Capital Gains Under Income Tax Act—Short-Term vs Long-Term

Capital Gains Under Income Tax Act refer to the profits or gains arising from the transfer of a capital asset, such as land, building, shares, securities, mutual funds, or other specified assets. The taxability of such gains depends on the nature of the asset and the period for which it is held before transfer, classifying them into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), each subject to different computation methods and tax treatment under the Income-tax Act.

Table of Contents

1. Table of Corresponding Sections
2. Distinction Between Short-Term Capital Gains and Long-Term Capital Gains
3. Overview of Section 2(42A) – Definition of Section 2(42A)
4. Classification of Capital Asset into Short-Term Capital Asset and Long-Term Capital Asset
5. Capital Assets Which Will Be Regarded as STCA If Held for 24 Months or Less
6. Capital Assets Which Will Be Held As Short-Term Capital Assets If Held for 12 Months or Less Before Transfer
7. How to Compute the Holding Period of a Capital Asset?

1. Table of Corresponding Sections

2. Distinction Between Short-Term Capital Gains and Long-Term Capital Gains

Section 2(42B) of the Act defines ‘short-term capital gain’ to mean ‘capital gain arising from the transfer of a short-term capital asset’.

Section 2(102) of the 2025 Act defines short-term capital gain on the same lines.

Section 2(29B) of the Act defines ‘long-term capital gain’ to mean ‘capital gain arising from the transfer of a long-term capital asset’. Section 2(29AA) of the Act defines ‘long-term capital asset’ as capital asset which is not a short-term capital asset.

Section 2(68) of the 2025 Act defines long-term capital gain to mean capital gains arising from the transfer of a long-term capital asset; viz. on the same lines like the 1961 Act.

Section 2(67) of the 2025 Act defines a capital asset which is not a short-term capital asset and this definition is also on the sale lines of definition of capital asset under the 1961 Act.

Similarly, while section 2(42A) of the 1961 Act defines short-term capital asset, section 2(101) of the 2025 Act defines the same phrase.

The Supreme Court in the case of CIT v. Vimal Lalchand Mutha [2001] 116 Taxman 242 (SC) held that whether capital gain that arose to assessee on sale of immovable property was a long-term capital gain and would depend on a correct interpretation of various clauses in purchase agreement of particular property entered into by assessee with vendors, and, therefore, it would be a question of law.

Transfer of a short-term capital asset gives rise to ‘Short Term Capital Gains’ (STCG) and transfer of a long-term capital asset gives rise to ‘Long Term Capital Gains’ (LTCG). Identifying gains as STCG and LTCG is a very important step in computing the income under the head Capital Gains as method of computation of gains and tax payable on the gains and treatment of losses is different for STCG and LTCG.

It may be mentioned that long-term capital gain gets more favourable tax treatment as compared to short-term capital gains.

2.1 Definition of Month

As the term month assumes importance especially in cases of capital gains let us discuss as to how “month” has been considered by various judicial authorities.

During the course of discussion let reference to section 54EC of the Act may be made. Briefly as per provisions of section 54EC of the Act in order to claim exemption under section 54EC of the Act, deposit in capital gain bonds has to be made within 6 months from the date of transfer of the capital asset.

The Special Bench of ITAT in the case of Alkaben B. Patel v. ITO [2014] 43 taxmann.com 333/148 ITD 31 (Ahd. – Trib.) (SB) adopting the reasoning which found favour with ITAT Mumbai Bench in the case of Yahya E. Dhariwala v. Dy CIT [2012] 17 taxmann.com 159/49 SOT 458 (Mum. – Trib.) that in the absence of any definition of the word ‘month’ in the Act, the definition of the General Clauses Act,1897 will be applicable, held that time limit of ‘six months’ in sec 54EC of the Act means ‘six British Calendar months’ in view of the General Clauses Act, 1897. The Special Bench also observed that “Legislature in its wisdom has chosen to use the word ‘month’ and this was done keeping in view the definition in section 3(35) of the General Clauses Act, 1897.” The Special Bench rejected the Revenue’s interpretation that ‘month’ should be understood in the ordinary sense i.e., the month is a period from a specified date in a month to the date numerically corresponding date in the following month.

The following observations from the above referred decision of the Special Bench are worth noticing:

“The subtle question is that whether the word “month” refers in this section a period of 30 days or it refers to the months only. Section 54EC, prescribes that an investment is required to be made within a period of six months. Whether the intention of the legislature was to compute six calendar months or to compute 180 days. To resolve this controversy, one has to be guided by a decision of Allahabad High Court pronounced in the case of CIT v. Munnalal Shrikishan [1987] 167 ITR 415 where answering the dispute in respect of law of limitation, the Court has clearly held that there is nothing in the context of section 256(2) to warrant the conclusion that the word ‘month’ in it refers to a period of 30 days, therefore, refers to six months in section 256(2) is to six calendar months and not 180 days.”

The Kolkata Bench of ITAT in the case of Kartick Chandra Mondal v. Principal CIT [2020] 113 taxmann.com 586/181 ITD 89 (Kol. – Trib.) has also held that the period of 6 months would start from the end of the month in which capital asset was sold. The Kolkata Bench in this case also relied on the decision of the Allahabad High Court in the case of Munnalal Shrikishan (supra) and held that

“we are of the view that the term “Month””means calendar month (and not period of thirty days), which should be applied for the purpose of section 54EC of the Act.”

Author

As per provisions of section 253(3) of the 1961 Act (corresponding provisions are contained in section 362(3) of the 2025 Act) “Every appeal under sub-section (1) or sub-section (2) shall be filed within two months from the end of the month in which the order sought to be appealed against is communicated to the assessee or the Principal Commissioner or Commissioner, as the case may be.

The time limit till 30.09.2024 was “sixty days of the date on” and this time limit has been extended by the Finance (No.2) Act, 2024.

From this it is clear that whenever the Legislature desires to fix the timelimit it does so in clear terms.

So, it is submitted, with respect, that the order passed by the ITAT Kolkata Bench in the case of Kartick Chandra Mondal v. Principal CIT (supra) has to be read with little caution.

However if reference is made to section 54EC of the Act it clearly states that

“the assessee has, at any time within a period of six months after the date of such transfer, ………………………………………………………………………………………… ”

It is therefore submitted that the section nowhere refers to a period of six months from the end of the month but only refers to only “six months after date of transfer”. Of course, this issue has not yet been tested before any High Court like calculating period of 6 months i.e., whether it has to be calculated from the date of receipt of amounts/instalments or from the date of transfer of capital asset.

The Kolkata Bench of ITAT in the case of Chanchal Kumar Sircar v. ITO [2012] 18 taxmann.com 304/50 SOT 289 (Kol. – Trib.) held that in case of receipt of sale consideration in instalments, period of six months for claiming deduction under section 54EC of the Act has to be calculated from the date of actual receipt of amount. The Pune Bench of ITAT in the case of Mahesh Nemichandra Ganeshwade v. ITO [2012] 21 taxmann.com 136/51 SOT 155 (URO) (Pune – Trib.) also echoed the same views.

But the Gujarat High Court in the case of Jyotindra H. Shodhan v. ITO [2015] 54 taxmann.com 342/229 Taxman 299 (Guj.) affirming the decision of the Special Bench in the case of Jyotindra H Shodhan v. ITO [2003] 87 ITD 312 (Ahd. – Trib.) (SB) held that the investment in capital gain bonds has to be made within 6 months from the date of transfer and the period of 6 months cannot be calculated from the receipt of final instalment.

Applying the same analogy as adopted by the Gujarat High Court in the case of Jyotindra H. Shodhan (supra) as provisions of section 54EC are clear that investment in capital gain bonds has to be made within a period of 6 months from the date of transfer, let there be an amendment to section 54EC of the Act by replacing 6 months period by 180 days to get over this controversy.

With regard to “month” Halsbury’s Laws of England, in para 143, volume 37, third edition states as under:

“When the period prescribed is a calendar month running from any arbitrary date, the period expires with the day in the succeeding month immediately preceding the day corresponding to the date upon which the period starts, save that, if the period starts at the end of the calendar month, which contains more days than the next succeeding month, the period expires at the end of the latter month.”

This definition has continuously been taken by the Courts in India as the correct definition of a “month”, which would mean that if the period of limitation starts on, say, the 15th of a month, and the period of limitation is one month, then the period of limitation would be on the 14th of the successive month [P. G. M. Spinning Ltd. v. A. P. S. F. Corporation [2000] 100 Comp. Cas. 449 (AP)], but if the period starts at the end of the calendar month the period would expire at the end of the subsequent month.

3. Overview of Section 2(42A) – Definition of Section 2(42A)

• General Rule – Holding period of 36 months or less before transfer to qualify as short-term asset.
• Exceptions to the General Rule of 36 Months or Less Holding Period – 1st Proviso – The following assets to be regarded as short-term capital assets if held for 12 months or less before transfer.

1. 1. Security (other than a unit) listed on a recognised stock exchange in India
   2. Units of UTI
   3. Units of equity oriented mutual funds
   4. Zero Coupon Bond

• 2nd Proviso – Holding period of 12 months or less for unlisted shares and units of mutual fund units transferred during the period 01.04.2014 to 10.07.2014
• 3rd Proviso – Unlisted shares of companies and immovable property to be regarded as short-term capital assets if held for 24 months or less before transfer.
• Explanation 1 – How to compute the holding period….what periods of time to be included or excluded
• Minimum holding period for various assets to qualify as long-term capital assets
• Explanation 2 – Definition of ‘security’
• Explanation 3 – Definition of ‘specified security’ and ‘sweat equity shares’
• Explanation 4 – Definition of ‘equity-oriented fund

3.1 For Latest of Holding Period

Refer to Chapter Zero – under the heading “Amendments made by the Finance (No. 2) Act, 2024 Serial no. 2 under the caption “Rationalisation of capital gains”.

4. Classification of Capital Asset into Short-Term Capital Asset and Long-Term Capital Asset

The incidence of tax on Capital Gains depends upon the length of the time period for which the capital asset was held before the transfer. In terms of section 2(42A) which defines a ‘short-term capital asset’, ordinarily, a capital asset held for 36 months or less is called a ‘short-term capital asset’ and the capital asset held for more than 36 months is called ‘long-term capital asset’.

5. Capital Assets Which Will Be Regarded as STCA If Held for 24 Months or Less

The following assets shall be regarded as short-term capital assets if held for 24 months or less and long-term assets if held for more than 24 months:

• Unlisted shares of companies (share of a company not listed in a recognised stock exchange in India)
• Immovable property, being land or building or both.

6. Capital Assets Which Will Be Held As Short-Term Capital Assets If Held for 12 Months or Less Before Transfer

The following assets shall be regarded as short-term capital assets if held for 12 months or less and long-term assets if held for more than 12 months:

• Security (other than a unit) listed in a recognised stock exchange in India
• Unit of UTI
• Unit of equity-oriented mutual funds
• Zero Coupon bond

Units of debt-oriented mutual funds, getfs/reits/InVITs to be held for more than 36 months to qualify as long-term capital assets – Section 2(42A)

6.1 Securities Transacted Through Stock Exchanges

When the securities are transacted through stock exchanges it is the established procedure that the brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares, accompanied by transfer deeds duly signed by the registered holders. The seller is entitled to receive the consideration agreed to as on the date of contract. Thus, it is the date of broker’s note that should be treated as the date of transfer in case of sale transactions of securities provided such transactions are followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned from the date of the broker’s note for purchase on behalf of the investors. In case the transactions take place directly between the parties and not through stock exchanges the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds.

Where securities are acquired in several lots at different points of time, the First-in-first-out (FIFO) method shall be adopted to reckon the period of the holding of the security, in cases where the dates of purchase and sale could not be correlated through specific numbers of the scrips. In other words, the assets acquired last will be taken to be remaining with the assessee while assets acquired first will be treated as sold. Indexation, wherever applicable, for long-term assets will be regulated on the basis of the holding period determined in this manner – Circular No. 704, dated 28-4-1995.

6.2 Zero-Coupon Bond

According to section 2(48) of the Act, “zero coupon bond” means a bond:

(a) Issued by any infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank on or after the 1st day of June, 2005;

(b) In respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank; and

(c) Which the Central Government may, by notification in the Official Gazette, specify in this behalf.

7. How to Compute the Holding Period of a Capital Asset?

In Bharti Gupta Ramola v. CIT [2012] 20 taxmann.com 762/207 taxman 178 (Delhi), the Delhi High Court held that the holding period of a capital asset (36 months/24 months/12 months) has to be computed as under:

“Holding period of capital asset u/s. 2(42A) (36 months/24 months/12 months) to be reckoned in calendar months by including both date of its acquisition and date of its transfer and without excluding even a fraction of a day.

The term ‘month’ has not been defined in the Act and, therefore, ‘month’ would have to be understood in the sense of ‘calendar month’ as defined in section 3(35) of the General Clauses Act, 1897.

Period of 12 calendar months would begin on the day when the assessee became the holder of the asset and end one day before in the relevant calendar month, next year. Thus, if an assessee acquires an asset on 2nd January in a preceding year, the period of 12 months would be complete on 1st January, next year and not on 2nd January. This position will apply to all cases, except when an asset is transferred/purchased on 1st January. In such cases, the period of one year or 12 months would expire and would be complete on 31st December in the same year.

There is nothing in section 2(42A) to show that the time period would not include   fraction of a day.”

The ITAT Mumbai Bench in the case of Anita D. Kanjani v. Asstt. CIT [2017] 79 taxmann.com 67/163 ITD 451 (Mum.-Trib.) held that in order to determine nature of asset in terms of section 2(42A) of the Act, holding period has to be computed from date of issue of allotment letter and not from date when agreement to sell was registered.

The question which arose before the Madras High Court in the case of CIT v. Exim Rajathi India (P.) Ltd. [2021] 130 taxmann.com 316/283 Taxman 480 (Mad.) was

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the shares/debentures not listed in the recognised stock exchange could be treated as a long-term capital asset as per Section 2(42A) read with its proviso?”

and the High Court answered the question as under:

“Shares/debentures not listed in a recognised Stock Exchange could be treated as long-term capital asset on its transfer after 12 months as per section 2(42A). All shares whether listed or unlisted have enjoyed benefit of shorter period of holding and even any investment in shares of private limited companies enjoyed long-term capital gains on its transfer after twelve months; so far as term used ‘shares held in a company’ is concerned, there is no category mentioned as listed or unlisted shares, albeit condition for being listed in recognised stock exchange in India is for ‘any other security’. Expression listed in a recognised stock exchange in India is only used for category of ‘any other security’ and not for category of ‘share held in a company’. Further after taking into consideration that condition for period of holding was curtailed from 36 months to 12 months by Finance Act, 1987, it was only for ‘share held in a company’. Further, when amendment to Finance Act, 1994 was brought in statute so far as category ‘shares held in a company’ was concerned, same was not disturbed, albeit, new category was included like ‘any other security listed in recognised stock exchange in India’”

The Karnataka High Court in the case of Mohan Virwani v. Dy. CIT [2014] 51 taxmann.com 43/227 Taxman 131 (Mag.) (Kar.) after taking  into consideration the definition of “short-term capital asset” as defined under Section 2(42A) of the Act, the circular issued by the Central Board of Direct Taxes (CBDT) bearing Circular No. 684 dated 10.06.1994  pointed out that the shares held in a company, which may be a private limited company, a public limited company or a listed company or any other security other than those shares listed in a recognised stock exchange in India, if it is held for a period of twelve months, then it ceased to be a short term capital asset and it becomes a long-term capital asset.

The ITAT Delhi Bench in the case of Shiv Kumar Jatia v. ITO [2021] 127 taxmann.com 179/190 ITD 181 (Delhi – Trib.) held that a right in an uncompleted building or a flat is clearly a property as contemplated by section 2(14) of the Act and period of holding is to be reckoned from date of first agreement while calculating capital gain on sale of such property.

The ITAT Mumbai Bench in the case of Yogesh Mavjibhai Gala v. Principal CIT [2020] 117 taxmann.com 783/183 ITD 665 (Mum.-Trib.) held that holding period for purpose of capital gains has to be reckoned from date of allotment of flat and not date of possession of flat. The earlier coordinate Bench in the case of Anita D. Kanjani v. Asstt. CIT [2017] 79 taxmann.com 67/163 ITD 451 (Mum.-Trib.) also expressed the same views.

The ITAT Bangalore Bench in the case of L. Vivekananda v. Asstt. CIT [2021] 124 taxmann.com 67/187 ITD 238 (Bang. Trib.) held that for computing indexed cost of property, date to be reckoned is date of allotment of property and not date on which possession certificate was issued.

The ITAT Delhi Bench in the case of Govind Singh Grewal v. ITO in ITA No. 3232/Del./2018 – Assessment Year 2013-14 – Date of order 31st March 2021 held that date of allotment of flat determines the period of holding. The Tribunal referred to its earlier decision in the case of Praveen Gupta v. Asstt. CIT [2012] 20 taxmann.com 308 (Delhi) wherein it was it was held as under at para 29 of its order:

“According to the aforementioned definition (reference is to section 2(14) of the Act), capital asset means property of any kind held by an assessee whether or not connected with the business or profession and it excludes certain items which while considering the facts of the present case are not relevant. Therefore, it has to be seen that whether by entering into an agreement vide which the assessee was allotted a particular flat by allotment letter whether the assessee has held any asset or not. By entering into an agreement to allot a flat, the assessee has identified a particular property which he intended to buy from the builder and the builder is also bound to provide the applicant with that property by accepting certain advance amount and making agreement for balance payment as scheduled in the agreement. Thus, going into the provisions, it is not necessary that to constitute a capital asset the assessee must be the owner by way of a conveyance deed in respect of that asset for the purpose of computing capital gain. The assessee had acquired a right to get a particular flat from the builder and that right of the assessee itself is a capital asset. The word ‘held’ used in section 2(14) as well as Explanation to section 48 clearly depicts that assessee must have some right in the capital asset which is subject to transfer. By making the payment to the builder and having received allotment letter in lieu thereof, the assessee will be holding capital asset and, therefore, the benefit of indexation has to be granted to the assessee on the basis of payments made by him for acquiring the said asset and the assessee has rightly claimed the indexation benefit from the dates when he has made the payments to the builder. Therefore, we see force in the claim of the assessee. The Assessing Officer is directed to provide the benefit of indexation to the assessee in the manner in which the assessee has claimed.”

The ITAT Mumbai Bench in the case of Mr. Jaiprakash A. Mishra v. ITO in ITA No. 1505/MUM/2019 vide order dated 30th March, 2021 extracted the following passages from the order passed by the Coordinate Bench in ITA No. 445/Mum/2014-(Same) Assessment Year 2007-08 and allowed the appeal of the assessee on the same points as decided by this earlier Bench to which reference was made. The issue was with regard to period of holding of the asset. The Tribunal extracted the following passages from its earlier order:

“2.8. It is true that the words of a statute are to be understood in their natural and ordinary sense unless the object of the statute suggests to the contrary. Thus, in construing the words ‘asset was held by the assessee’ in cl. (iii) of Expln. To s. 48 of the Act, one has to see the object with which the said words are used in the statute. If one reads Expln. 1(i)(b) to section 2(42A) together with sections 48 and 49 of the Act, it becomes absolutely clear that the object of the statute is not merely to tax the capital gains arising on transfer of a capital asset acquired by an assessee by incurring the cost of acquisition, but also to tax the gains arising on transfer of a capital asset inter alia acquired by an assessee as provided under section 49 of the Act where the assessee is deemed to have incurred the cost of acquisition. Therefore, if the object of the legislature is to tax the gains arising on transfer of a capital asset acquired under a gift or will or inheritance by including the period for which the said asset was held by the previous owner in determining the period for which the said asset was held by the assessee, then that object cannot be defeated by excluding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee. In other words, in the absence of any indication in cl. (iii) of the Explanation to section 48 of the Act that the words ‘asset was held by the assessee’ has to be construed differently, the said words should be construed in accordance with the object of the statute, that is, in the manner set out in Expanation 1(i)(b) to section 2(42A) of the Act.

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