Long-term capital asset

Two people sell the same share for the same profit and pay different tax. The difference is how long each held it.

An asset held beyond the prescribed period is a long-term capital asset. Sell it and the gain is a long term capital gain, which is generally taxed more lightly.

Hold it for less and it is a short-term capital asset, and the gain is taxed harder. The workbook puts it simply: the incidence of tax is higher on short-term gains than on long-term gains.

The general test after 23 July 2024 is more than 24 months. Listed securities and equity oriented fund units get a shorter test of more than 12 months.

And some assets never qualify, however long they are held. Depreciable assets, market linked debentures, specified mutual funds and, from July 2024, unlisted bonds and debentures.

So the question is never just how long. It is how long, for this kind of asset.

The general rule. For transfers on or after 23 July 2024, a capital asset is long-term if held for more than 24 months immediately preceding the date of transfer, and short-term if held for not more than 24 months. The Finance Act, 2024 made this change with effect from that date; for transfers before it, the erstwhile provisions apply. The workbook states it assumes transactions on or after 23 July 2024 throughout.

Exception 1 — the 12 month list. These are short-term if held for not more than 12 months, so long-term at more than 12 months:

• Listed shares of a company, equity or preference
• Listed securities — debentures, bonds, derivatives, government securities, units
• Units of UTI, listed or unlisted
• Units of an equity oriented fund, listed or unlisted
• Zero coupon bonds, listed or unlisted
• A unit linked insurance policy to which the section 10(10D) exemption does not apply, from FY 2025-26
• High premium equity oriented ULIPs, for financial years 2020-21 to 2024-25

Exception 2 — assets that can never be long-term.

Table 8.1 — the holding period needed to be long-term, for transfers on or after 23 July 2024.

How the period is counted. From the date of purchase or acquisition to the date of transfer. Section 8.3.1 gives the special cases: listed shares are counted from date of purchase to date of transfer, demat securities on a first-in-first-out basis, bonus shares from the date of allotment of the bonus shares, sweat equity from the date of allotment, and on conversion of bonds or debentures the holding period of the original asset is included.

Why it matters at the rate level. Long-term status is what unlocks the concessional rates and, for property acquired before 23 July 2024, the surviving indexed cost of acquisition comparison. A short-term asset gets neither.

Mr Anand sells five holdings in FY 2024-25, all on 1 December 2024. Each cost Rs 5,00,000 and each sells for Rs 8,00,000, a gain of Rs 3,00,000.

Five identical gains of Rs 3,00,000. Two long-term, three short-term, and the holding periods run from 15 months to 83 months. The 83-month holding is short-term and the 15-month holding is long-term.

What that costs on the equity pair. Assume STT was paid on the listed shares.

The unlisted holding costs him roughly Rs 68,000 more on an identical gain over an identical 15 months, purely because the prescribed period is 24 months rather than 12.

And the bonus share trap. Suppose he had received bonus shares in October 2024 on the listed holding and sold them on 1 December 2024. Their holding period runs from the date of allotment of the bonus shares, not from the date he bought the original shares — so about two months, and short-term.

Chapter 8 (Capital Gains), section 8.3 (Types of Capital Asset), gives the general 24-month rule, Exception 1 for the 12-month list, Exception 2 for the always-short-term assets, and Table 8.1, which sets out the holding period needed for long-term status listed against unlisted. Section 8.3.1 and Table 8.2 give the special rules for calculating the period of holding.

Expect a Table 8.1 row question — an unlisted debenture held three years, a debt fund held six years, an unlisted share held eighteen months — and a period-of-holding question on bonus shares, demat FIFO or conversion of debentures. The 23 July 2024 date is the pivot and is worth memorising on its own.

• The general rule is 24 months, not 36. The Finance Act, 2024 replaced the earlier tests with effect from 23 July 2024, and the workbook assumes transfers on or after that date.
• Listed means 12 months; unlisted generally means 24 months. But not always: units of an equity oriented fund get 12 months whether listed or unlisted, and unlisted debentures, bonds, government securities and zero coupon bonds are always short-term.
• A debt fund holding 65% or more in debt is always short-term, however many years it is held. So is a market linked debenture and a depreciable asset.
• The specified mutual fund type 2 rule turns on the sale date. Bought on or after 1 April 2023 and sold before 1 April 2025 it is always short-term; sold on or after 1 April 2025 the ordinary 12 or 24 month test returns.
• More than, not not less than. Exactly 12 months on a listed share is short-term, because short-term is defined as not more than 12 months.
• Bonus shares are counted from the date of allotment of the bonus shares, not from the purchase of the original holding.
• Demat holdings are FIFO. The security that entered the account first is deemed sold first, which decides the holding period.
• Long-term status is not the same as indexation. Indexation was withdrawn for transfers on or after 23 July 2024 except for land or building acquired before that date, so an asset can be long-term and still get no indexation.
• Stock-in-trade is not a capital asset at all, so this classification never reaches it — those gains are business income.