Capital Gains: One Rate, Many Rules!
“What is the capital gains tax rate?” It sounds like a simple question. And, for Long Term Capital Gains (LTCG), the answer is broadly simple: 12.5%. But when it comes to Short Term Capital Gains (STCG), the answer depends upon the asset and the applicable special provisions.
The capital-gains regime has undergone substantial rationalisation. LTCG is broadly taxed at 12.5%, while specified equity STCG is taxed at 20%. But STCG does not have one uniform rate. Depending upon the asset, its listing status, holding period and the applicable deeming provisions, the tax treatment can differ significantly.
That is where the apparent simplicity of the present capital-gains regime meets its many rules.
STCG is not one rate:
The first misconception is that all STCG are taxable at 20%. That is not correct. The general rule is that STCG is taxable at the applicable rate of the assessee. The special 20% rate applies to specified equity shares, units of Equity Oriented Mutual Funds (EOMF) & units of business trusts where the statutory conditions with STT payment is satisfied. The earlier rate of 15% in such case has therefore become history under the current regime. The expression “STCG” therefore tells us the nature of the gain, but not necessarily its tax rate. The holding period here is only 12 months.
Gold and Silver:
Physical gold and silver are generally subject to a 24-month holding period. If sold within that period, it will be STCG & taxable like other regular income of the taxpayer; if held beyond it, the gain becomes LTCG and is taxable at 12.5%, subject to applicable provisions.
Gold ETF and Silver ETF:
Gold ETFs and Silver ETFs create another interesting distinction.
Listed securities generally have a 12-month holding period for LTCG/STCG recognition. But being listed does not automatically make an investment eligible for the special 20% STCG provision. Therefore, a Gold ETF or Silver ETF can have the benefit of the 12-month holding-period rule but not the special 20% STCG rate. Remember, the holding-period provision and the rate provision are not necessarily the same provision.
Debt Mutual Funds – Where holding period can become irrelevant:
Debt mutual funds provide perhaps the clearest example of the complications created by special deeming provisions. Under Section 76 of the Income-tax Act, 2025, a Specified Mutual Fund acquired on or after 1 April 2023 is treated as giving rise to STCG irrespective of the actual holding period. Therefore, an investor cannot simply say:
“I held my debt fund for five years, so it must be LTCG.” If the fund falls within the specified provision, the gain is deemed to be short-term. Since this is not the special equity STCG covered by the 20% provision, it is generally taxed at the rate applicable to the taxpayer.
Debentures – classification matters:
Debentures provide another example. A listed debenture can qualify as long-term after the applicable 12-month holding period. The resulting LTCG is generally taxed at 12.5%. But, an unlisted bond or unlisted debenture transferred, redeemed or maturing on or after 23 July 2024 is specifically deemed to generate STCG, irrespective of the period of holding. A Market Linked Debenture (MLD) is also specifically covered by the special provision.
The LTCG side – A Great Deal Simpler:
Broadly, LTCG is now taxed at 12.5% without indexation. For specified listed equity shares & EOMF, the rate is 12.5% on gains exceeding ₹1.25 lakh, subject to other conditions. There is, however, an important grandfathering provision for a resident individual or HUF in respect of land or building acquired before 23 July 2024. Where the old indexed 20% computation is more beneficial, the law protects the taxpayer from the additional tax arising solely because of the 2024 change. So, broadly speaking:
STCG → Multiple Rates and Special Rules.
LTCG → Broadly 12.5%.
And what happened to STT?
When STT was introduced in 2004, qualifying LTCG enjoyed exemption U/s 10(38). That exemption was withdrawn from 2018, and LTCG was made taxable. STT, however, continued even thereafter. Today, an investor in qualifying listed equity may therefore encounter both STT on the transaction and LTCG tax on the resulting gain. STT stayed. The LTCG exemption went. And after the 2024 reforms, the LTCG rate applicable to specified equity investments is broadly aligned with the 12.5% rate as applicable even to other LTCG.
The paradox of simplification
The 12.5% LTCG rate is simpler, but the calculation is not necessarily simpler. The taxpayer must ask:
What is the asset?
Is it listed or unlisted?
What holding period applies?
Is there a special deeming provision?
Is STT relevant?
Does a special rate apply?
Is there a threshold or grandfathering provision?
In other words, the rate table may have become simpler, but the classification table has become more important.
[Views expressed are the personal views of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
