Short-Term vs. Long-Term Capital Gains: A Complete Guide

When you invest in any capital asset, you can earn either short-term capital gains or long-term capital gains. Depending on your holding period, your income is classified into one of these two types. Based on this classification, tax rules differ. 

To better estimate your returns and manage your taxes, learn about both types of capital gains. This will also help you align your goals to the investment and redeem units at the right time. Read on to learn briefly about what are capital gains and short-term vs long-term capital gains.

Definition of Capital Gains

Capital gain is a term you will often come across when investing in mutual funds. Say you invest your money to buy an asset and hold on to it for a period of time. When its price is higher than the amount you have invested, you sell off the asset. The profit you make in this way is your capital gain from that particular asset.

Based on your holding period, there are two types of capital gains:

• Short-term capital gain (STCG)
• Long-term capital gain (LTCG)

What is Short-Term Capital Gain?

If you sell off your asset before a certain tenure to make a profit, it is called a short-term capital gain. In most cases, if your lock-in period is less than 12 months, it is a short-term capital gain. Every asset class has a different lock-in period and defines this duration differently. 

For your gains to be considered STCG, see the holding period for different types of assets:

• If you sell your debt funds purchased before April 1, 2023, within 2 years 
• If you sell debt funds purchased after April 1, 2023, at any time 
• If you sell your immovable assets within 2 years 
• If you sell you movable assets within 2 years
• If you sell your equity funds before 1 year 

Formula for Short-Term Capital Gain

To calculate this, you need to subtract the purchase price from the selling price. Here’s the formula you can use to simplify your calculation of STCG:

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

• Sale Consideration: The total amount you have received by selling an asset
• Summation of Cost of Acquisition: The amount you have paid while purchasing the asset
• Cost of Improvement: The cost that had to be paid during the holding period to improve or modify the asset
• Transfer: The additional cost you may have paid while selling off the asset

STCG Taxation: STCG is charged at 20% on your capital gains or as per your tax slab, depending on the asset. 

STCG Impact: It directly impacts your tax bill, especially if you fall in the higher tax bracket. 

What is Long-Term Capital Gain?

If you sell your equity assets after 12 months or debt funds (if bought on or before March 31, 2023,) after 24 months, then it will be considered LTCG. For immovable assets, the holding period for LTCG is considered as 24 months. 

• Formula: There’s no formula to calculate LTCG as it is the total profit after the holding period 
• Taxation: In India, you will be charged 12.5% on equity funds held for more than 12 months. The same percentage will be applied to debt funds for over 24 months.
• Impact: It has a lower rate, which makes it easier for you to build wealth

Difference Between Short-term and Long-term Capital Gain

Here are the differences between short-term capital gains and long-term capital gains:

Parameters	Short-Term Capital Gains	Long-Term Capital Gains
Definition	When you sell an asset within the defined short term	When you sell an asset after the short-term holding period ends
Period	For equity, your holding period <12 months For immovable assets, your holding period <24 month For Debt Funds, your holding period <24 months	For Equity, your holding period >12 months For immovable assets, your holding period >24 month For Debt Funds, your holding period >24 months
Indexation Benefits	STCG has no indexation benefits	LTCG no longer has indexation benefits as of July 23, 2024 (even on debt funds)
Tax Rates	For equity, it is 20% and for debt funds, it is based on the tax slab	For equity, it is 12.5% on gains over ₹1.25 lakhs

By deciding on your investment and redemption keeping short-term capital gains and long-term capital gains taxes in mind, you can ensure your financial wellbeing. To benefit from a lower tax burden, try to stay invested for longer. If you require instant funds, try to avoid making early withdrawals of your mutual funds. 

Instead, you can apply for a Loan Against Mutual Funds which gives you 80% of the funds’ value. It has a simple and easy-to-follow application process with loan disbursal in just minutes. To up to ₹10 lakhs with this process, download the Fibe App.

FAQ on Short Vs. Long-Term Capital Gains

Is long-term capital gain more advantageous than short-term capital gain?

In various ways, long-term capital gain has some favourable tax benefits, impacting your financial growth immensely.

Is short-term capital gain taxed at a higher rate compared to long-term capital gain?

Generally, long-term capital gains have lower tax rates and short-term capital gains have higher rates. 

Can I carry forward losses from short-term or long-term capital gains?

If you are comparing short-term vs long-term capital gains, keep in mind income from both can set off short and long-term capital losses, which may be carried forward up to 8 years. To do this, ensure you file your income tax return by the due date.