A capital asset includes any property or security owned by an individual, regardless of its connection to his/her business. Securities which adhere to rules under the SEBI Act of 1992 classify as capital assets in India.
The profits an individual makes from sale or transfer of a capital asset is termed Capital Gains and they attract a capital gains tax.
Long Term Capital Assets vs Short Term Capital Assets:
Short term capital assets – Any asset owned by an individual (taxpayer) for less than 3 years since the date of transfer/ownership is referred to as a short term capital asset. This duration should be less than 12 months in case of shares.
Long term capital assets – Any asset owned by an individual (taxpayer) for more than 3 years since the date of transfer to his/her name is treated as a long term capital asset. This duration is taken as 12 months or more in case of shares.
Short Term and Long Term Capital Gain:
Capital gain earned by an individual in lieu of transfer of a short term capital asset is termed as short term capital gain.
Capital gain earned by an individual in lieu of transfer of a long term capital asset is termed as long term capital gain.
Time Period:
Short term capital gains – This refers to gains arising out of sale/transfer of assets within three years of ownership (in case of gold, property, etc) and 1 year of ownership in case of shares.
Long term capital gains – This refers to gains arising out of sale/transfer of assets after owning them for three years (in case of gold, property, etc) and more than 1 year in case of shares or mutual funds.
Tax on Short Term Capital Gains and Long Term Capital Gains:
Short term capital gains which fall under section 111A are charged a tax of 15%, excluding surcharge and cess. Short term capital gains which are not covered under section 111A are charged tax at a rate determined by the total taxable income of the individual.
Long term capital gains generally attract a tax of 20%, excluding cess and surcharge. This tax rate comes down to 10% if certain eligibility criteria are met by taxpayers and is applicable in terms of securities listed on a recognized stock market, UTI/mutual fund and zero coupon bonds.
Computation of Long Term and Short Term Capital Gain:
Long term capital gain is computed using indexed cost of acquisition/improvement and is calculated as follows.
(Cost of acquisition x cost inflation index of year of transfer of capital asset)/(Cost inflation index of year of acquisition)
Long term Capital Gains = cost of selling a property – Indexed cost of acquisition
Short term capital gains are easier to calculate, and one can determine it by subtracting the expenditure incurred on an asset from the cost of sale of that asset.
Short term capital gains = sale cost of asset – (expenditure incurred on asset) – (cost of acquisition/improvement)
The table below highlights the basic differences between short term and long term capital gains.
| Parameter | Short Term Capital Gain | Long Term Capital Gain |
|---|---|---|
| Time Duration of Asset | Less than 36 months for regular assets and 12 months for shares | More than 36 months for regular assets and 12 months for shares |
| Tax Rate | 15.00% | 20.00% |
| Computation | Short term capital gains = sale cost of asset – (expenditure incurred on asset) – (cost of acquisition/improvement) | Long term Capital Gains = cost of selling a property – Indexed cost of acquisition |