Short-Term vs Long-Term Capital Gains Tax: Key Differences
- Nimisha Panda
- 6 days ago
- 11 min read
Capital gains tax in India is imposed on profits earned from selling capital assets such as property, stocks, or mutual funds. The taxation depends on how long the asset was held before it was sold. Assets sold within a short duration attract short-term capital gains tax, while those held longer fall under long-term capital gains tax. Understanding these two categories helps taxpayers plan better, minimize liabilities, and comply with the Income Tax Act, 1961.
Short-term and long-term capital gains differ mainly in their holding periods, applicable tax rates, and calculation methods. Short-term gains are taxed at higher rates due to their quick turnover, whereas long-term gains benefit from lower rates and specific exemptions.
Table of Contents
Definition of Short-Term and Long-Term Capital Gains
Capital gains represent the profit earned when a capital asset, such as property, stocks, mutual funds, or bonds, is sold for a higher price than its purchase cost. These gains are classified into short-term and long-term based on the duration for which the asset is held before it is sold. Short-term capital gains (STCG) refer to profits from assets held for a relatively short duration, whereas long-term capital gains (LTCG) arise when assets are held for a longer period. The classification helps determine the applicable tax rate and available benefits, ensuring that long-term investors receive certain advantages compared to short-term traders.
Holding Period Criteria Under Income Tax Rules
The holding period determines whether a gain qualifies as short-term or long-term under Indian tax laws. For listed equity shares, equity-oriented mutual funds, and zero-coupon bonds, the holding period is 12 months. If these assets are sold within 12 months of purchase, the profit is treated as short-term; if held longer, it becomes a long-term gain. For immovable property such as land or buildings and unlisted shares, the threshold is 24 months. Assets sold within this period attract STCG, whereas those held beyond it are treated as LTCG. This distinction ensures that taxation aligns with the investment’s duration and risk profile.
Short-Term vs Long-Term Capital Gains Tax Rates
The tax rates for short-term and long-term capital gains differ significantly. For listed equity shares and equity-oriented mutual funds, short-term capital gains are taxed at 15% under Section 111A of the Income Tax Act, along with applicable surcharge and cess. However, for other assets like property or debt funds, short-term gains are taxed as per the individual’s income tax slab rate.
Long-term capital gains on listed shares and equity-oriented funds exceeding ₹1 lakh are taxed at a flat rate of 12.5% without indexation benefits, as per the updates introduced in Budget 2024. For immovable property and certain other assets, LTCG is taxed at 20% with the benefit of indexation. This dual-rate structure incentivizes long-term investing while ensuring that frequent trading attracts higher tax liability.
How Capital Gains Are Calculated
Capital gains are calculated by deducting the cost of acquisition, cost of improvement, and expenses related to the transfer (such as brokerage or stamp duty) from the total sale price. The formula for both short-term and long-term capital gains is:
Capital Gain = Sale Price – (Purchase Price + Cost of Improvement + Transfer Expenses)
For long-term gains where indexation applies, the purchase price is adjusted for inflation using the Cost Inflation Index (CII) notified by the government. This adjustment ensures that taxpayers are not taxed on inflationary gains, especially in the case of property and debt funds.
Indexation and Its Applicability
Indexation is a mechanism used to adjust the purchase cost of an asset to reflect inflation, thereby reducing the taxable gain. It applies primarily to long-term capital assets such as property, debt mutual funds, and bonds (excluding listed equities and equity-oriented funds). The indexed cost of acquisition is computed by multiplying the original cost with the ratio of the CII of the year of sale to that of the year of purchase.
However, as per the latest amendments introduced in Budget 2024, the indexation benefit for listed equity shares and equity-oriented funds has been removed. Instead, a flat 12.5% tax is applied on long-term gains exceeding ₹1 lakh. The continued availability of indexation for real estate and certain debt assets makes it an important consideration for investors focusing on long-term capital preservation.
Capital Gains Tax on Property, Shares, and Mutual Funds
The tax treatment of capital gains varies depending on the type of asset sold. For property, gains arising within 24 months of purchase are treated as short-term and taxed at the individual’s slab rate, while gains beyond 24 months qualify as long-term and are taxed at 20% with indexation.
For listed equity shares and equity-oriented mutual funds, the holding period is 12 months. Gains within this period are short-term and taxed at 15%, while gains beyond 12 months are long-term and taxed at 12.5% for amounts exceeding ₹1 lakh.
For debt mutual funds, the classification depends on the holding period of 36 months. Short-term gains are taxed as per the slab rate, and long-term gains attract 20% with indexation. Understanding these differences helps investors manage their portfolios and plan redemptions more efficiently.
Recent Changes and Budget 2025 Updates
Budget 2025 continued the reform efforts started in the previous year to simplify capital gains taxation. The removal of indexation benefits for listed equity shares and the introduction of a uniform 12.5% LTCG rate were major steps towards a cleaner tax structure. The government also emphasized reducing ambiguity by standardizing reporting requirements in income tax returns.
Additionally, the CBDT has issued notifications to align capital gains computation and disclosure formats with the new tax structure. These changes aim to enhance clarity for taxpayers while ensuring that long-term investments remain tax-efficient. With these revisions, investors are encouraged to make informed decisions when comparing short-term trading and long-term wealth creation strategies.
Set-Off and Carry Forward of Capital Losses
Losses from the sale of capital assets can be adjusted against gains to reduce taxable income. Short-term capital losses can be set off against both short-term and long-term gains, providing flexibility for taxpayers. However, long-term capital losses can only be set off against long-term gains.
If losses remain unadjusted in a particular financial year, they can be carried forward for up to eight assessment years. These provisions encourage accurate record-keeping and ensure that investors can fully utilize losses to minimize future tax liabilities. To claim these benefits, taxpayers must file their income tax return within the due date specified by the Income Tax Department.
Choosing Between Old and New Tax Regime for Capital Gains
Capital gains taxation operates independently of the choice between the old and new tax regimes. Whether an individual opts for the new regime under Section 115BAC or stays with the old one, capital gains continue to be taxed as per their specific provisions under Sections 111A, 112, and 112A.
The primary difference between regimes lies in the treatment of deductions and exemptions on income, not in capital gains. Therefore, investors must assess their overall tax position before choosing the regime, taking into account salary income, deductions, and the expected level of capital gains in a given year.
How TaxBuddy Helps in Managing Capital Gains Tax
TaxBuddy simplifies the complex process of calculating and filing capital gains tax. The platform uses automation to extract data directly from Form 26AS, AIS, and broker statements to compute accurate short-term and long-term gains. It also identifies applicable exemptions and ensures correct reporting while filing the ITR.
For those handling multiple investment accounts, TaxBuddy provides consolidated summaries and compliance checks, reducing the chances of mismatch or notice from the Income Tax Department. With expert-assisted filing options, taxpayers can ensure their returns are accurate, compliant, and optimized for tax savings.
Conclusion
Understanding the difference between short-term and long-term capital gains is vital for effective tax planning and compliance. Recent policy changes, including revised LTCG rates and indexation updates, have simplified the structure but also require careful reporting. By managing holding periods strategically and keeping track of changes in tax laws, investors can maximize post-tax returns while staying compliant with Indian income tax regulations.
For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers two flexible options for filing income tax returns — self-filing and expert-assisted filing. The self-filing plan is designed for salaried individuals or taxpayers with simple financial structures, allowing them to upload Form 16, bank statements, and TDS certificates. The system automatically extracts data, pre-fills the return, and checks for possible mismatches or errors before submission. For more complex cases involving multiple income sources, business income, capital gains, F&O transactions, or NRI taxation, the expert-assisted plan connects users with certified tax experts. These professionals ensure accurate computation, claim eligible exemptions, and provide post-filing support if any notice arises from the Income Tax Department.
Q2. Which is the best site to file ITR?
The official Income Tax Department portal (incometax.gov.in) is the statutory platform for e-filing income tax returns. However, third-party platforms like TaxBuddy have gained popularity due to their simplified, AI-powered filing process. TaxBuddy automates data import from Form 26AS, AIS, TIS, and Form 16, reducing manual entry errors. It provides real-time validation, guided assistance, and expert reviews before submission. Unlike generic portals, TaxBuddy also includes features such as notice management, refund tracking, and personalized tax planning, making it a preferred choice for those seeking a hassle-free and compliant filing experience.
Q3. Where to file an income tax return?
Income tax returns can be filed through two primary channels — the official Income Tax e-filing portal or reliable tax platforms such as TaxBuddy. While the government portal serves as the legal submission gateway, TaxBuddy simplifies the process by integrating automation and expert support. TaxBuddy’s system allows users to upload their Form 16 or link their PAN to auto-fetch data from government sources. Once all details are validated, the return is reviewed by experts before being electronically filed with the Income Tax Department. This dual-layer verification ensures higher accuracy and reduces the risk of receiving defective return notices.
Q4. What defines short-term capital gains?
Short-term capital gains (STCG) are profits earned from the sale of capital assets held for a short duration before being sold. The definition of “short-term” depends on the type of asset:
For listed equity shares and equity-oriented mutual funds, assets sold within 12 months of purchase qualify as short-term.
For immovable property, unlisted shares, and other assets, the threshold extends to 24 months.
Such gains are taxed at a higher rate — 15% for listed equities and as per slab rates for other assets — to discourage frequent trading and speculation. The shorter holding period also means investors cannot claim indexation benefits on short-term gains.
Q5. How are long-term capital gains calculated?
Long-term capital gains (LTCG) are computed by adjusting the purchase cost of an asset for inflation (where applicable) and subtracting this from the sale price. The basic formula is:
LTCG = Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
The “indexed cost” is derived by applying the Cost Inflation Index (CII) to the purchase cost to neutralize the impact of inflation over time. For example, if an investor bought property in 2010 for ₹40 lakh and sold it in 2025 for ₹1.2 crore, the purchase price would be adjusted using the CII to calculate the taxable LTCG accurately. However, for listed equity shares and equity mutual funds, indexation is not allowed, and a flat 12.5% tax is levied on gains exceeding ₹1 lakh.
Q6. What are the current tax rates for LTCG and STCG?
Tax rates differ based on asset type and holding period:
Listed equity shares and equity-oriented mutual funds:
STCG (≤12 months): 15% under Section 111A
LTCG (>12 months): 12.5% on gains exceeding ₹1 lakh (no indexation)
Immovable property and unlisted shares:
STCG (≤24 months): Taxed at individual slab rates
LTCG (>24 months): 20% with indexation under Section 112
Debt mutual funds and bonds:
STCG (≤36 months): Taxed as per slab rates
LTCG (>36 months): 20% with indexation
Applicable surcharge and cess are added as per the taxpayer’s income level. These structured rates encourage long-term investment and discourage short-term speculative gains.
Q7. Is indexation benefit available on all assets?
No. The indexation benefit is available only for specific long-term capital assets such as immovable property, debt mutual funds, and certain bonds. It allows investors to adjust the purchase cost using the Cost Inflation Index, reducing the taxable portion of their gains. However, recent amendments through Budget 2024 withdrew indexation benefits for listed equity shares and equity-oriented mutual funds. Instead, a flat LTCG rate of 12.5% now applies on gains exceeding ₹1 lakh. This change simplifies the taxation process while maintaining favorable treatment for real estate and debt investments.
Q8. Can capital losses be adjusted against future gains?
Yes, capital losses can be adjusted or carried forward as per the provisions of the Income Tax Act.
Short-term capital losses can be set off against both short-term and long-term capital gains.
Long-term capital losses, however, can only be set off against long-term capital gains. If any losses remain after set-off in a given financial year, they can be carried forward for up to eight assessment years, provided the taxpayer has filed the return before the due date. This provision helps investors reduce their future tax burden by offsetting past investment losses against upcoming profits.
Q9. How are mutual fund gains taxed?
Taxation on mutual funds depends on the type and holding period:
Equity-oriented mutual funds: Gains on investments held for 12 months or less are taxed as STCG at 15%. Gains exceeding ₹1 lakh on holdings over 12 months are taxed as LTCG at 12.5% without indexation.
Debt-oriented mutual funds: STCG on holdings up to 36 months is taxed as per the investor’s slab rate, while LTCG on holdings beyond 36 months attracts 20% tax with indexation.
Dividends from mutual funds are added to total income and taxed as per slab rates. TaxBuddy’s platform helps calculate these gains accurately by auto-fetching data from AMC statements, ensuring proper tax treatment for each fund type.
Q10. Do capital gains apply under the new tax regime?
Yes, capital gains taxation remains consistent under both the old and new tax regimes. The new regime primarily impacts income from salary, business, or other sources by removing most exemptions and deductions, but it does not alter how capital gains are computed or taxed. STCG and LTCG continue to be taxed under Sections 111A, 112, and 112A, irrespective of the regime chosen. Taxpayers must still report all capital gains separately while filing their returns, ensuring compliance with Income Tax Department requirements.
Q11. Are reinvestments eligible for exemptions?
Yes, the Income Tax Act offers several provisions that exempt or defer capital gains tax if the proceeds are reinvested in specified assets:
Section 54: Exemption on LTCG from the sale of a residential property if reinvested in another residential property within stipulated timelines.
Section 54EC: Exemption on LTCG if invested in notified bonds such as NHAI or REC within six months of sale.
Section 54F: Exemption on LTCG from sale of any asset other than residential property if reinvested in a residential property.
To claim these exemptions, the taxpayer must comply with the investment conditions and time limits prescribed under each section. Non-compliance can lead to withdrawal of the exemption.
Q12. How does TaxBuddy help with capital gains filing?
TaxBuddy provides a complete solution for managing and filing capital gains tax. The platform’s AI-driven engine extracts data directly from sources such as Form 26AS, AIS, and broker statements to automatically calculate both short-term and long-term gains. It applies relevant tax rates, indexation, and exemptions based on asset type and holding period. For users with multiple investments, TaxBuddy consolidates transactions across demat accounts, mutual funds, and property sales to prepare an accurate summary for ITR filing.
Additionally, its expert-assisted plans ensure every return is reviewed by tax professionals to prevent mismatches, errors, or notice triggers. The system also provides guidance for reinvestment-based exemptions and helps track refund status post-filing, making it one of the most comprehensive tax management tools for investors.
