What is Holding Period?

The time for which an investor has ownership of a stock is called the holding period. The holding period is calculated from the date when a share is bought till the date it is sold. It helps to determine the returns and taxing procedure of any security. The return and tax differ based on the holding period of shares.

To levy tax on stock holdings, first, you must determine the type of asset. Shareholdings can be held for long-term or short-term. A long-term holding in the share market means that the shares are held for more than a year. The holding period determines the time different assets are held for. However, this article will look at what holding means in the share market, its importance, and steps to calculate holding period returns.

Importance of holding period

Now that you know what is holding period in stock market, let's understand the importance of investment holding period, which include the following:

  • Tax on stock holdings is calculated according to the period of holding.
  • Holding period helps to determine the return on investment over a period.

For the computation of taxation and returns, the holding period plays an important role. If a stock is held by an investor for over 12 months or more, this qualifies as long-term gains while an investment holding period of less than 12 months qualifies as short-term gains. Both these categories are taxed separately. Holding period thus plays a crucial role in the taxation aspect of a stock.

How to calculate the holding period?

The period of stock holding is calculated from the day a share is purchased till the day it is sold. For example, an investor buys shares of ABC company on August 10 and sells it on December 10 for a profit. Here the holding period is four months, i.e, short-term holding. Hence, the short-term capital gain tax rate is levied.

To calculate the holding period return, use the formula mentioned below.
Return = Income + (EOPV – IV)] /IV
Here,
EOPV = End Of Period Value
IV = Initial value

Holding period return helps estimate the value of a stock and compare it with other shares that an investor can opt for. The return from holding can be positive or negative depending on the final price while selling the stock. If you know what is holding in share market, you are already ready for investing.

Capital gains

Capital gain refers to the profit from the sale of an asset. For taxation purposes, calculating capital gains is essential. Whether the capital gains are short-term or long-term, is determined by the stock holding period. If an investor holds a stock for less than 12 months, it is a short-term capital gains. If the period of holding is over 12 months, it is a long-term capital gain. The profit from the sale of stock holdings is taxable as per the period of holding.

The tax on short-term capital gain is charged at 15℅ and 10% on long-term shareholdings. While selling shares, there are chances of capital loss as well.

Conclusion

Stock holding period is essential for calculating taxes and returns. Besides the two, the holding period is helpful for a company when announcing dividends. An investor must hold the stocks of a company for a particular period to be eligible for dividends on shareholding. By knowing the holding period, shareholders can understand the taxation aspect of gains earned from holding stocks.

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