Capital gains are categorised as short-term and long-term gains based on the period, for which they were held before transfer. This is because the tax treatment differs based on the type of asset and the type of capital gains. If the asset has been held for period not exceeding 36 months, immediately before transfer, the gains, if any, is considered short-term in nature. For units of equity mutual funds, shares of companies whether quoted or unquoted and quoted securities holding period of not more than 12 months is considered for short-term capital gains.

Rates of Taxation Short-term capital gains (STCG) for equity shares and equity-oriented funds are taxed at 15%. In case of all other securities and funds, STCG is taxed at the applicable rate of tax. STCG is added to the taxable income and taxed at the marginal rate applicable to the investor’s level of taxable income. Long-term capital gains (LTCG) are exempt from tax in the case of equity shares and equity-oriented funds. In the case of all other securities and funds they are taxed at 20% after indexation. The rates of tax have to be increased by surcharges and cess where applicable.

Type of Mutual Fund scheme Long Term Capital Gains Short Term Capital Gains
Equity mutual fund/shares Units held for more than 12 months: Nil Units held for less than 12 months: 15%+ 10% Surcharge + 3% Cess
Non-equity schemes Units held for more than 36 months: 20% with indexation* Units held for more than 12 months: Tax rate as per tax bracket + 10% Surcharge + 3% Cess

 

Exemptions in case of a long term capital gain on sale of residential house

  • ­Section 54 exempts long-term capital gains from sale of residential house from tax to the extent that the gains have been invested in another residential property. The other residential property should have been purchased within six months of sale of the first residential house.
  • ­Section 54EC, exempts long-term capital gains on the transfer of any capital asset if they are invested in bonds specified for this exemption. This exemption is available up to a limit of Rs. 50 lakhs per financial year.

In case you have an investment horizon of more than five years, you should definitely invest some portion of your portfolio in equity due to tax free advantage after one year. This will provide growth to your portfolio on a tax-efficient basis.