Every year, your mutual fund statement and broker tax P&L arrive. Most salaried investors check the LTCG figure, see it’s under ₹1.25 lakh, and file without a second thought.
That works — until it doesn’t. The ₹1.25 lakh exemption has conditions. The holding period has a trap most SIP investors miss. And the ITR form you pick determines whether you can carry forward a loss.
Here’s how equity capital gains actually work for Tax Year 2026-27.
Listed equity and equity-oriented funds — what this covers
This thread covers two asset types: listed equity shares (traded on a recognised stock exchange in India) and units of equity-oriented mutual funds — funds that invest at least 65% of their money in listed Indian stocks, as defined under Section 198(8) of the Income Tax Act, 2025.
Debt funds, international funds, and hybrid funds below the 65% equity threshold are taxed differently.
Short-term or long-term? Getting the 12-month rule right
Here’s the only rule you need to know: hold for more than 12 months and your gain is long-term. Sell within 12 months and it’s short-term. That single boundary determines your tax rate.
Most other assets (property, gold) use a 24-month threshold. Equity shares and equity MF units get the shorter 12-month window — under Section 2(101) of the ITA 2025.
Three holding period mistakes that cost filers money
Trade date, not settlement date. The clock starts on the day you placed the buy order, not the day your shares settled in your demat (T+1). Bought on 1 June 2024 and sold on 1 June 2025? That’s exactly 12 months — short-term. Sell on 2 June 2025 or later for long-term treatment.
SIP tranches have individual holding periods. Each monthly SIP instalment has its own clock, starting from the date it was allotted to your folio — not the date you started the SIP. FIFO applies (first-in, first-out: units bought earliest are treated as sold first). So if you started a SIP in January 2023 and redeem everything in February 2025, only some tranches are long-term. Your AMC statement shows the allotment date for each tranche.
Bonus shares start fresh. The holding period for bonus shares starts from their allotment date — not from when you bought the original shares.
STCG: 20% tax on gains from short-term equity
Sell within 12 months and you pay 20% tax on the gain — under Section 196 of the ITA 2025 (the successor to Section 111A of the old Act). No indexation benefit. STT (Securities Transaction Tax, which your broker deducts automatically) must have been paid on the sale.
One relief: if your total income excluding this short-term gain is below the basic exemption limit, the gain is reduced by the shortfall before the 20% applies. For most salaried investors, this won’t apply.
Here’s how it plays out with real numbers:
| Shares bought | 10 March 2025 at ₹500 each (200 shares) |
| Shares sold | 15 October 2025 at ₹650 each |
| Holding period | ~7 months — short-term |
| Sale value | ₹1,30,000 |
| Cost | ₹1,00,000 |
| Short-term gain | ₹30,000 |
| Tax at 20% | ₹6,000 |
| Add 4% health & education cess | ₹240 |
| Total tax | ₹6,240 |
LTCG: 12.5% tax, with the first ₹1.25 lakh free
Hold for more than 12 months and you pay 12.5% tax on gains — under Section 198 of the ITA 2025 (the successor to Section 112A of the old Act). But there’s a catch in your favour: the first ₹1,25,000 of long-term gains every financial year is completely exempt.
Two conditions must be met for this rate to apply: the asset must be a listed equity share, an equity-oriented MF unit, or a business trust unit; and STT must have been paid (on both purchase and sale for shares; on sale only for MF units).
How the ₹1.25 lakh exemption actually works
The exemption is per year, not per transaction or per fund. All your long-term gains from stocks and equity MFs across the entire year are added together, and the ₹1.25 lakh comes off the total — once.
One thing many filers get wrong: the tax rebate available to lower-income filers (under Section 156 of the ITA 2025, the equivalent of the old 87A rebate) does not apply to long-term equity gains. This is explicitly stated in Section 198(7). Even if your total income is low enough to claim that rebate elsewhere, you still owe tax on long-term gains above ₹1.25 lakh.
Here’s what nil tax looks like:
Rahul redeems equity MF units in May 2025. His total long-term gain = ₹1,15,000.
Below ₹1,25,000 — Tax: ₹0
And here’s what happens when gains cross the threshold:
| Long-term gains from listed shares | ₹3,00,000 |
| Long-term gains from equity MF redemption | ₹50,000 |
| Total long-term gains | ₹3,50,000 |
| Less: annual exemption | ₹1,25,000 |
| Taxable gains | ₹2,25,000 |
| Tax at 12.5% | ₹28,125 |
| Add 4% cess | ₹1,125 |
| Total tax | ₹29,250 |
Want to calculate your own number?
Grandfathering: a special rule for shares bought before 1 February 2018
If you bought shares or MF units before 1 February 2018, there’s a rule in your favour. When LTCG tax on equity was reintroduced in 2018, the government said: gains that built up before that date won’t be taxed. To make this work, the law lets you use the market price on 31 January 2018 as your cost — if it was higher than what you actually paid.
The technical version, under the cost of acquisition provisions of the ITA 2025 (Section 72A(7)): your cost of acquisition is the higher of your actual purchase price and the lower of the FMV on 31 January 2018 and the actual sale price.
In plain terms: if the stock was worth more on 31 January 2018 than you paid for it, you get to use that higher value as your starting point — but only up to your actual sale price.
Here’s an example:
| Shares bought | March 2015 at ₹100/share (500 shares) |
| Actual cost | ₹50,000 |
| Market price on 31 Jan 2018 (highest quoted price that day) | ₹180/share = ₹90,000 |
| Sold | December 2025 at ₹250/share = ₹1,25,000 |
Step 1: lower of FMV (₹90,000) and sale price (₹1,25,000) = ₹90,000
Step 2: higher of actual cost (₹50,000) and ₹90,000 = ₹90,000 ← your grandfathered cost
Long-term gain = ₹1,25,000 − ₹90,000 = ₹35,000 → within the ₹1.25 lakh exemption → ₹0 tax
For mutual fund units, the FMV on 31 January 2018 is the NAV (Net Asset Value — the per-unit price of the fund) on that date. Your AMC, CAMS, or KFintech can give you the historical NAV.
Which ITR form to use, and where to report your gains
| Your situation | File this form | Report here |
|---|---|---|
| Only long-term gains, total ≤ ₹1,25,000, no short-term gains, no losses carried forward | ITR-1 (Sahaj) | Schedule CG |
| Any short-term gains, or long-term gains above ₹1,25,000, no business income | ITR-2 | Schedule CG + Schedule 112A |
| Business or professional income also present | ITR-3 | Schedule CG + Schedule 112A |
Not sure which form applies to you?
For long-term gains (Section 198): report in Schedule 112A of ITR-2. For shares bought before 31 January 2018, enter each stock separately — one row per company — because the grandfathered price is different for each stock. For shares bought after that date, consolidated reporting is allowed.
For short-term gains (Section 196): report in Schedule CG.
Don’t rely entirely on the pre-fill
The tax portal pre-fills your AIS (Annual Information Statement — a summary of your income and transactions pulled automatically from brokers and AMCs) and capital gains data. Convenient, but not always complete.
Before finalising your return: cross-check your broker’s tax P&L and your mutual fund statement from CAMS or KFintech against the pre-fill. Check that the cost of acquisition is correct — especially if grandfathering applies. Look for missing transactions (some broker uploads lag). Any mismatch between your ITR and your AIS is likely to trigger an automated notice from the tax department.
Three mistakes worth avoiding
Filing as equity gains when the fund isn’t equity-oriented. Only funds with 65%+ allocation to listed Indian stocks qualify for the 12.5% rate and the ₹1.25 lakh exemption. International funds, debt funds, and many hybrid funds don’t. Check your fund’s factsheet if you’re unsure.
Skipping loss reporting when you owe no tax. Made a loss on equity this year? Report it even if you owe nothing. Long-term losses can be carried forward for 8 years and set off against future long-term gains. Skip the filing and that carry-forward is gone permanently.
Assuming the low-income rebate wipes out your LTCG tax. Section 198(7) of the ITA 2025 explicitly excludes long-term equity gains from the rebate calculation. If your gains exceeded ₹1.25 lakh, that tax is payable — regardless of how low your other income is.
For set-off rules when you have losses, see Set-off and carry forward of losses for stock market investors & traders.
For the full grandfathering calculation, see What is the grandfathering rule for capital gains?.
For debt and hybrid fund taxation, see the Complete guide to debt funds: features, types and taxation.
This thread is for general information, based on the Income Tax Act, 2025 and Income Tax Rules, 2026 as applicable for Tax Year 2026-27. Tax positions vary with individual facts. Consult a Chartered Accountant for advice specific to your situation.