Categories: Stock Markets

Holding Period for a Stock – Importance, Taxation & Ideal Holding Period

The profits in the stock markets hugely depend on the correct time to enter and exit the markets. Investors are often faced with a question regarding the ideal holding period of a stock that can generate them enough profits and safeguard their investment from a loss too. Due to the volatility in stock markets, the ideal holding period of stocks can vary from days to months and years depending on the type of stock and the industry it belongs to.

Table of Contents hide

1 What is the holding period in stocks?

2 What is the importance of the holding period?

3 How are equities taxed based on the holding period?

4 What is the ideal holding period?

5 Conclusion

6 FAQs

Let us discuss the meaning and the key factors to be considered while determining the ideal holding period of stocks.

What is the holding period in stocks?

The holding period in stocks is the duration that a particular stock is held in the portfolio of an investor. In simple terms, it is the duration between the purchase and sale of the stock. The holding period can be short-term or long-term depending on the period for which the asset is held in the portfolio. In the case of stocks or equities, the short-term holding period is when the stocks are held for a period of less than a year whereas a long-term stock investment is when a stock is held for a period of more than a year or 12 months for Income Tax purposes.

What is the importance of the holding period?

The holding period of a stock is quite important from the point of view of its taxation as well as the amount of returns that can be generated. It is common knowledge that stock markets can be quite volatile in the short term. Hence, the returns generated by stocks can be low to moderate in the case of large-cap or value stocks whereas moderate to high in the case of mid-cap and small-cap or growth stocks. The holding period of the stocks is therefore important to determine the amount of returns that can be generated in the short term or long term.

Apart from returns, the taxation of the profits generated from the sale of stocks is also dependent on the holding period of stocks. The set-off and carry forward rules of the loss incurred from the sale of stocks is also based on the holding period of the stocks which determines it to be a short-term or a long-term loss.

How are equities taxed based on the holding period?

Taxation of any asset is one of the key factors that have to be considered while investing. As mentioned above, the holding period of the stock determines the tax treatment of the gains or the loss generated from such investment. The Income Tax Act, 1961, provides for the classification as well as the applicable tax rate on the sale of stocks and related exemptions based on their holding period.

The taxation of stocks or equities as per the Income Tax Act, 1961 is tabled below.

Type of gain/loss	Period of holding	Tax treatment	Exemptions (if any)
Short term capital gain	Less than 12 months	Taxed at 15% (excluding cess)	Not applicable
Long term capital gain	More than 12 months	Taxed at 20% (with the benefit of indexation), or10% without the benefit of indexation	Exempt up to Rs. 1,00,000
Short term capital loss	Less than 12 months	Allowed to carry forward for a period of 8 assessment years and can be set off against short term or long term capital gains arising from the sale of stocks (provided such loss has been included in the tax return duly filed)	Not applicable
Long term capital loss	More than 12 months	Allowed to carry forward for a period of 8 assessment years and can be set off against long term capital gains arising from the sale of stocks (provided such loss has been included in the tax return duly filed)	Not applicable

What is the ideal holding period?

The concept of the ideal holding period is wishful but does not exist. If there was a set pattern or a formula for determining the ideal holding period of stocks to generate profits, every investor would be sitting on money churning investments and there would be no weightage given to other factors.

The ideal holding period of a stock will depend on various factors like the
Financial goals of the investor
The risk appetite and
The returns expectations of such investors
Taxation of the gains will also have an impact on the net returns of the investor

Apart from all these factors, market volatility also cannot be ignored. There could also be a case where market volatility puts the investor’s planning for a toss and can force them to exit the markets before their target holding period is completed. Hence, the ideal holding period for every investor will differ on a case-to-case basis and will depend on various factors.

Conclusion

There is no direct or set formula to ensure profitability in stocks. Among various other factors, the holding period of stocks is an important factor in determining the returns and taxation of the stocks. An ideal portfolio will be a mix of different stocks or securities of varying holding periods to maximize the returns and gain the maximum advantage of diversification.

FAQs

When can an investor sell their stocks?

The buying and selling of stocks are done for the sole purpose of making profits. However, there may be several occasions when the investors choose to sell their investment and exit the markets. Some of such occasions are mentioned below.
a.)If the stock is at an all-time high market price, it is an ideal time to sell the stock and cash in the profits.
b.)When the stock is on a downward trend and there is no foreseeable growth opportunity, it is safer to exit the markets even with a loss in hand to stop the possibility of further or higher loss.
c.)When the purpose of the investment and the financial goals set by the investor are fulfilled, it can be an ideal time to sell the stocks.
d.)If the basic fundamentals of the stock have changed, it may result in an altered risk and return profile of the stocks. Such change may no longer be in line with the investor’s expectations and can prompt them to sell their investment in such stocks.

What is the usual holding period for mid-term stocks?

Mid-term stocks have a usual holding period between 3 years to 5 years.

How are large-cap stocks taxed?

Large-cap stocks are taxed based on their holding period. If they are held in the portfolio for a period of less than 12 months, the gains arising will be taxed at the rate of 15% excluding cess. If the large-cap stocks are held for a period of more than 12 months, such stocks will be taxed at the rate of 20% with the benefit of indexation or 10% without indexation.

Can investors invest in stocks of multiple holding periods?

Yes. It is better to invest in stocks with multiple holding periods as the investors can spread their overall risk and can also achieve potentially better returns with the benefit of diversification.