For the purpose of taxation, capital assets are classified into two categories as given below:

Short-Term Capital Asset:

Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months Note: Period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company and immovable property being land or building or both.

Long-Term Capital Asset:

Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months Note: Period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company and immovable property being land or building or both.

Illustration

Mr. Kumar is a salaried employee. In the month of April, 2013, he purchased a piece of land and sold the same in December, 2022. In this case, land is a capital asset for Mr. Kumar. He purchased land in April, 2013 and sold in December, 2022 i.e. after holding it for a period of more than 24 months. Hence, land will be treated as long-term capital asset.

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Mr. Raj is a salaried employee. In the month of April, 2021, he purchased a piece of land and sold the same in December, 2022. In this case land is a capital asset for Mr. Raj. He purchased land in April, 2021 and sold it in December, 2022, i.e., after holding it for a period of less than 24 months. Hence, land will be treated as short-term capital asset.

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Mr. Vipul is a salaried employee. In the month of July, 2017, he purchase a piece of land and sold the same in January 2023. In this case land is a capital asset for Mr. Vipul and it was sold in the Assessment Year 2023-24. He purchased land in July, 2017 and sold it in January 2023, i.e. after holding it for a period of more than 24 months. Hence land will be treated as long-term capital asset.

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Mr. Raj is a salaried employee. In the month of April, 2021 he purchased equity shares of SBI Ltd. (listed in BSE) and sold the same in December, 2022. In this case shares are capital assets for Mr. Raj. He purchased shares in April, 2021 and sold them in December, 2022, i.e., after holding them for a period of more than 12 months. Hence, shares will be treated as long-term capital assets.

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Mr. Kumar is a salaried employee. In the month of April, 2022 he purchased equity shares of SBI Ltd. (listed in BSE) and sold the same in January, 2023. In this case shares are capital assets for Mr. Kumar. He purchased shares in April, 2022 and sold them in January, 2023, i.e., after holding them for a period of less than 12 months. Hence, shares will be treated as short-term capital assets.

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Mr. Kumar is a salaried employee. In the month of April, 2021 he purchased un-listed shares of XYZ Ltd. and sold the same in January, 2023. In this case shares are capital assets for Mr. Raj and to determine nature of capital gain, period of holding would be considered as 24 month as shares are unlisted. He purchased shares in April, 2021 and sold them in January, 2023, i.e., after holding them for a period of less than 24 months.

Hence, shares will be treated as Short Term Capital Assets.

Illustration

Mr. Raj is a salaried employee. In the month of April, 2013 he purchased un-listed shares of XYZ Ltd. and sold the same in December, 2022. In this case shares are capital assets for Mr. Raj and to determine nature of capital gain, period of holding would be considered as 24 month as shares are unlisted. He purchased shares in April, 2013 and sold them in December 2022, i.e., after holding them for a period of more than 24 months. Hence, shares will be treated as Long Term Capital Assets.

[As amended by Finance Act, 2022]

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Mr. Vikas is a salaried employee. In the month of September, 2017 he purchased unlisted shares of ABC ltd. and sold the same in May 2022. In this case, shares are sold in assessment year 2023-24. Hence, period of holding for unlisted shares to be considered as 24 months instead of 36 months.

Mr. Vikas purchased shares in September 2017 and sold them May 2022, i.e. after holding them for a period of 24 months or more. Hence, shares will be treated as Long Term Capital Assets.

Meaning of short-term capital gain and long-term capital gain

Gain arising on transfer of short-term capital asset is termed as short-term capital gain and gain arising on transfer of long-term capital asset is termed as long-term capital gain.

However, there are few exceptions to this rule like gain on depreciable asset is always taxed as short-term capital gain.

Illustration

In April, 2022 Mr. Raja sold his residential house property which was purchased in May, 2002. Capital gain on such sale amounted to Rs. 8,40,000. In this case the house property is a long-term capital asset and, hence, gain of Rs. 8,40,000 will be charged to tax as long-term capital gain.

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In April, 2022 Mr. Rahul sold his residential house property which was purchased in May, 2020. Capital gain on such sale amounted to Rs. 8,40,000. In this case the house property is a short-term capital asset and, hence, gain of Rs. 8,40,000 will be charged to tax as short-term capital gain.

Reason for bifurcation of capital gains into long-term and short-term gains :–

The taxability of capital gains depends on the nature of gain, i.e., whether short-term or long-term. Hence, to determine the taxability, capital gains are classified into short-term capital gain and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term capital gain are different.