Long-Term or Short-Term? The Holding Periods That Decide Your Capital Gains Tax in ITR-2

When you sell a capital asset, the single most important date in your tax file is not the day you sold it but the day you bought it. The gap between those two dates decides whether your profit is taxed as a short-term capital gain or a long-term capital gain, and from 23 July 2024 those two buckets carry sharply different rates. Get the holding period wrong in Schedule CG of ITR-2 and you can overpay by lakhs or, worse, invite a scrutiny notice. This guide walks through the holding-period rules that apply for Assessment Year (AY) 2026-27, with a worked example and the mistakes that surface most often in Income Tax Department processing.

Individuals and Hindu Undivided Families (HUFs) who have any capital gains during the year cannot use ITR-1; they must file ITR-2, where Schedule CG splits gains into Part A (short-term) and Part B (long-term), per the Income Tax Department's File ITR-2 Online help page.

What the Section Says

The "holding period" is defined in Section 2(42A) of the Income-tax Act 1961, read with the amendments brought in by the Finance (No. 2) Act 2024 effective 23 July 2024. An asset held for longer than the prescribed threshold is "long-term"; anything held for that threshold or less is "short-term". Until 22 July 2024 there were three thresholds (12, 24 and 36 months). The 36-month category has been abolished, so for transfers on or after 23 July 2024 only two holding periods remain.

Once you have classified the gain, the rate follows. The Finance (No. 2) Act 2024 reset the special rates with effect from 23 July 2024:

For land or building acquired before 23 July 2024, the law preserves a one-time choice: pay 12.5% without indexation, or 20% with indexation under the second proviso to Section 112(1). You pick whichever is lower. A useful detail for AY 2026-27 filers: the earlier requirement to bifurcate gains by transfer date (before versus on/after 23 July 2024) inside the return has been removed, because the entire year now falls under the post-amendment rates. You can model your own numbers with our capital gains tax calculator and read the underlying concepts in the capital gains glossary entry.

Worked Example

Take Priya, a salaried professional in the 30% slab, who made three disposals in FY 2025-26 (AY 2026-27):

• Listed equity shares (STT-paid) bought in November 2023 for Rs 7,00,000 and sold in May 2025 for Rs 10,00,000. Held about 18 months, so it crosses the 12-month line and is long-term under Section 112A. Gain: Rs 3,00,000.
• Units of an equity mutual fund bought in October 2024 for Rs 2,00,000 and sold in June 2025 for Rs 2,50,000. Held about 8 months, below 12 months, so it is short-term under Section 111A. Gain: Rs 50,000.
• A residential plot bought in December 2022 for Rs 20,00,000 and sold in June 2025 for Rs 35,00,000. Held about 30 months, above 24 months, so it is long-term under Section 112. Gain: Rs 15,00,000.

Here is how the tax stacks up:

The LTCG exemption of Rs 1,25,000 under Section 112A applies only to the equity LTCG bucket, which is why Priya's Rs 3,00,000 share gain is taxed on Rs 1,75,000. Her equity LTCG tax is Rs 21,875, her equity STCG tax is Rs 10,000, and her plot LTCG tax is Rs 1,87,500, for Rs 2,19,375 before adding 4% health and education cess of Rs 8,775, giving Rs 2,28,150. Because the plot was bought before 23 July 2024, Priya should also test the 20%-with-indexation route on the plot and file under whichever produces the smaller bill. To see how these special-rate taxes sit on top of her salary income, she can use the income tax calculator and compare regimes with the old vs new regime tool.

Common Mistakes

Counting from the wrong date. The holding period runs from the date of acquisition to the date of transfer. For shares received through a bonus or rights issue, the clock starts on the date those specific shares were allotted, not the date of the original holding. Misdating a November 2023 purchase as November 2024 can flip a long-term gain into a short-term one and lift the rate from 12.5% to 20% under Section 111A.

Assuming the Section 87A rebate wipes out the tax. For FY 2025-26 the Section 87A rebate in the new regime is up to Rs 60,000 where total income does not exceed Rs 12,00,000, but the rebate is not available against tax charged at the special rates under Sections 111A and 112A. So even a taxpayer below the Rs 12 lakh threshold still pays 20% STCG and 12.5% LTCG on equity gains.

Forgetting the Rs 1,25,000 exemption is annual and equity-only. The Rs 1,25,000 floor under Section 112A is a per-year exemption for listed-equity and equity-fund LTCG only. It does not shelter LTCG on property or gold taxed under Section 112, and it does not carry forward if unused.

Mishandling capital losses. A long-term capital loss can be set off only against long-term capital gains, while a short-term capital loss can be set off against either short-term or long-term gains. Unabsorbed capital losses carry forward for up to 8 assessment years, but only if you file the return by the due date under Section 139(1). Many taxpayers lose this carry-forward simply by filing late.

Skipping reconciliation before filing. Brokers and registrars report transactions in the Annual Information Statement (AIS) and Form 26AS. If your Schedule CG does not match, the return can be flagged. Reconcile first, as we explain in TDS not showing in Form 26AS, and remember to complete e-verification, covered in 30 days to e-verify your ITR. If a processing error still creeps in, you can file a rectification request under Section 154.

FAQ

Which holding period applies to debt mutual funds bought after 1 April 2023?

Under Section 50AA, gains on specified mutual funds (those investing 35% or less in domestic equity) acquired on or after 1 April 2023 are always treated as short-term and taxed at your slab rate, regardless of how long you hold them. The 24-month long-term rule does not apply to them.

Did the 36-month holding period really disappear?

Yes. For transfers on or after 23 July 2024, the Finance (No. 2) Act 2024 removed the 36-month threshold. Assets such as gold and unlisted shares that previously needed 36 months for long-term status now qualify at 24 months. You can confirm the amended provisions on indiacode.nic.in.

How is the holding period of inherited or gifted assets calculated?

Under Explanation 1(b) to Section 2(42A), the holding period of the previous owner is included. If your father bought a property in 2010 and you inherited it in 2024 and sold it in 2025, the long-term clock counts from 2010, so the gain is long-term under Section 112.

Are listed shares held for exactly 12 months long-term or short-term?

They are short-term. Section 2(42A) requires the asset to be held for "more than" 12 months for listed equity to be long-term, so you need at least 12 months and one day. A sale on the 365th day stays short-term and is taxed at 20% under Section 111A.

Can I claim the Rs 1,25,000 exemption on every demat account separately?

No. The Rs 1,25,000 exemption under Section 112A is a single annual limit per taxpayer for all equity LTCG combined, not per account or per broker. Aggregate all your equity-fund and listed-share LTCG before applying it once.

Where in ITR-2 do I report these gains?

In Schedule CG: Part A captures short-term gains (including the Section 111A equity bucket) and Part B captures long-term gains (including Sections 112A and 112), as set out on the Income Tax Department's File ITR-2 Online help page.

What surcharge applies to large capital gains?

The surcharge on income taxed under Sections 111A and 112A is capped at 15%, even if your total income would otherwise attract a 25% rate. This cap protects high-income investors from the top surcharge slab on their equity gains. Model your combined liability with the income tax calculator before you file.