Short-Term vs Long-Term Capital Gains: Holding Period and Tax Rates (Income Tax Act 2025)

Under the Income Tax Act 2025, profit on selling a capital asset is taxed under the head "Capital gains" (section 67). Whether the gain is short-term or long-term depends on how long you held the asset: more than 12 months for listed shares, equity mutual fund units and a few other securities, and more than 24 months for everything else (section 2(101)). Long-term gains on listed equity (with securities transaction tax paid) are taxed at 12.5% above Rs 1,25,000; short-term gains on the same assets are taxed at 20%.

This guide covers the holding periods, the rates, how a gain is computed, the exemptions you can claim by reinvesting, and four worked examples for tax year 2026-27. Every figure is from the Act as amended by the Finance Act, 2026, with the section number alongside so you can verify it. Last reviewed against that text on 10 November 2026. Surcharge and cess are not included in the examples.

What is a capital asset and what counts as a transfer?

A capital asset is property of any kind that you hold, whether or not it is connected with your business (section 2(22)(a)). Stock-in-trade, personal effects and rural agricultural land are excluded, among other items listed in that section. A transfer includes a sale, an exchange, giving up the asset, extinguishing rights in it, compulsory acquisition, and certain property transactions such as handing over possession under a part-performance contract (section 2(109)).

The gain is taxed in the tax year in which the transfer takes place (section 67(1)). Section 67 also pulls in some less obvious receipts, such as insurance money for a destroyed asset (section 67(2)), a capital asset converted into stock-in-trade (section 67(6)) and an asset put into a firm as capital contribution (section 67(9)).

How long must you hold an asset for it to be long-term?

Asset	Short-term if held	Long-term if held
Listed securities (recognised stock exchange in India), UTI units, units of an equity-oriented fund, zero-coupon bonds	12 months or less	More than 12 months
All other capital assets: land, building, unlisted shares, gold and so on	24 months or less	More than 24 months
Asset in a block of assets on which depreciation has been allowed	Any excess of the sale value over the block's written down value and costs is deemed short-term gain (section 74), whatever the holding period	Not applicable

The 12-month rule is in section 2(101)(b) and the 24-month rule in section 2(101)(a). A long-term capital asset is simply one that is not short-term (section 2(67)).

The holding period is counted back from the date of transfer. Section 2(101)(c) adds the previous owner's period in some cases (where the asset came to you in the circumstances in section 73(1), Sl. No. 1) and counts a bonus or rights allotment from the date of allotment. For shares held in a depository, the first-in-first-out method decides which shares you sold, and so their cost and holding period (section 67(7)(c)).

What are the tax rates on short-term and long-term capital gains?

Gain	Rate	Section
Short-term gain on an equity share, equity-oriented fund unit or business trust unit, where securities transaction tax (STT) applies to the sale	20%	196(1)
Long-term gain on an equity share, equity-oriented fund unit or business trust unit, with STT paid (on acquisition and transfer for shares; on transfer for units)	12.5% on the gain above Rs 1,25,000	198(1), (2)
Other long-term gains (land, building, unlisted shares and so on)	12.5% on the whole gain	197(1)
Land or building acquired before 23 July 2024, sold by a resident individual or HUF	12.5%, with the excess over a 20% indexed computation ignored	197(3)

Section 196 is the special rate for short-term gains. A short-term gain that does not fall under it is not given a separate rate in these sections, so it forms part of your total income and is taxed at the rates that apply to your total income.

Three points apply across these sections:

• Basic exemption shortfall. A resident individual or HUF whose other income is below the maximum amount not chargeable to tax can set the shortfall against the gain before the special rate applies (sections 196(2), 197(2), 198(3)).
• Chapter VIII deductions are allowed from gross total income after removing these capital gains (sections 196(4), 197(5), 198(6)).
• STT condition. The 198 treatment needs STT to be paid as described above. The Central Government may notify acquisitions for which the STT-on-acquisition condition does not apply (section 198(5)), and the condition is relaxed for certain transfers on an IFSC exchange in foreign currency (section 198(4)).

What is an "equity-oriented fund"?

Section 198(8) defines it as a fund under a specified mutual fund scheme (or a unit linked insurance policy scheme not exempt under Schedule II, Sl. No. 2) that invests at least 65% of its proceeds in equity shares of domestic listed companies. A fund that invests in units of another listed fund needs at least 90% in that fund, and that fund must itself hold at least 90% in listed domestic equity. The percentage is measured on the annual average of the monthly averages of opening and closing figures. Check a fund's scheme documents before assuming it qualifies.

How is a capital gain computed?

Section 72(1) takes the full value of consideration and deducts:

1. expenditure incurred wholly and exclusively in connection with the transfer (brokerage, legal fees on the sale); and
2. the cost of acquisition and the cost of any improvement.

Two things are not deductible: interest claimed under section 22(1)(b) or Chapter VIII, and securities transaction tax paid (section 72(3)). The indexed cost of acquisition appears only in the comparison used for pre-23 July 2024 land and buildings under section 197(3) (section 72(2)).

Worked example 1: short-term gain on listed shares

Assumptions: tax year 2026-27, resident individual, other income already above the basic exemption amount, STT paid on the sale. Ravi bought 500 listed shares at Rs 400 each and sold them after 10 months at Rs 560 each, paying Rs 1,000 brokerage on the sale.

Step	Amount (Rs)
Full value of consideration (500 x 560)	2,80,000
Less cost of acquisition (500 x 400)	2,00,000
Less transfer expense (brokerage)	1,000
Short-term capital gain	79,000
Tax at 20% (section 196(1)(i))	15,800

Ten months is 12 months or less, so the shares are short-term. STT is not deducted from the gain (section 72(3)(b)).

Worked example 2: long-term gain on listed shares

Assumptions: tax year 2026-27, resident individual, STT paid on both purchase and sale. Meena sold listed shares she had held for three years for Rs 9,50,000. She paid Rs 6,00,000 for them and Rs 2,000 in brokerage on the sale.

Step	Amount (Rs)
Full value of consideration	9,50,000
Less cost of acquisition	6,00,000
Less transfer expense	2,000
Long-term capital gain	3,48,000
Less amount not taxed (section 198(2)(a))	1,25,000
Gain taxed at 12.5%	2,23,000
Tax (2,23,000 x 12.5%)	27,875

Worked example 3: land bought before 23 July 2024

Assumptions: tax year 2026-27, resident individual. Anil sold a plot in 2026-27 for Rs 80,00,000. He bought it in 2013 for Rs 30,00,000 and has no improvement or sale expenses. For illustration only, assume the indexed cost of acquisition under section 72(8) works out to Rs 55,00,000. The actual figure depends on the Cost Inflation Index notified by the Central Government, which is not in the Act text.

Step	Amount (Rs)
Gain without indexation (80,00,000 - 30,00,000)	50,00,000
A: tax at 12.5% (section 197(1)(b))	6,25,000
Gain with indexed cost (80,00,000 - 55,00,000)	25,00,000
B: tax at 20% on that gain	5,00,000
Excess E = A - B, ignored (section 197(3))	1,25,000
Tax payable on the gain (A - E)	5,00,000

Anil pays the lower of the two computations. The section 197(3) relief is for resident individuals and HUFs and for land or buildings acquired before 23 July 2024.

Worked example 4: reinvesting the gain in a house

Section 86 lets an individual or HUF avoid tax on part or all of a long-term gain on an asset that is not a residential house, if the money goes into one residential house in India. The house must be bought within one year before or two years after the transfer, or built within three years after it (section 86(1)(b)).

Assumptions: Kiran sells a long-term asset (not a house) with net consideration of Rs 40,00,000 and a long-term gain of Rs 15,00,000. Within two years she buys a house for Rs 30,00,000.

Step	Amount (Rs)
Net consideration more than cost of new house, so the proportion rule applies (section 86(1)(i))	40,00,000 vs 30,00,000
Gain not charged (15,00,000 x 30,00,000 / 40,00,000)	11,25,000
Gain still charged under section 67	3,75,000

Conditions to watch: if the net consideration is not spent before the return is filed, the unused amount must be deposited in a specified bank scheme by the return due date under section 263 (section 86(2)). The exemption is withdrawn if you sell the new house within three years (section 86(7)) or own or buy another house that earns house property income, as set out in section 86(5) and (6). The cost of the new house and the net consideration are capped at Rs 10 crore for this purpose (section 86(8), (9)).

Which other reinvestment exemptions exist?

Section 67(1) is expressly "save as otherwise provided" in sections 82 to 89. The ones most clients ask about:

• Section 85, bonds. For a long-term gain on land or a building, invest in a specified bond within six months of the transfer (NHAI and REC bonds redeemable after five years, or others notified). The investment eligible for this exemption is capped at Rs 50 lakh (section 85(2)), and the bonds must be held for five years (section 85(3)).
• Section 86, house. As in example 4.
• Section 89, compulsory acquisition. If compensation is received late, the time to reinvest runs from the date it is received.

Sections 82, 83, 84, 87 and 88 cover other cases (residential property sale, agricultural land, compulsory acquisition of land and buildings, industrial undertaking shifts). Read the section for the specific asset before relying on any of them.

Are debt mutual funds and unlisted bonds always long-term after a holding period?

No. Section 76 overrides the holding-period test in section 2(101). Gains on a Specified Mutual Fund unit acquired on or after 1 April 2023, on a Market Linked Debenture, and on an unlisted bond or unlisted debenture transferred, redeemed or maturing on or after 23 July 2024, are always treated as short-term, however long you held them (section 76(1), (2)). The gain is sale value less cost less transfer expenses, and STT is not deducted (section 76(3), (4)). A Specified Mutual Fund is one that invests more than 65% of its proceeds in debt and money market instruments (section 76(5)(b)). Since section 196 and section 198 cover equity, such a gain is not given a special rate there, so it is taxed with your other income.

Is a gift or inheritance taxed as capital gains, and what happens when the receiver sells?

Receiving an asset by gift, will or irrevocable trust is not a "transfer" for section 67, so the giver has no capital gain on that step (section 70(1)(b)). The tax question arises when the receiver later sells. The cost of acquisition is the previous owner's cost plus improvements (section 73(1), Sl. No. 1), and the previous owner's holding period is added to the receiver's (section 2(101)(c)(B)(I)).

Example (tax year 2026-27): Meena's father gifts her listed shares he bought 5 years ago for Rs 2,00,000. She sells them 3 months later for Rs 5,00,000. The holding period includes her father's, so the gain is long-term, and the cost is Rs 2,00,000. The gain is Rs 3,00,000 before transfer expenses.

Can a capital loss be set off against other gains?

Loss	Can be set off against	Section
Short-term capital loss	Short-term or long-term capital gains of the year	108(2)(a)
Long-term capital loss	Long-term capital gains only	108(2)(b)
Any capital loss	Not against salary, business, house property or other heads	109(2)
Unabsorbed loss	Carried forward up to 8 tax years, with the same short-term/long-term restriction	111(1), (2)

Carry-forward needs a return filed in time; see our guide on filing a return to carry forward losses.

Two plain-language scenarios

Ravi sells after 11 months. Ravi buys listed shares in January 2026 and sells in December 2026. He held them for 11 months, which is 12 months or less, so the gain is short-term and taxed at 20%. If he had waited until February 2027, it would have been long-term, taxed at 12.5% on the amount above Rs 1,25,000.

Meena sells a flat after 26 months. Meena buys a flat in September 2024 and sells it in November 2026. A flat is not a listed security, so the test is 24 months. At 26 months it is a long-term asset, and the whole gain is taxed at 12.5% (section 197(1)(b)). The Rs 1,25,000 limit applies only to listed equity with STT paid, and the pre-23 July 2024 comparison does not apply because she bought after that date.

What are the common mistakes with capital gains?

• Using 12 months for everything. Only listed securities, UTI units, equity-oriented fund units and zero-coupon bonds get the 12-month test. Property and unlisted shares need more than 24 months.
• Applying the Rs 1,25,000 limit to property. It belongs to section 198, which is for listed equity, equity-oriented fund units and business trust units with STT paid.
• Deducting STT. Section 72(3)(b) disallows it.
• Ignoring the date of acquisition for land or buildings. A date before 23 July 2024 opens the section 197(3) comparison.
• Missing the deposit date for house reinvestment. Unused money has to be in the specified scheme by the return due date, and the proof goes with the return.
• Treating depreciable assets as long-term. For a block of assets on which depreciation was allowed, the excess over the block's written down value is short-term gain under section 74, whatever the holding period.

Quick reference

Question	Answer	Where
Holding period, listed securities and equity fund units	More than 12 months for long-term	2(101)(b)
Holding period, other assets	More than 24 months for long-term	2(101)(a)
Short-term gain on listed equity with STT	20%	196(1)
Long-term gain on listed equity with STT	12.5% above Rs 1,25,000	198(2)
Other long-term gains	12.5%	197(1)
Reinvestment in specified bonds	Within 6 months, up to Rs 50 lakh	85
Reinvestment in a house	1 year before to 2 years after (purchase), 3 years (construction)	86(1)

Where this is in the Act

• Section 2(22), 2(67), 2(68), 2(101), 2(102), 2(109): definitions of capital asset, long-term and short-term, transfer
• Section 67: charge to capital gains
• Section 72: computation, section 74: depreciable assets
• Sections 196, 197, 198: tax rates
• Sections 85, 86, 89: reinvestment exemptions
• Sections 70, 73, 76: not a transfer, cost on gifts, debt funds and unlisted bonds
• Sections 108, 109, 111: set-off and carry forward of capital losses

For how a gain fits into your overall income and the tax year, see our guide on the tax year under the Income Tax Act 2025.

How can CA firms keep track of capital gains work?

For a CA firm, the hard part is usually collecting the purchase dates, contract notes and reinvestment proof from each client in time for the return. Finexo's practice management software lets you track those document requests and filing deadlines across your client list. It does not compute capital gains for you.

This article explains the Income Tax Act 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.