Long-Term And Short-Term Capital Gains: The most important step in financial planning is managing your taxes. While some individuals prefer to manage their taxes on their own, others hire professional accountants or advisers. The management of taxes can be a cumbersome process due to several complex financial terminologies.
In today’s digital era, tax management software has been adopted by big multinational companies to make the entire process easier. In this article, we will discuss long-term and short-term capital gains, and the differences between the two.
First, you need to have a fair idea of capital gains. In simple terms, capital gains refer to profits you earn after selling a capital asset for more than its purchase price. Capital gains tax gets calculated by using the total sale price of an asset and then deducting its original cost.
When individuals sell something, the intention behind selling is to book profits from it. Capital gains are those profits resulting from an asset sale, like your home, business, stocks, etc. Long-term and short-term capital gains face different tax rates.
This is the main difference between short-term and long-term capital gains. Taxes only become due when you sell an asset, and not during the period when you are holding it. After an asset is sold, capital gains are known as “realized gains.” During the time they are held, they are termed as “unrealized gains.”
For most individuals, the main tax considerations include:
- For how long they have owned an asset
- What is the cost
- Income tax bracket
Capital assets include stocks, bonds, metals, jewelry, real estate, etc. For example, individuals selling their artwork, vintage car, a boat, etc. for more than what they paid for it are liable to pay capital gains.
A tax that you are obliged to pay on capital gains depends on your holding period. Therefore, it is very important to keep a track of capital gains when you sell a capital asset. This is particularly important for day traders in stocks.
Difference between long-term and short-term capital gains
Capital gains on the sale of all listed securities in India (except debt-oriented mutual funds) which are held for more than 12 months are known as long-term capital gains. Unlisted shares and immovable property are required to be held for over 24 months to be qualified for long-term capital gain.
Other capital assets, including debt-oriented mutual funds, should be held for a minimum period of 36 months. Therefore, the sale of these assets after 36 months will attract long-term capital gains.
On the other hand, a short-term capital gain is attracted when an asset is sold before the period of 12 months. Long-term capital gains attract taxes at more favorable rates than salary or wages. But short-term capital gains do not have any special tax rates as they are taxed as ordinary income.
Individuals pay lower taxes on long-term capital gains than they pay on short-term capital gains. On a related note, capital losses are categorized as the short term or long term by using the same criteria.
In India, information about the new tax rates and any relevant changes are explained and highlighted in the Budget every year. In Union Budget 2022-23, which was presented on Feb 1, it was explained that a surcharge at 15% has been capped on long-term capital gains tax for all the listed and unlisted corporations.
This news was particularly pleasing for the investors in early-stage companies and venture capitalists. This is because it will help them reduce their overall cost of exit.
The sale of capital assets can result in capital gains, and these gains are taxed under Income Tax Act. To save tax on capital gains, some capital gains exemptions are available to the assessee. Therefore, individuals need to do planning after considering all the deductions and reliefs available under the said law.
In brief, net sale consideration is arrived at by deducting the expenses related to the sale which has been made. Later, the cost of acquisition and improvement is subtracted from the net sale consideration. These costs are considered after applying for the indexation benefits. Thus, the resulting figure represents capital gains.
The idea behind giving deductions is that the capital gains amount gets invested in the new capital asset. This has to be done within the prescribed time period. Furthermore, the deduction is available if such type of investment is made in the new capital asset. However, certain conditions are required to be met.
Calculation of capital gains-short term or long-term, and the relevant tax rate involve the use of financial jargon and other complex terminologies. Since first-time investors might find it difficult, it is always advised to get these matters sorted by professional advisers.
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