PROSPERR.IO

Determining whether the gain from the sale of a capital asset is short-term or long-term is a critical aspect of financial planning and tax compliance. The classification affects not only the tax rate applied but also potential tax benefits such as indexation and tax exemptions. Here’s a detailed guide on how to ascertain the nature of your capital gains.

Understanding Capital Assets

Before diving into the classification, it’s essential to understand what constitutes a capital asset. The word “Capital asset” has been defined under Section 2(14) of the Income-tax Act. This includes real estate, securities, jewellery, and other investments; however, it excludes certain assets such as agricultural land (not located in the areas specified), stock in trade, certain personal effects, etc. 

Short-Term Capital Assets

General Rule: A capital asset held for up to thirty six months immediately preceding the date of its transfer is classified as a short-term capital asset. However, the following are exceptions:

• Exceptions with a 12-Month Holding Period:
• Securities Listed on a Recognized Stock Exchange in India,
• Units of the Unit Trust of India,
• Units of an Equity-Oriented Fund,
• Zero-Coupon Bonds.

• Exceptions with a 24-Month Holding Period:
• Shares of an unlisted company,
• Immovable property: land/buildings

Long-Term Capital Assets

A long-term capital asset is essentially any capital asset that is not a short-term capital asset. This means:

• General Rule: Any asset held for more than 36 months.
• Exceptions:
• Listed securities, UTI units, equity-oriented mutual funds, and zero-coupon bonds held for more than 12 months are long-term assets . 
• Unlisted shares and immovable property, held for more than 24 months, are long-term capital assets.

Determining the Holding Period

To determine whether your capital gain is short-term or long-term, follow these steps:

• Identify the Acquisition Date: Note the date on which you acquired the capital asset.
• Identify the Transfer Date: Note the date on which you transferred (sold) the capital asset.
• Calculate the Holding Period: Calculate the duration between the acquisition date and the transfer date.

Examples

• Listed Shares: You purchased shares of a company listed on a recognized stock exchange in India on January 1, 2022, and sold them on March 1, 2023. The holding period is 14 months. Since the holding period exceeds 12 months, these shares are classified as long-term capital assets.
• Immovable Property: You bought a piece of land on January 1, 2021, and sold it on February 1, 2023. Since, the holding period exceeds 24 months, the property is considered a long-term capital asset.
• Unlisted Company Shares: You acquired unlisted company shares on January 1, 2022, and sold them on February 1, 2023. The holding period is 13 months. As it do not exceed 24 months, these shares are classified as short-term capital assets.

Determining the Holding Period in special cases 

When a capital asset is acquired through any distribution of assets on partition of a HUF, under a gift or will, by succession, inheritance or devolution or other modes specified under section 49(1) of the the Income Tax Act, the holding period includes the period for which the property is owned by the previous owner. 

In such cases, the Holding Period is computed as follows:

• Determine the Date of Acquisition by the Previous Owner: Identify the date on which the previous owner originally acquired the asset.
• Determine the Date of Transfer to the Assessee: Identify the date on which the asset was transferred to the assessee .
• Determine the date of transfer by the assessee: Identify the date on which the assessee transfers (sells) the asset.
• Compute the Total Holding Period: Add the period for which the asset was held by the previous owner to the period for which it was held by the assessee. 

Example:

• Mr. A purchased a piece of land on January 1, 2010.
• Mr. A gifted this land to his son, Mr. B, on January 1, 2020.
• Mr. B sold the land on January 1, 2023.

Steps to Compute the Holding Period:

• Date of Acquisition by the Previous Owner (Mr. A): January 1, 2010
• Date of Transfer to the Assessee (Mr. B): January 1, 2020
• Date of Transfer by the Assessee (Mr. B): January 1, 2023

Holding Period Calculation:

• Period held by Mr. A: January 1, 2010, to January 1, 2020 = 10 years
• Period held by Mr. B: January 1, 2020, to January 1, 2023 = 3 years

Total Holding Period:

• Total Holding Period = 10 years (by Mr. A) + 3 years (by Mr. B) = 13 years

Since the total holding period of the land is 13 years, which exceeds the long-term threshold for immovable property (24 months), the gain from the sale of the land by Mr. B would be classified as a long-term capital gain.

The explanation to Section 2(42A) of the Income-tax Act, provides the other instances where for the purpose of determining the holding period of a capital asset, the period needs to be included or excluded.

Implications for Taxation

• Short-Term Capital Gains (STCG): These are added to your total income and taxed at the applicable income tax rates.
• Long-Term Capital Gains (LTCG): These generally benefit from lower tax rates and may qualify for indexation benefits, which adjust the purchase price for inflation, potentially reducing the taxable gain.

Conclusion

Correctly classifying your capital gains as short-term or long-term can significantly impact your tax liability. By understanding the holding period requirements and special provisions, you can ensure compliance with tax laws. Always consider consulting a tax professional for complex cases to ensure accurate tax treatment. Click here to book your FREE tax assessment call

Disclaimer:

The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.