Capital Gains, simply put, is profit made from the sale of a capital asset. A capital asset includes property (may or may not be connected with the business or profession of the taxpayer), shares, jewellery, precious metals and works of art. Profits or gains arising from transfer of a capital asset during the year are charged under the 'Capital Gains' tax category.
Capital assets are of two types, i.e. long-term capital assets and short-term capital assets. Capital assets held by a person for a period of more than 3 years are treated as long-term capital assets. However, certain assets such as shares, equity-oriented mutual funds, debentures and government securities, UTI units and zero coupon bonds are considered as long-term capital assets if they are held for a mere 12 months. All the remaining capital assets would be considered as short-term capital assets.
Capital gains are classified into long-term capital gains and short-term capital gains, depending on whether the assets were held for the long term or within a shorter span. Gains arising from transfer of long-term capital assets are known as long-term capital gains and gains accruing from transfer of short-term capital assets are termed as short-term capital gains. However, the gains from depreciable assets are always taxed as short-term capital gains.
The taxes on capital assets / gains vary, depending on whether the gains were long-term or made over a shorter period. Long-term capital gains are generally taxed at more favorable rates compared to short-term ones. It, therefore, makes sense to hold assets for a longer period and pay lower capital gains tax.