In order to follow budget-related announcements easily, it is useful to understand a few important words and concepts in advance. The main focus of all Budget speeches is on taxes. Do you know how dividends are taxed in the country? In this article, let’s dive deeper into capital gains tax and the difference between long term capital gains (LTCG) and short term capital gains (STCG) taxes.
First things first, what are the biggest benefits?
The term capital gains refers to gains made on the sale of capital assets, such as stocks and equity-related instruments such as mutual funds. Capital gains come from an increase in the asset’s value above its purchase price, resulting in a profit at the time of sale.
For example, if you sell a share bought at Rs 200 for Rs 210, your capital gain—or profit—on this purchase is Rs 10 (Rs 210 minus Rs 200).
Now, what are the major long-term and short-term benefits?
Long Term Capital Gains vs Short Term Capital Gains
For stocks, long-term gains are gains from the sale of listed securities that are realized after completing a holding period of at least 12 months. For some asset classes, such as real estate, stocks or bonds, a 24-month holding period applies.
Similarly, short-term capital gains are gains from shares sold within one year of purchase. For some asset classes, this period is 24 months.
Now, let’s look at the tax rates:
| LTCG tax | STCG tax |
| 12.5% ​​on earnings above Rs 1.25 lakh in a financial year | 20% |
Please note that additional components such as surcharge and cess are also applicable while calculating capital gains tax applicable to both categories.
LTCG vs STCG | Important points to remember
- The main difference between long-term and short-term capital gains is the holding period.
- The lower tax rate in the case of LTCG than STCG encourages investors to hold their investments for a longer period of time.
- As of now, the LTCG tax is 750 basis points (bps) less than the STCG tax.
- In Budget 2024, the short-term capital gains tax rate has been increased to 20 percent from 15 percent and the long-term capital gains tax to 12.5 percent from 10 percent with a 25 percent increase in the exemption limit to Rs. 1.25 lakh per financial year.
The difference between LTCG and short term capital gains tax is the holding period, LTCG applies to assets held for more than 12 months (24 months for some assets) and STCG applies to assets held for 12 months (months 24 for other goods) or less.