Long-Term vs Short-Term Capital Gains – Tax Implications Explained

If you've ever made a profit from selling shares, mutual funds, or any other investments, you’ve likely heard of capital gains tax. But what many people don’t realize is that how long you hold the investment can make a big difference in the taxes you pay.

That’s where short-term and long-term capital gains come in. They sound simple, but the tax treatment varies—and knowing the difference can help you plan smarter and save more.

So, let’s break it down in a simple terms.

📈 What Are Capital Gains?

In plain terms, capital gains are the profits you earn when you sell a capital asset like stocks, mutual funds, bonds, real estate, or even gold—at a price higher than what you paid.

For example:

• Bought 100 shares of Company A at ₹200 = ₹20,000
• Sold them later at ₹250 = ₹25,000
• Capital Gain = ₹5,000

Now, depending on how long you held those shares, the gain will either be classified as short-term or long-term—and that’s what determines how much tax you owe.

⏳ Short-Term Capital Gains (STCG)

📌 Definition:

If you sell listed stocks or equity mutual funds within 12 months of buying them, your profits are considered short-term capital gains.

💼 Tax Rate:

STCG on listed shares and equity mutual funds is taxed at 15%, plus applicable cess and surcharge.

🔍 Key Things to Know:

• No basic exemption limit applies if you're earning only capital gains.
• Short-term losses can be set off against any capital gains—short or long-term. Click here to know more about tax on short term capital gain 

📆 Long-Term Capital Gains (LTCG)

📌 Definition:

If you hold listed equity shares or equity mutual funds for more than 12 months, then your gains fall under the long-term category.

💼 Tax Rate:

LTCG exceeding ₹1 lakh in a financial year is taxed at 10% (without indexation benefit). Gains up to ₹1 lakh are tax-free.

🔍 Key Things to Know:

• If your total LTCG is less than ₹1 lakh, you pay no tax.
• Long-term losses can only be set off against long-term gains.

🧮 Capital Gains Tax: Real Example

Let’s say you bought equity mutual funds worth ₹2 lakh in June 2022 and sold them for ₹2.8 lakh in August 2023. Your gain of ₹80,000 qualifies as LTCG, and since it’s below ₹1 lakh, there’s no tax.

Now, suppose you sell a stock within 8 months of buying it for a ₹20,000 profit. That becomes STCG and is taxed at 15%, i.e., ₹3,000.

📊 Capital Gains Tax on Other Assets

Asset Type	STCG Holding Period	LTCG Holding Period	LTCG Tax Rate
Equity Shares/Equity MFs	≤ 12 months	> 12 months	10% over ₹1L (no indexation)
Debt Mutual Funds	≤ 36 months	> 36 months	Taxed at slab rate (STCG)
Real Estate	≤ 24 months	> 24 months	20% with indexation
Gold	≤ 36 months	> 36 months	20% with indexation

🔍 Why Does This Matter to You?

Understanding short-term vs long-term capital gains helps you:

• Plan your exits smartly
• Delay selling to reduce tax impact
• Use exemptions and set-offs wisely
• Avoid unpleasant tax surprises

For long-term wealth creation, it’s not just about how much you earn—it’s also about how much you keep after taxes.

Final Thoughts

Capital gains tax might not sound exciting—but knowing how it works is key to smarter investing.
If you’re an active investor or even a casual one, planning your holding period can go a long way in helping you maximize returns and minimize taxes.

So before hitting that “sell” button, take a moment to ask:
Short-term gain or long-term advantage?

FAQs

Q1. What is the difference between short-term and long-term capital gains?
A: The main difference is the holding period. If you sell equity investments within 12 months, it’s short-term; beyond 12 months, it’s long-term.

Q2. Is long-term capital gains on shares tax-free?
A: Only the first ₹1 lakh in LTCG is tax-free in a financial year. Anything above that is taxed at 10% without indexation.

Q3. What is the tax rate on short-term capital gains from stocks?
A: STCG on listed equity shares and mutual funds is taxed at 15%, plus cess and surcharge.

Q4. Can I set off capital losses?
A: Yes. Short-term losses can be set off against both short- and long-term gains. Long-term losses can only be set off against long-term gains.

Q5. Are mutual funds taxed differently than stocks?
A: Equity mutual funds follow the same STCG and LTCG rules as stocks. Debt mutual funds are taxed as per your income slab (STCG) and at 20% with indexation (LTCG).