What is a Holding Period?

The period during which an investor owns the stock is called the holding period. The holding period of the stocks or shares is calculated from the date of purchase of the shares to the date of sale. Returns and taxes vary depending on the holding period of the shares. Therefore, it helps determine the return and tax treatment of each asset.

For stockholdings to be taxable, you must first determine what type of asset you own. Shares can be held for long or short term. Long-term holding in the share market means holding shares for more than one year. This article will discuss the concept of what is holding period is, further explaining its significance in the stock market and the steps to calculate holding period returns.

Types of Holding Period

Holding periods of shares can be classified into different types based on the time the asset is held. The following is the breakdown of several types of holding periods. 

1. Short-term holding period: A short-term holding period means keeping assets for less than a year. It gives investors the flexibility to change plans quickly as per their preference. However, this type of stock holding period might be risky due to short-term market changes.
2. Medium-term holding period: A medium-term holding period involves keeping assets for a moderate time. It balances the factor of risks and returns in the share market. This will further help with risk across different investments. Investors are suggested to consider factors like stock history, growth potential, and risk level when holding assets for a moderate period. 
3. Long-term holding period: A long-term holding period means keeping assets for many years. Investors usually choose assets and securities that have a history of steady growth and potential for profits. It is suitable for investors who have patience and do not aim for quick returns.

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Importance of Holding Period 

The tax levied on the holding period of stocks is calculated according to the holding period. The holding period is especially important for two main reasons: return and taxation. Let’s understand its importance in detail.

• The holding period helps determine the return on investment for the period. 
• Holding periods are taxed separately in two categories.
• If an investor holds an amount for 12 months or more, this qualifies as a long-term gain and is taxed as per the rules of the long-term holding period.
• While investments held for less than 12 months qualify as short-term gains and are taxed as per the short-term holding period category rules. 
• The holding period is also used to calculate the return on investment. 
• The value of the initial investment increases, and at the same time, many companies also pay dividends because of the clear calculation of return on investments. 
• The holding period return meaning addresses that the calculation of holding period returns helps to understand different investment schemes with different durations. Therefore, the holding period of the stock plays an important role in the tax aspect of the stock. 

When calculating the return on investment for the holding period, consider the total return on investment. This also includes taking dividends along with the increase in the value of the investment throughout the investment.

How to Calculate the Holding Period?

Let’s now understand how to calculate the share or stock holding period with an example.

Suppose an investor buys shares of ABC on April 10 and sells them on November 10 for a better potential gain. The holding period here is 7 months, which means a short holding period. Therefore, tax is charged on short-term capital gains.

The formula for holding period calculation is: 

Return = income + (EOPV – IV)] / IV

Here,

• EOPV = value at the end of the period
• IV = initial value

Depending on the last price when the stock is sold, the return on holding period for shares can be positive or negative. Holding period returns help calculate the value of the stock and compare it to other shares an investor may choose. 

Capital Gains on Holding Period

Capital gain refers to the returns obtained by selling an asset. Calculating capital gains is important for tax purposes. This gain can be of two types, i.e., short-term and long-term. The holding period for allocating short-term and long-term returns varies according to the holding period. In the case of equity shares, if the asset is held for less than 12 months, it is considered to be a short-term asset and vice versa.

Short-term gains are taxed at 15 % and long-term assets or shares are taxed at 10%, as of 2024. If no securities transaction tax applies, short-term capital gains are included in income and taxed according to the taxpayer’s income slab. However, it is important to note that selling shares might not always provide returns, sometimes it may lead to potential losses as well.

Conclusion
The holding period in the share market is crucial for investors. It's the time you keep a stock before selling it. This period affects your returns and taxes. Short-term holding lasts less than a year, medium-term is moderate, and long-term is for many years. Each type has its pros and cons. Your choice depends on your goals and risk tolerance. To track your holding periods easily, consider using a share market app. These apps help you monitor your investments, calculate returns, and understand tax implications. Remember, longer holding periods often mean lower taxes, while shorter periods might offer quick profits, but taxes can be higher. Always consider your financial goals when deciding how long to hold your stocks.