Budget Explained: What’s the difference between LTCG & STCG taxes?

In order to follow Budget-related announcements with ease, it’s useful to understand a few important terms and concepts in advance. A major focus area in every Budget speech is about taxes. Do you know how equities are taxed in the country? In this article, let’s delve deep into capital gains taxation and the difference between long-term capital gains (LTCG) and short-term capital gains (STCG) taxes.

First things first, what are capital gains?

The term capital gains refers to the profit realised from the sale of a capital asset, such as equities and equity-related instruments like mutual funds. Capital gains come out of the increase in value of an asset over its purchase price, leading to a profit at the time of sale.

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For example, if you sell a share bought at Rs 200 at Rs 210, your capital—or profit—out of these transactions is Rs 10 (Rs 210 minus Rs 200).

Now, what are long- and short-term capital gains?

Long-term Capital Gains vs Short-term Capital Gains

In equities, long-term capital gains are gains arising out of sales of listed securities initiated after completing a holding period of at least 12 months. In other asset classes, like real estate, commodities or bonds, a holding period of 24 months is applicable.

Similarly, short-term capital gains are gains out of equities sold within one year of buying. In other asset classes, this period is 24 months.

Now, let’s look at the tax rates:

Please note that additional components like surcharge and cess also apply while calculating the effective capital gains tax in both categories.

LTCG vs STCG | Key points to remember

• The main difference between long- and short-term capital gains is the holding period.
• A lower tax rate in the case of LTCG than in STCG encourages investors to hold their investments for longer.
• As of now, the LTCG tax is 750 basis points (bps) lower than the STCG tax.
• In Budget 2024, the short-term capital gains tax rate was raised to 20 per cent from 15 per cent and the long-term capital gains tax to 12.5 per cent from 10 per cent with a 25 per cent increase in the exemption limit to Rs 1.25 lakh per financial year.

The difference between LTCG and short-term capital gains tax is the holding period, with LTCG applying to assets held for more than 12 months (24 months for other assets) and STCG applying to assets held for 12 months (24 months for other assets) or less.