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Unit 4: Measuring Investment Return

4.5 Long-term and Short-term Capital Gains Notes

We often hear the term “Capital Gains”. What is capital gain or loss? How is it classified into
long term and short term? Let’s understand what capital gains is, how it is classified into long
term and short term, and how it is taxed.
Capital gain (or loss) is a profit (or loss) made while selling a capital asset. Therefore, let’s start
by understanding what capital asset is.

Capital Asset

Capital asset roughly means property – a house, an apartment, office space, factory, godown or
a plot of land.

Did u know? Agricultural land is not considered as a capital asset, unless it is situated
within the limits of, or within 8 kilometers of a municipality. Investments such as shares
and bonds are also considered as capital assets.

When does a Capital Gain or Loss arise?

When the sale price of a capital asset is more than its purchase price, you incur a capital gain.
Similarly, when the sale price of a capital asset is less than its purchase price, you incur a capital
loss.

Classification of Capital Gains

Capital gain is classified into two types, depending on the period of holding of the capital asset.
1. Short-term Capital Gain (STCG)

2. Long-term Capital Gain (LTCG)
This classification also varies depending on the type of the capital asset. So, let’s understand this
classification based on the type of the capital asset.

Shares/Stocks/Equities and Equity Mutual Funds (MFs)

Short-term Capital Gain (STCG): If shares or equity MFs are held for less than 12 months before
selling, the gain arising is classified as Short Term Capital Gain. The only condition here is that
the shares/equities should be sold on a recognized stock exchange (for example, BSE or NSE),
and a securities transaction tax (STT) should be paid on it. If the sale of shares is off-market (that
is, if the sale is not on a stock exchange), the gain would be classified like that for other capital
assets. A short term capital loss arising from sale of shares can be offset against a short term
capital gain from sale of other shares, as long as both the sales occur in the same financial year.

Long-term Capital Gain (LTCG): If shares or equity MFs are held for more than 12 months
before selling, the gain arising is classified as Long Term Capital Gain. In the case of long term
capital gain arising out of the sale of shares or equity mutual funds, there is no income tax. The
long term capital gain in this case is tax free.

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