Understanding short-term and long-term capital gains is crucial for complying with tax laws and filing your taxes accurately. The Income Tax Act includes multiple complex regulations to determine the type of capital gains. Let’s dive into this in detail.
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What Are Capital Gains?
Capital gains refer to the profit earned from selling assets such as:
- Real estate (land, houses, etc.)
- Stocks or mutual funds
- Gold, jewellery, and other valuables
- Bonds or financial instruments
Capital gains are classified into two categories based on the holding period:
- Short-Term Capital Gains (STCG):
- Holding Period
- Listed Equity shares or Equity-Oriented Mutual Funds or units of Business Trust: if these assets are held for less than 12 months.
- Other Assets: If these assets are held for less than 24 months.
- Taxability
The Finance Act, 2024 has increased the tax rates on their short-term capital gains which is effective from July 23, 2024:
- Listed Equity shares or Equity-Oriented Mutual Funds or units of Business Trust: The tax rate has been increased from 15% to 20%.
- Other assets: STCG is added to your total income and taxed as per your income tax slab.
Example:
Investments: In January 2023, Arjun bought shares worth Rs. 1,00,000 and a piece of artwork for Rs. 1,50,000.
Sales in August 2024:
- Shares: Sold for Rs. 1,50,000. Since held for less than 12 months, the profit of Rs. 50,000 is taxed at 20% due to new rules effective from July 2024, resulting in Rs. 10,000 tax.
- Artwork: Sold for Rs. 2,00,000. Held less than 24 months, profit of Rs. 50,000 is added to Arjun’s income and taxed at 30%, leading to Rs. 15,000 tax.
Outcome: Arjun learns how different assets are taxed based on holding periods and navigates through his tax obligations effectively, paying a total of Rs. 25,000 on his short-term gains.
Long-Term Capital Gains (LTCG)
Holding Period
- Equity shares or Equity-Oriented Mutual Funds or units of Business Trust: If these assets are held for more than equal to 12 months.
- Other Assets: If these assets are held for more than equal to 24 months.Taxability
The Finance Act, 2024 has provided tax relief to individuals on their long-term future investments and removed the Indexation benefit, which is effective from July 23, 2024:
- Listed Equity shares or Equity-Oriented Mutual Funds or Units of Business Trust: The exemption limit has been increased from ₹1 lakh to ₹1.25 lakh and the tax rate has been increased from 10% to 12.5%.
- Other assets: The tax rate has been reduced from 20% to 12.5%.
However, the Income Tax authorities have provided relief to real estate owners by offering the option to pay 20% tax along with the benefit of indexation, applicable to owners who purchased real estate prior to the amendment date.
Example:
Background: Maya, a software developer, invested in both the stock market and real estate as part of her long-term financial planning.
Investment Details:
- Equity Shares: In January 2022, Maya invested Rs. 2,00,000 in equity shares of a leading fintech company.
- Real Estate: In the same month, she also purchased an apartment for Rs. 50,00,000 as an investment property.
Sales in 2025:
- Equity Shares: By February 2025, Maya decides to sell her shares, now valued at Rs. 3,00,000, having held them for over 36 months.
- Real Estate: In March 2025, she sells her apartment for Rs. 75,00,000, also after more than 36 months of ownership.
Tax Implications Under Finance Act, 2024:
- Equity Shares:
- Profit: Rs. 1,00,000.
- Tax: With the revised rules, the exemption limit for LTCG on equity shares increases to Rs. 1.25 lakh, and gains up to this amount are tax-free. The surplus (if any) is taxed at 12.5%. In Maya’s case, her entire gain is exempt, so she pays no tax on her shares.
- Real Estate:
- Profit: Rs. 25,00,000.
- Tax Options:
- Option 1: Pay 12.5% tax without indexation, resulting in a tax of Rs. 3,12,500.
- Option 2: Since the property was purchased before the amendment, she can opt to pay 20% tax with indexation. Assuming an indexed cost basis of Rs. 60,00,000, her taxable gain would be Rs. 15,00,000, leading to a tax of Rs. 3,00,000.
- Maya opts for the second option to utilize the indexation benefit, reducing her tax liability.
Maya navigates the new tax landscape by strategically choosing tax options that optimize her returns from long-term investments. Her proactive approach allows her to maximize the benefits of the updated LTCG tax rules, keeping her tax liabilities minimized while securing substantial returns from her investments.
Conclusion:
Accurately reporting capital gains in your ITR is not just about following rules, it’s a smart way to manage your finances. By understanding how to categorise your assets, calculate your gains or losses, and take advantage of available exemptions, you can lower your tax burden.
Staying informed about the current tax rules will empower you to make better financial choices. A qualified financial advisor can help you in reporting the capital gains correctly. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.
