You put money into stocks or mutual funds. The market went up. Now you want to sell and pocket the profit.
Before you do, there's one more thing to figure out: how much of that profit goes to the government?
Capital Gains tax in India trips up a lot of people — not because it's incredibly complex, but because the rules depend on how long you held the investment and what type of investment it was. Let me break it down clearly.
What Is a Capital Gain?
A capital gain is simply the profit you make when you sell an asset for more than you paid for it.
If you bought 100 shares of a company at ₹200 each (total ₹20,000) and sold them at ₹320 each (total ₹32,000), your capital gain is ₹12,000.
The tax you pay on that ₹12,000 depends on whether it's classified as Short-Term or Long-Term.
Short-Term vs Long-Term: The Holding Period Rule
For equities (stocks and equity mutual funds):
- Held for 12 months or less → Short-Term Capital Gain (STCG)
- Held for more than 12 months → Long-Term Capital Gain (LTCG)
For debt mutual funds (changed in 2023):
- All gains regardless of holding period → Taxed at your income tax slab rate
For real estate and gold (not covered in detail here):
- Long-term holding period is 24 months for property and 36 months for gold
This article focuses on equity — stocks and equity mutual funds — since that's what most readers ask about.
Current Tax Rates on Equity (FY 2025-26)
| Type | Rate |
|---|---|
| Short-Term Capital Gains (STCG) on equity | 20% (flat) |
| Long-Term Capital Gains (LTCG) on equity above ₹1.25L | 12.5% (flat) |
| LTCG up to ₹1.25 Lakhs in a year | Nil (tax-free!) |
These rates apply regardless of your income tax slab. Even if you're in the 30% bracket for salary income, your long-term equity gains above ₹1.25L are taxed at 12.5%, not 30%.
Note: 4% Health and Education Cess applies on the capital gains tax amount.
The ₹1.25 Lakh LTCG Exemption: How It Actually Works
This is one of the most useful — and underused — provisions for retail investors.
Every financial year, your first ₹1.25 Lakhs of long-term equity gains are completely tax-free. This applies across all your equity investments combined — both stocks and equity mutual funds.
Example 1: Gain within the exemption limit
Vikram invested ₹3 Lakhs in a Nifty 50 index fund 2 years ago. Today it's worth ₹4 Lakhs. He decides to sell.
- Capital gain: ₹1,00,000
- Exemption: ₹1.25 Lakhs
- Since ₹1 Lakh < ₹1.25 Lakh: Tax = ₹0
He got a 33% return, held for 2+ years, and paid zero tax. That's the LTCG benefit in action.
Example 2: Gain above the exemption limit
Meera's portfolio grew from ₹5 Lakhs to ₹8 Lakhs over 3 years. She sells everything.
- Capital gain: ₹3,00,000
- Tax-free exemption: -₹1,25,000
- Taxable gain: ₹1,75,000
- LTCG tax at 12.5%: ₹21,875
- Plus 4% cess: ₹875
- Total tax: ₹22,750
On a ₹3 Lakh profit, she pays ₹22,750 — an effective rate of about 7.6%. That's significantly lower than what she'd pay if that ₹3 Lakhs were ordinary income.
The Tax Harvesting Strategy: Legally Save Tax Every Year
This is one of the smartest things long-term investors can do, and very few people actually do it.
The concept: Every year in March (before the financial year ends), sell enough of your long-term equity holdings to book approximately ₹1.25 Lakhs in gains — even if you immediately buy the same fund back.
Why does this help?
- You "reset" your cost basis to the current price
- Those ₹1.25 Lakhs in gains are tax-free
- You haven't actually exited the market — you rebought immediately
- Over many years, you're permanently reducing your eventual LTCG tax burden
A Simple Tax Harvesting Example
Arjun has been investing ₹10,000/month in a Nifty 50 index fund for 5 years. His portfolio has grown significantly. He has unrealized long-term gains of ₹4 Lakhs.
Without tax harvesting, when he eventually sells everything, he'll pay 12.5% on ₹4L minus ₹1.25L = ₹2.75L → tax of ₹34,375.
With tax harvesting (selling and rebuying ₹1.25L worth of gains each year):
- Year 1: Book ₹1.25L gains → ₹0 tax
- Year 2: Book ₹1.25L gains → ₹0 tax
- Year 3: Remaining gains much lower → smaller tax
He's effectively eliminated a significant portion of his future LTCG tax, completely legally.
Important: When you sell and rebuy immediately, you pay:
- Brokerage (typically very low for index funds — ₹0 for direct mutual funds)
- STT (Securities Transaction Tax) on the sell side
For direct mutual fund redemptions, the STT and transaction cost is minimal (the STT is included in the exit load/STT at the fund level). For stock trades, factor in the brokerage and STT before deciding if it's worth it.
What About STCG? Should You Avoid It?
Short-term capital gains (selling within 12 months) are taxed at 20%. That's higher than the 12.5% LTCG rate.
The general advice is to hold equity investments for at least 12 months whenever possible to qualify for the lower LTCG rate and the ₹1.25L exemption.
However, don't make the mistake of holding a losing investment just to qualify for LTCG. If an investment has fundamentally gone wrong, selling it and taking the STCG tax hit is often better than holding hoping for a recovery.
Debt Mutual Funds: Different Rules Entirely
Since April 2023, the tax rules for debt mutual funds changed significantly.
Before April 2023: Debt funds held for more than 3 years got LTCG treatment with indexation benefits (which reduced the taxable gain significantly).
After April 2023: All gains from debt mutual funds are now added to your income and taxed at your applicable slab rate — exactly like FD interest. There's no longer a LTCG benefit for debt funds.
This change made debt mutual funds significantly less tax-efficient compared to before. For many investors, this has made FDs and debt funds roughly equivalent on a post-tax basis now.
Equity Mutual Funds vs Direct Stocks: Same Rules?
Yes. For tax purposes, LTCG and STCG rules are the same for:
- Direct stock holdings
- Equity mutual funds (funds with 65%+ equity allocation)
- ELSS funds (after the 3-year lock-in)
- ETFs (Exchange Traded Funds based on equity indices)
The 12-month holding period and the ₹1.25 Lakh exemption apply to all of these.
The Grandfathering Rule (For Old Investments)
This is relevant if you have stocks or equity funds you bought before January 31, 2018.
When LTCG tax was reintroduced in 2018, the government included a "grandfathering" provision: the cost of acquisition for investments bought before January 31, 2018 is the higher of the actual purchase price OR the closing price on January 31, 2018.
This means gains before February 1, 2018 are effectively exempt from LTCG tax. Only gains made after that date are taxable.
For most people who started investing recently, this doesn't apply. But if you've been holding the same stocks or funds since before 2018, your cost basis might be higher than your original purchase price for tax calculation purposes.
👉 Build your investment corpus first LTCG tax only matters when you have substantial gains. Use our SIP Calculator to see how your regular investments grow over time before you worry about the tax on those gains!
Quick FAQs
1. If I made a loss on some stocks and a gain on others, can I offset them?
Yes! Short-term losses can be offset against both short-term and long-term gains. Long-term losses can only be offset against long-term gains. If you have more losses than gains in a year, you can carry forward the remaining losses for up to 8 years.
2. Do I need to declare capital gains in my ITR even if they're below ₹1.25 Lakhs?
Yes, you should still report them in your ITR under the capital gains schedule, even if the tax is zero. Keeping records clean prevents future notices.
3. Is SIP taxation different from lump sum?
Functionally, no — each SIP installment is treated as a separate purchase. When you redeem, each installment's holding period is calculated separately from its purchase date. So a SIP you started 2 years ago: some installments might be LTCG and the most recent ones might be STCG.
4. What about ELSS — is the maturity amount taxed?
Yes. ELSS returns above ₹1.25 Lakhs per year are taxed at 12.5% LTCG. However, since the minimum lock-in is 3 years, all ELSS redemptions automatically qualify as LTCG — never STCG.
5. What is STT and does it affect my returns?
STT (Securities Transaction Tax) is a small tax charged on every equity transaction — 0.1% on delivery-based equity purchases and sales. It's separate from capital gains tax and is included automatically in your transaction price by your broker.
Disclaimer
Tax rules change with each budget. Rates mentioned reflect FY 2025-26 provisions. Please verify current rates with the Income Tax portal or a CA before filing.