Short-term capital gains

What are short-term capital gains?

Capital gains arise when any capital asset is sold; be it property, land, shares, bonds or even gold. When these capital assets are sold, they can result in capital gains or capital loss. However, not all capital gains are the same. Capital gains arising from assets are classified as short-term or long-term capital gains based on the holding period. Normally, short-term capital gains attract higher rate of tax compared to long-term capital gains.

Types of short-term capital gains

There are different types of short-term gains arising based on the type of assets. Let us look at a few specific assets. Short-term capital gains in the case of equity and equity mutual funds are defined as holding period of less than 1 year. However, in the case of bonds and most other assets, the definition of short-term is a holding period of less than 3 years. One exception is immovable property, where the definition of short-term capital gains is a holding period of less than 2 years.

How are short-term capital gains taxed?

There are two things you must understand about short-term capital gains. Firstly, the rates are higher and secondly, there is no indexation benefit in short term capital gains. Short term capital gains on equity are charged at 15% plus cess. However, in the case of short term capital gains on bonds, they are just added to your income and taxed at the peak incremental tax rate applicable to you. The idea of taxing short term capital gains at a higher rate is to ensure that investors take a longer term approach to investing.