Capital Gains Tax in India: Short-Term vs Long-Term
Capital gains tax applies whenever a capital asset — real estate, shares, mutual funds, bonds, or gold — is sold at a profit. The tax treatment of that profit depends heavily on how long the asset was held before sale, since short-term and long-term gains are taxed at materially different rates and carry different benefits.
Short-Term vs Long-Term: The Holding Period Test
Equity shares and equity mutual funds held for less than 12 months, immovable property held for less than 24 months, and other assets typically held for less than 36 months qualify as short-term. Beyond these respective periods, the gain is treated as long-term.
|
Basis |
Short-Term Capital Gains |
Long-Term Capital Gains |
|---|---|---|
|
Holding period |
Below the threshold for the asset class |
Above the threshold for the asset class |
|
Tax rate |
Generally higher |
Generally lower |
|
Indexation benefit |
Not available |
Available for certain assets |
|
Equity shares (with STT) |
Taxed at 15% |
Taxed at 10% above ₹1 lakh, without indexation |
|
Other assets (e.g., real estate, gold) |
Taxed per applicable income slab |
Taxed at 20% with indexation |
What Indexation Does
Indexation adjusts the original purchase price for inflation before computing the taxable gain, using the formula: Indexed Cost = Purchase Price × (Cost Inflation Index of the sale year ÷ Cost Inflation Index of the purchase year). This benefit is available only for long-term gains on eligible assets and can meaningfully reduce the tax payable on a long-held property or gold holding.
Exemptions Worth Knowing
Section 54 exempts gains on the sale of a residential property where the proceeds are reinvested in another residential property. Section 54F extends a similar exemption where gains from other capital assets are reinvested in a residential property. Section 54EC allows exemption by investing the gain in specified bonds, offering a route to defer tax without necessarily reinvesting in property.
Computing the Gain
The calculation starts with the sale consideration, from which the cost of acquisition, cost of improvement, and transfer expenses are deducted; for long-term assets, indexation is applied to the acquisition and improvement costs before this deduction.
Setting Off and Carrying Forward Losses
Short-term capital losses can be set off against both short-term and long-term gains, while long-term losses can only be set off against long-term gains — a distinction that matters when planning which assets to sell in a given year. Unutilised losses can be carried forward for up to eight assessment years.
Where Taxpayers Commonly Go Wrong
Miscalculating the holding period, overlooking available indexation, failing to claim eligible exemptions, and misreporting gains in the income tax return are the recurring sources of avoidable tax outgo and, in some cases, subsequent notices.
Reporting Capital Gains
Capital gains must be reported in the appropriate ITR form with full transaction details — inaccurate reporting is a common trigger for scrutiny, even where the underlying tax position is correct.
Frequently Asked Questions
What is the holding period for equity shares to qualify as long-term? More than 12 months from the date of acquisition.
Is indexation available on short-term capital gains? No. Indexation applies only to long-term capital gains on eligible assets.
Can capital losses be carried forward indefinitely? No. Unutilised capital losses can be carried forward for up to eight assessment years.
Which exemption applies when gains from shares are reinvested in a house? Section 54F, which applies when gains from assets other than a residential property are reinvested in one.
