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Every investor should know the difference between short-term and long-term capital gains derived from selling off their key assets held over some time.
What is the difference between short-term and long-term capital gains?
For effective financial planning and maximising your investment plans, one should first understand the basics of capital gains, divided into two parts: short-term gains and long-term gains. Each comes with different implications for taxation and investment strategy. Here’s what you need to understand about both forms of capital gains to continue your journey successfully as an investor.
Definition
Short-term capital gains (STCG) are gains made by selling assets that are held for short durations, ranging from a few months up to one year. Commonly, short-term gains are made on stocks, bonds and real estate investments, where gains are realised quickly. These are taxed at the ordinary income tax rates.
Long-term capital gains (LTCG) are profits made from the sale of asset investments held for over a year by the individual or in collaboration. In a major difference from STCGs, LTCGs face lower tax rates as authorities encourage long-term capital holders to persist with their investments and successful financial strategies.
Key Difference
The key difference between short-term and long-term capital gains lies in the taxation rates involved. In countries such as India, STCG is taxed at the individual’s income tax rate, which can be as high as 30 per cent depending on the income bracket. Unlike short-term capital gains, the LTCG is generally taxed at a lower rate in India, typically around 20 per cent, while also providing certain exemptions to the investor selling their asset.
Since long-term investments offer tax advantages, many investors in India prefer holdings for longer durations. It can be achieved by staying invested in your asset for more than 12 months before selling it and reaping the profits. However, investors must study certain asset classes, such as real estate and mutual funds, that have specific regulations regarding their holding periods. Investors need to be aware of these rules to optimise their tax strategies effectively.
Apart from the duration, investors can try tax-loss harvesting, which is another effective strategy to minimise the taxation on your capital gains. This strategy entails selling underperforming assets to offset gains that help reduce your overall taxable income. Investing in tax-exempt retirement accounts such as the Public Provident Fund and National Pension System may also prove beneficial, allowing you to defer taxes on capital gains until the sum is withdrawn.
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More
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Delhi, India, India
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