Long-Term Capital and Short-Term Capital – What is the Difference Between them?

A capital asset includes any security or property owned by a person, regardless of its connection to their business. In India, securities which adhere to the rules and regulations laid out under the SEBI Act, 1992, are classified as capital assets. When one sells a capital asset for a value greater than the one you paid for, this transaction’s result is a capital gain. These capital assets include stocks, precious metals, bonds, jewelry, and even real estate. Some of the players in the market provide seamless ways to manage all your assets which results in good profits for you. You can manage the portfolio easily and keep track of the same.

When one sells a capital asset for a value greater than the one you paid for, this transaction’s result is a capital gain. In other words, when one makes a profit from the sale or transfer of a capital asset, it is termed as a Capital Gain, and these gains attract Capital Gains Tax.

The tax paid on these capital gains depends on the period for which you have held the asset before selling it off. These capital gains are classified into long-term capital and short-term capital and are taxed accordingly.

What are Short-term Capitals?

An asset or assets that are owned for three years or less than that, since the date of transfer of ownership, before disposing of them are known as Short Term Capital Gains. While on the one hand, Capital gains are usually taxed out at a relatively favorable rate than salary or wages, gains categorized under Short term capital do not benefit from any special tax rates. These gains are subjected to taxation, just like any other ordinary income.

This period must be less than 12 months in the case of shares.

What Are Long-Term Capitals?

Assets held for more than three years, since the transfer of ownership, before getting disposed of, is known as Long-term capital gains. These capital gains are taxed according to the graduated thresholds for taxable income at 0%, 15%, or 20%, but when capital gains may be taxed at rates greater than 20%, some exceptions exist.

This time duration must be more than 12 months, at least, in the case of shares.

Difference Between Short-Term & Long-Term Assets

The significant differences between short term capital gain and long-term capital gain are as follows −

Short Term Capital Gain vs Long Term Capital Gain

• Short-term Capital Gains- The capital gained by a person after transferring or selling a short-term capital asset is known as a short-term capital gain.

The period for this gain is within three years of ownership. In the case of gold or property, and one year in the case of Shares.

• Long-term Capital Gains- The capital gained by a person after the transfer or sale of a Long-term asset is known as a long-term capital gain.

The period for this gain is more than three years of ownership, in the case of gold, property, etc., and more than a year in Shares or Mutual Funds.

Short Term Capital Gains Tax and Long-Term Capital Gains Tax

• Short-term Capital Gains Tax: Section 111A of the SEBI Act, 1992 states that the Short-term capital gains which fall under this section are to be charged a tax of 15%, excluding surcharges and cess.

Those short-term capital gains that do not get covered under this section are charged a tax at a rate determined by the total taxable income of the person.

• Long-term Capital Gains Tax: These capital gains charge a tax of 20%, excluding surcharges and cess. In case some eligibility criteria are met by the taxpayers, and it is applicable in terms of securities listed on a recognised stock market, zero-coupon bonds, and UTI or Mutual funds, the tax rate may come down to 10%.

Some other differences

• In the case of Short-term capital gains, if the person owns the asset for less than 24 months, it is considered an immovable property, and if it is held for less than 36 months, it is called a movable property.

In the case of Long-term Capital gains, if the asset is owned by the person for a while more than 24 months, it is an immovable property. And if the property is owned for more than 36 months, it is known as movable property.

• Short Term Capital assets are easily tradable and liquid, while Long-term capital assets include all easily tradable, liquid, and other assets like machinery and gold.
• View of the market- In the case of short-term capital, it’s short, and for long-term capital, it’s long.
• There’s a higher risk in the market for Long-term Capital in comparison to Short-term Capital.
• In contrast to Long-term Capital, Short-term Capital yields lesser profits.

Calculation of Capital Gains

• Short-term Capital Gains = Total Value of Sale Consideration- (Acquisition Cost + Improvement Cost + Total Expenditure with Transfer) – Reinvestment in a specific asset.

• Long Term Capital Gains = Total Value of Sale Consideration – (Acquisition Cost with Indexation + Improvement Cost with Indexation + Total Expenditure with Transfer) – Reinvestment in Specific Asset.