Capital Gains Holding Periods & Tax Rates - Income Tax Act, 2025

Capital gains arise when a capital asset is transferred and the transaction results in a profit or gain. One of the first steps in calculating the tax is to determine whether the asset is a short-term capital asset (STCA) or a long-term capital asset (LTCA).

This distinction is important because the applicable tax rate can depend on the type of asset, its period of holding, whether Securities Transaction Tax (STT) has been paid and other prescribed conditions.

What is a Short-Term Capital Asset?

Under section 2(101) of the Income-tax Act, 2025, a capital asset is generally considered a short-term capital asset if it is held for not more than 24 months immediately preceding the date of transfer.

However, certain specified financial assets are subject to a shorter holding-period threshold of 12 months.

What is a Long-Term Capital Asset?

Under section 2(67), a long-term capital asset is a capital asset that does not qualify as a short-term capital asset.

Therefore, the applicable holding period must first be identified according to the type of asset.

Holding Period for Short-Term and Long-Term Capital Assets

Example

Suppose Priya buys listed shares on 1 May 2026 and sells them on 1 February 2027.

Since the shares have been held for less than 12 months, they would be treated as short-term capital assets.

If the shares are instead sold after being held for more than 12 months, they would generally qualify as long-term capital assets.

Certain Assets are Always Treated as Short-Term

The normal 12-month or 24-month classification does not apply to every investment.

Under section 76, capital gains arising from the transfer of the following assets are treated as short-term capital gains irrespective of the period for which they were held:

• Units of a specified mutual fund acquired on or after 1 April 2023
• Market Linked Debentures
• Unlisted bonds
• Unlisted debentures

Tax Rate on Short-Term Capital Gains

The tax treatment of short-term capital gains depends on the nature of the capital asset.

1. STCG on Listed Equity Shares and Equity-Oriented Funds – Section 196

Under section 196, short-term capital gains arising from the transfer of specified assets are taxable at 20%.

The provision covers:

• Equity shares in a company
• Units of an equity-oriented fund
• Units of a business trust

For the concessional 20% rate, the sale transaction should generally be subject to Securities Transaction Tax (STT).

Example

Rahul purchases listed equity shares for ₹4,00,000 and sells them eight months later for ₹5,50,000. Assume that the relevant STT conditions are satisfied.

Short-term capital gain:

₹5,50,000 − ₹4,00,000 = ₹1,50,000

Tax under section 196:

₹1,50,000 × 20% = ₹30,000

This is before considering other applicable components of the final tax computation.

IFSC Transactions

Short-term capital gains from eligible transactions undertaken on a recognised stock exchange located in an International Financial Services Centre (IFSC) can also attract the 20% rate where the consideration is received or receivable in foreign currency, even where STT is not paid, subject to the prescribed conditions.

2. Other Short-Term Capital Gains

Short-term capital gains that do not fall within section 196 are generally taxable at the taxpayer's normal applicable rate.

For example, if land or another ordinary capital asset is transferred within the applicable short-term holding period, the resulting short-term capital gain does not automatically qualify for the 20% rate under section 196.

Tax Rate on Long-Term Capital Gains

Long-term capital gains are principally governed by sections 197 and 198.

Section 197 – LTCG on Other Long-Term Capital Assets

Long-term capital gains on capital assets other than those covered by section 198 are generally taxable at 12.5% under section 197.

This can include long-term capital gains arising from assets such as land, buildings and other capital assets, subject to the applicable provisions.

Example

Suppose Arjun purchases a plot for ₹20 lakh and, after satisfying the applicable long-term holding requirement, sells it for ₹28 lakh.

Ignoring transfer expenses and other adjustments purely for illustration:

LTCG = ₹28 lakh − ₹20 lakh = ₹8 lakh

Tax at 12.5%:

₹8 lakh × 12.5% = ₹1 lakh

The actual capital gain may differ depending on the cost of acquisition, cost of improvement, transfer expenses, deemed consideration provisions and deductions available under the law.

Special Rule for Certain Land and Buildings Acquired Before 23 July 2024

A special protection applies where a resident individual or Hindu Undivided Family (HUF) transfers a long-term capital asset being land or building or both acquired before 23 July 2024.

In such a case, the excess of:

Tax computed at 12.5% without indexation

over

Tax computed at 20% with indexation

is ignored.

Section 198 – LTCG on Listed Equity Shares and Equity-Oriented Funds

Section 198 provides a special tax rate for long-term capital gains from specified assets, including:

• Listed equity shares in a company
• Units of an equity-oriented fund
• Units of a business trust

The long-term capital gain exceeding ₹1,25,000 is taxable at 12.5%, subject to the prescribed STT conditions.

For listed equity shares, STT should generally have been paid at the time of acquisition as well as transfer. In the case of units of an equity-oriented fund or business trust, STT should generally have been paid at the time of transfer, subject to applicable exceptions.

Example

Neha earns qualifying long-term capital gains of ₹3,00,000 from listed equity shares. Assume that her basic exemption limit has already been fully utilised by other income.

LTCG = ₹3,00,000

Less: Threshold = ₹1,25,000

Taxable LTCG = ₹1,75,000

Tax:

₹1,75,000 × 12.5% = ₹21,875

Therefore, the ₹1.25 lakh threshold under section 198 should be considered before applying the 12.5% tax rate.

Adjustment Against the Basic Exemption Limit

An additional benefit is available to a resident individual or resident HUF.

Where income other than the specified capital gains does not fully utilise the applicable basic exemption limit, the unutilised portion may be adjusted against:

• STCG taxable under section 196
• LTCG taxable under section 197
• LTCG taxable under section 198

The remaining capital gain is then subjected to the applicable special rate.

Can Chapter VIII Deductions Reduce These Capital Gains?

Deductions under Chapter VIII cannot be claimed against:

• STCG taxable under section 196
• LTCG taxable under section 197
• LTCG taxable under section 198

Taxpayers should therefore avoid treating these special-rate capital gains in the same manner as ordinary income while applying Chapter VIII deductions.

Capital Gains Tax Rates at a Glance

Common Mistakes to Avoid

• Assuming that every capital asset becomes long-term after 12 months.
• Applying the 20% STCG rate to every short-term capital gain.
• Applying the ₹1.25 lakh threshold to every type of long-term capital gain.
• Treating an unlisted bond, unlisted debenture or Market Linked Debenture as long-term merely because it was held for several years.
• Ignoring the STT conditions applicable to sections 196 and 198.
• Overlooking the special protection available for qualifying land or building acquired before 23 July 2024.
• Claiming Chapter VIII deductions against capital gains taxable under sections 196, 197 or 198.

Conclusion

Under the Income-tax Act, 2025, capital-gain taxation begins with correctly identifying the nature of the asset and its applicable holding period.

Certain listed securities and specified financial assets generally follow a 12-month holding-period threshold, whereas most other capital assets follow a 24-month threshold. At the same time, certain investments covered by section 76 are treated as short-term irrespective of how long they are held.

After classification, the relevant tax provision must be identified. Qualifying short-term equity gains can be taxable at 20% under section 196, while long-term capital gains are generally taxable at 12.5% under sections 197 or 198. The ₹1.25 lakh threshold applies specifically to qualifying long-term capital gains covered by section 198.

Therefore, the holding period alone does not determine the final tax liability. The nature of the asset, applicable section, STT conditions and other statutory requirements must also be considered.

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