Short-Term And Long-Term Capital Gains: Save Upto Rs 15,000 Tax On Your Equity Holdings

Investing can be a powerful tool for building wealth, but it’s essential to understand the tax implications of your investment returns. In India, profits from the sale of assets are classified as either short-term or long-term capital gains, each with its tax rates and rules. Let’s dive into these terms and how they can affect your investment strategy.

What Are Capital Gains?

Capital gains are profits from selling a capital asset, such as property, stocks, or bonds. When you sell an asset for more than you paid, the profit is considered a capital gain subject to taxation.

Short-term Capital Gains (STCG)

If you sell an asset within 36 months (or 24 months for certain assets like unlisted equity shares) of purchasing it, any profit you make is classified as a short-term capital gain. These gains are taxed at the same rate as your regular income, which varies depending on your income tax bracket. Meanwhile, the tax on capital gains on equity and equity-based funds is 15%. For example, if you’ve invested Rs 50 thousand in equity and it grows to Rs 80 thousand in 6 months, this is how much tax you are supposed to be paying:

Equity Price	50,000
Equity Price After Capital Gain	80,000
Capital Gain	30,000
Applicable tax	30,000 x 15%
	4500

So, with your capital gain of Rs 30,000, you will be paying a tax of Rs 4,500.

Long-term Capital Gains (LTCG)

On the other hand, if you hold onto an asset for longer than the periods mentioned above, the profit from its sale is classified as a long-term capital gain. Whereas the below-listed assets shall be considered long-term capital assets if held for over 12 months.

• Equity or preference shares in a company listed on a recognized stock exchange in India
• Securities (like debentures, bonds, govt securities, etc.) are listed on a recognized stock exchange in India.
• Units of UTI, whether quoted or not
• Units of equity-oriented mutual funds, whether quoted or not
• Zero coupon bonds, whether quoted or not

The tax rate for LTCG is generally lower than that for STCG and can be 20% with indexation benefits, which adjusts the purchase price of an asset for inflation. In the case of Equity or Equity funds, the tax on capital gain is 10%  if the capital gain is over Rs 1 lakh. To understand it, let’s take the example above, where you have bought equity of Rs 50 thousand, which grows to Rs 80 thousand in one year. So you have made a capital gain of Rs 30 thousand, which is under 1 lakh so that this income will be tax-free. But this would have been the tax calculation if your investment had grown to Rs 1.6 Lakhs.

Equity Price	50,000
Equity Price After Capital Gain	1,60,000
Capital Gain	1,10,000
Applicable tax	(1,10,000 – 1,00,000) x 10%
	1,000

Tax Type	Condition	Applicable Tax
Long-term capital gains tax (LTCG)	Sale of:- Listed Equity shares (If Securities Transaction Tax -STT has been paid on the purchase and sale of such shares) – units of equity-oriented mutual fund (If STT has been paid on the sale of such units)	10% over and above Rs 1 lakh
	Others	20%
Short-term capital gains tax (STCG)	When Securities Transaction Tax (STT) is not applicable	Normal slab rates
	When STT is applicable	15%.

Why Does It Matter?

Understanding the difference between STCG and LTCG is crucial for investors because it can significantly impact their net returns. By planning the duration for which you hold an asset, you can optimize your tax liability and maximize your returns. For example, all long-term capital gains up to Rs 1,00,000 are tax-free, but they would be taxable as short-term capital gains as you’ll be paying 15% tax on the gain, and the payable tax will be Rs 15,000, making your effective income Rs 1,00,000 – 15,000 which is Rs 85,000

Capital Gain	1,00,000
Applicable tax	1,00,000 x 15%
	15,000
Profit After Tax	1,00,000 – 15,000
	85,000

You can also use these criteria to help you reduce taxes on your long-term investments. Here’s an example: Let’s say you have invested Rs 40 lakhs in a company for 10 years, and your investment grows by 20% every year. Then, this is what your taxes would look like.

Year	Amount in portfolio
1	400000
2	480000
3	576000
4	691200
5	829440
6	995328
7	1194394
8	1433272
9	1719927
10	2063912
Total Capital Gain	1663912
Exemption of 1 lakh	1563912
10% Tax	156391

So the total payable tax becomes Rs 1.56 lakhs, but here’s a clever trick to reduce how much tax you pay:

• If you sell your stocks and buy them back immediately, it’s like hitting a reset button on your investment. It’s still the same stock, but it’s considered a new investment for tax purposes.
• By doing this, you can make it look like you’re not earning as much each year, so you pay less tax.

Let’s see how it works over a few years:

• Year 2: You earn ₹80,000. That’s less than ₹1 lakh, so you pay no tax.
• Year 3: You earn ₹96,000. Again, it’s less than ₹1 lakh, so no tax.
• Year 4: You earn ₹1,15,200. This time, it’s more than ₹1 lakh, but you only pay tax over ₹1 lakh. So, you subtract ₹1 lakh and find that you have ₹15,200 that can be taxed. The tax rate is 10%, so you pay 10% of ₹15,200, which is ₹1,520.
• If you continue paying these taxes yearly after the 10th year, the total tax will be Rs 78,791 instead of Rs. 1,56,391, which is 98% higher.

In simple terms, by selling and buying back your stocks, you’re spreading out your earnings to keep them below the ₹1 lakh limit each year, so you either pay no tax or a much smaller amount. It’s like slicing a big cake into smaller pieces so each slice fits into a smaller box. Each slice is still part of the same cake, but you’re packaging it differently to save space or, in this case, to save on taxes!

Year	Amount in portfolio	Capital Gain	Taxes paid after the exemption of 1 lakh
1	400000	0	0
2	480000	80000	0
3	576000	96000	0
4	691200	115200	1520
5	829440	138240	3824
6	995328	165888	6589
7	1194394	199066	9907
8	1433272	238879	13888
9	1719927	286654	18665
10	2063912	343985	24399
Total Tax Paid			78791

Tips for Investors

• Plan Your Sales: Consider the timing of selling your assets to qualify for LTCG and benefit from lower tax rates.
• Tax Loss Harvesting: You can offset capital gains with capital losses, so consider selling underperforming assets to reduce your tax burden.
• Take Advantage of Exemptions: Certain exemptions, such as reinvestment in residential property or specified bonds, are available for LTCG, which can help with tax savings.

Conclusion

Investing is about picking the right assets and understanding the tax rules for your returns. By being aware of the differences between short-term and long-term capital gains, you can make more informed decisions that align with your financial goals.

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