What are Long-Term Capital Gains (LTCG) and Short-Term Capital gains (STCG), and how are they calculated?

Capital Gains are profits earned from the sale of stocks, bonds, real estate, or mutual funds etc. The profit is the difference between the selling price and the purchase price of the asset. Based on the holding period of the asset, capital gains are categorised into Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG).

Long-Term Capital Gains (LTCG)

Long-term capital gains (LTCG) are the profits earned from the sale of an asset held for a certain period (usually 1 year), which is called the holding period. LTCG consists of a tax rate percentage and an exemption limit, which vary based on specific dates.

As per the latest budget, securities sold before 23rd July 2024 are taxed at 10%, and those sold on or after 23rd July 2024 are taxed at 12.5%.

The LTCG exemption limit for securities was ₹1,00,000 per annum. It has been increased to ₹1,25,000 per annum from FY 2024-25.

Example scenario

If you sell securities on 15th June 2024, the tax rate will be 10%, and the exemption limit will be ₹1,25,000. This is because the sale occurs after 1st April 2024, when the higher exemption limit takes effect, but before 23rd July 2024, when the higher tax rate of 12.5% begins.

Grandfathering Clause

Before the 2018 budget, LTCG, from the sale of equity shares and equity-oriented mutual funds was exempt from tax if the holding period was more than 12 months. However, starting from April 1, 2018, the government imposed a 10% tax on LTCG exceeding ₹1 lakh in a financial year on these assets.

The grandfathering clause was introduced to ease the transition and protect existing investors. It allows investors to calculate LTCG based on the highest price of their equity shares or mutual funds as of January 31, 2018, rather than the original purchase price.

Example scenario

1. Shares were purchased in January 2015 at ₹500.
2. The share's price on 31st January 2018, was ₹700.
3. In August 2024, the shares were sold for ₹1000.
4. The LTCG tax would be applicable on ₹300 (₹700 - ₹1000).
5. If the share was sold in August for ₹650. The purchase price of ₹700 cannot be considered to claim a loss. Instead, the sale price of ₹650 will be considered as the new purchase price, rendering it tax-exempt.

This is applicable under the current taxation rules and is subject to changes.

Download the tax P&L to see LTCG tax liability. To learn more, see Where can the holding period of investments and the tax liability based on the grandfather clause of LTCG be found?

Short-Term Capital Gains (STCG)

If securities are sold after being held for one year or less, the profits are classified as Short-Term Capital Gains (STCG).

As per the latest budget, securities sold before 23rd July 2024 are taxed at 15%, and those sold on or after 23rd July 2024 are taxed at 20%.

There are no tax exemptions under STCG.

The tables below explain the tax rates for residents and non-residents for securities sold on after 23rd July 2024: