. The acquisition cost is the purchase price, while the cost of improvement refers to any expenses for making additions and alterations.  Any additional costs connected with selling the item is also taken into account.

What Are Long Term Capital Gains (LTCG)?

Unlike short-term capital gains, when one sells their assets after the end of the holding period, such gains are considered to be long-term capital gains. 

For immovable assets, the holding period must be two years or more to be considered for LTCG. On the contrary, gains from movable assets can become LTCG if sold after 3 years. For financial assets, any gains that occur after selling assets after 1 year are considered as  long-term capital gains.

Formula for calculating Long Term Capital Gains Tax

There are no indexation benefits on long term capital gains tax for equity investments. Only 10% of the non-indexed long-term capital gain is charged as tax.  There is no formula as such to calculate tax on long-term capital gains. 

Key Differences between Short-Term Capital Gains and Long-Term Capital Gains 

Let’s take a look at the key differences between short-term and long-term capital gains in the table below.

Final Words

To conclude, investors should be well aware of their financial scenario and risk appetite while planning any investment. This will help one understand their finances well and aim for the future with an informed decision. This is all about small-term vs long-term capital gains that will help you plan your investment better. 

Frequently Asked Questions (FAQs) .