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Income Tax · Capital gainsCapital gains on shares and mutual funds: STCG and LTCG examples
Equity investors face a 20% short-term and 12.5% long-term rate, a ₹1.25 lakh annual exemption, grandfathering for pre-2018 holdings and slab-rate taxation for most debt funds. Budget 2026 also moved buyback proceeds back to capital gains. Here is the full picture with examples.
Gains from selling shares and mutual fund units are taxed as capital gains. The rate depends on the type of asset, whether STT was paid and how long you held it. The rules were overhauled from 23 July 2024, and the Income-tax Act, 2025 carried them into Sections 196 (STCG), 197 (LTCG other) and 198 (LTCG on listed equity).
Rates at a glance (transfers from 23 July 2024)
| Asset | Long-term if held | STCG rate | LTCG rate |
|---|---|---|---|
| Listed equity shares (STT paid) | > 12 months | 20% | 12.5% above ₹1.25 lakh a year |
| Equity-oriented mutual funds | > 12 months | 20% | 12.5% above ₹1.25 lakh a year |
| Unlisted shares | > 24 months | Slab rate | 12.5% (no indexation) |
| Specified (debt) mutual funds bought from 1 Apr 2023 | Always short-term | Slab rate | — |
| Debt funds bought before 1 Apr 2023 | > 24 months | Slab rate | 12.5% (no indexation) |
| Gold ETFs / international funds (non-equity, not specified) | > 12 months (listed) / > 24 months | Slab rate | 12.5% |
| Listed bonds, debentures | > 12 months | Slab rate | 12.5% |
Add surcharge (capped at 15% for these gains) and 4% cess.
Grandfathering for shares bought before 1 February 2018
For listed equity bought before 31 January 2018, the cost is the higher of actual cost and the lower of (a) fair market value on 31 January 2018 and (b) sale price. This protects gains up to 31 January 2018 from tax.
Example 1: equity portfolio
Example: Ravi, a resident in Pitampura, has these transactions in FY 2025-26:
| Transaction | Holding | Gain/(loss) | Type |
|---|---|---|---|
| Sold Infosys shares | 3 years | ₹2,10,000 | LTCG 112A |
| Sold equity MF units | 8 months | ₹60,000 | STCG 111A |
| Sold small-cap shares | 5 months | ₹(40,000) | STCL |
| Sold equity MF units | 2 years | ₹35,000 | LTCG 112A |
Set-off: STCL ₹40,000 is first set off against STCG ₹60,000 → STCG ₹20,000. LTCG total ₹2,45,000 – exemption ₹1,25,000 = ₹1,20,000 taxable.
| Head | Taxable | Rate | Tax |
|---|---|---|---|
| STCG | ₹20,000 | 20% | ₹4,000 |
| LTCG | ₹1,20,000 | 12.5% | ₹15,000 |
| Cess 4% | ₹760 | ||
| Total | ₹19,760 |
Tip: set off losses against the head that saves the most – STCL against STCG (20%) before LTCG (12.5%).
Example 2: harvesting the ₹1.25 lakh exemption
Ravi could sell and buy back equity funds with unrealised LTCG of up to ₹1.25 lakh each year to reset his cost upward without tax. This is legal "tax-gain harvesting", but watch exit loads and transaction costs.
Example 3: debt fund bought in 2024
Example: Neha invested ₹10,00,000 in a corporate bond fund in May 2024 and redeems for ₹11,40,000 in December 2025. The gain of ₹1,40,000 is a specified mutual fund gain – short-term regardless of holding – and is added to her income at slab rates. If she is in the 30% slab, tax is ₹43,680 including cess.
Buyback of shares
From 1 October 2024 the entire buyback amount was taxed as dividend in the shareholder's hands, with the cost of shares treated as a capital loss. Budget 2026 proposed returning to capital gains treatment for shareholders, with special rates for promoters. Confirm the enacted provision and effective date before computing tax on a 2026-27 buyback.
Dividends
Dividends are taxed at slab rates as income from other sources. TDS of 10% applies above ₹10,000 per company per year. Interest on money borrowed to buy shares is deductible only up to 20% of dividend income.
Reporting
- Use the capital gains statement from your broker and the mutual fund RTAs (CAMS/KFintech).
- In ITR-2/ITR-3, report 112A gains scrip-wise (or in aggregate where allowed) with ISIN, cost and FMV as on 31 January 2018.
- AIS shows sale values – your return should reconcile with it.
- Losses can be carried forward only if the return is filed by the due date.
Under the 2025 Act
For Tax Year 2026-27, the rates continue under Sections 196–198. The ₹1.25 lakh exemption and grandfathering were carried over. Quote the new sections in Tax Year 2026-27 computations.
Common mistakes
- Using ITR-1 when there are short-term gains or LTCG above ₹1.25 lakh.
- Ignoring grandfathering and paying tax on pre-2018 gains.
- Missing the due date and losing carry-forward of losses.
- Treating debt funds bought after April 2023 as long-term.
- Reporting F&O as capital gains.
Key takeaway
Equity: 20% short-term, 12.5% long-term above ₹1.25 lakh. Most new debt funds: slab rate. Plan set-offs and use the annual exemption. For portfolios with F&O, ESOPs or foreign shares, our tax planning team prepares accurate computations and schedules.
Official references
Provisions discussed (summaries in our Law Library):
- Income-tax Act, 2025 – Section 196 (corresponds to 111A): STCG on listed equity
- Income-tax Act, 1961 – Section 111A (corresponds to 196): STCG on listed equity
- Income-tax Act, 2025 – Section 198 (corresponds to 112A): LTCG on listed equity
- Income-tax Act, 1961 – Section 112A (corresponds to 198): LTCG on listed equity
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
What is the LTCG exemption limit on equity?
Long-term capital gains on listed equity shares and equity-oriented mutual funds are exempt up to ₹1.25 lakh in a year. Gains above that are taxed at 12.5% (Section 112A; Section 198 of the 2025 Act).
How are debt mutual funds taxed now?
Units of specified mutual funds (broadly, funds investing more than 65% in debt and money-market instruments) bought on or after 1 April 2023 are taxed at slab rates regardless of holding period, with no indexation.
Can I set off a short-term loss against long-term gain?
Yes. Short-term capital loss can be set off against both short-term and long-term gains. Long-term loss can be set off only against long-term gains. Unabsorbed losses are carried forward for eight years if the return is filed on time.
How is a share buyback taxed after Budget 2026?
Budget 2026 proposed that buyback proceeds be taxed as capital gains in the shareholder's hands, rather than as dividend (which applied from 1 October 2024), with special rates for promoters. Check the final enacted provision and its effective date.
Are F&O profits capital gains?
No. Futures and options trading is non-speculative business income, taxed at slab rates and reported in ITR-3.
Is the ₹1.25 lakh LTCG exemption available to NRIs?
Yes. The exemption under Section 112A (Section 198) is available to non-residents too, though TDS applies on their gains.
How are bonus shares taxed on sale?
Cost of bonus shares is nil (or FMV on 31 January 2018 for grandfathered listed shares). The holding period starts from the bonus allotment date.
Are SIP units sold on a first-in-first-out basis?
Yes. Each SIP instalment is a separate purchase; units are redeemed on FIFO basis for holding period and cost.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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