Short Term Vs Long Term Capital Gains: What’s the Difference?

Investing in mutual funds has become a favoured option for investors looking to grow their wealth steadily.

When you invest in these funds, the profits you earn are categorised as either long-term or short-term capital gains, depending on the holding period. It’s important to understand the distinction between short-term vs long-term capital gains, as they are taxed differently and can significantly impact your investment decision.

This article will explain what short-term capital gains and long-term capital gains are, and how they are taxed.

What are short-term capital gains?

Short-term capital gains arise when you sell a capital asset within one year of holding it.

For example, if you purchased 100 units of an equity mutual fund at a Net Asset Value (NAV) of Rs.10 each in January 2023, your total investment would be Rs.1000. If you sell these units in November 2023 at an NAV of Rs.15 each, your sale proceeds would be Rs.1500.

Since you sold the units within a year, the profit of Rs. 500 will be considered short-term capital gains.

How are short-term capital gains taxed?

Before the Union Budget 2024, short-term capital gains from equity mutual funds, stocks, and units of business trusts were taxed at 15%. However, following the new budget, these gains are now taxed at 20%. For other types of assets, short-term capital gains continue to be taxed as per your applicable income tax slab.

What are long-term capital gains?

Long-term capital gains arise when you sell an asset after holding it for more than one year.

Continuing with the previous example, if you sold your 100 units of equity mutual funds in March 2024 at an NAV of Rs. 20, the sale value would be Rs. 2,000. In this case, the Rs.1000 profit would be considered long-term capital gains.

It's important to note that the holding period for long-term capital gains can differ by asset class.

How are long-term capital gains taxed?

After Budget 2024, long-term capital gains are taxed at a rate of 12.5% for all asset classes. Before this, some assets enjoyed LTCG tax rates of 20% with indexation and 10% without indexation, but these provisions have now been removed.

Difference between short-term and long-term capital gains

Here's a detailed comparison between short-term and long-term capital gains taxation.

Wrapping up

Understanding both short-term and long-term capital gains is important for effective tax planning. Matching your investing strategy with these tax implications can help you improve your financial progress and help you make more informed decisions.

For more insights and expert guidance on financial planning, visit the Tata Capital Moneyfy website or download the mutual fund app Tata Moneyfy today.