Capital Gains Tax on Shares and Mutual Funds in India: A Plain-English Guide

When you sell shares or redeem mutual fund units at a profit, the gain is taxed under the head "capital gains". Capital gains tax on shares and mutual funds in India depends on three things: what you sold, how long you held it and when you sold it. This guide sets out the current rates and holding periods, explains what the new Income-tax Act, 2025 changed (and did not change), and covers debt funds, old investments and losses.

First, which law and which year?

India now has two income-tax laws in play, depending on when you earned the income.

• The Income-tax Act, 2025 came into force on 1 April 2026. It replaces the terms "previous year" and "assessment year" with a single "tax year", defined as the twelve-month financial year starting on 1 April. The government's explainer states that the rewrite was designed with no modifications of tax rates (PIB, The Income Tax Act, 2025: Reshaping Tax Framework).
• The Income-tax Act, 1961 still governs income of FY 2025-26, which you report for assessment year (AY) 2026-27. The Finance Bill 2026 memorandum sets out rates "for the assessment year 2026-27 for the purposes of the Income-tax Act, 1961" separately from rates for "tax year 2026-27" under the new Act (Memorandum explaining the Finance Bill 2026).

For capital gains on listed equity, the rates and holding periods are the same in both cases. What changes is the section numbering. The Finance Bill 2026 memorandum refers to capital gains "under the provisions of sections 196, 197 and 198" of the new Act, which carry the special rates previously in sections 111A, 112 and 112A of the 1961 Act.

Short-term or long-term: the holding period

The Finance (No. 2) Act, 2024 reduced the holding periods to just two: 12 months for all listed securities and 24 months for all other assets (Memorandum explaining the Finance (No. 2) Bill 2024). The Income Tax Department's ITR-2 FAQ gives the same test: listed shares generally need more than 12 months of holding to be long-term, and unlisted shares 24 months (Income Tax Department, ITR-2 FAQs).

Rates for listed shares and equity-oriented funds

The Union Budget of 23 July 2024 changed equity rates with immediate effect. The Finance Minister's speech set short-term gains on specified financial assets at 20% and long-term gains at 12.5%, and raised the annual exemption on certain listed financial assets from ₹1 lakh to ₹1.25 lakh (Budget Speech 2024-25). The 2024 memorandum states that these changes took effect from 23 July 2024.

Sources: Finance (No. 2) Bill 2024 memorandum and AMFI's tax regime page. Cess and any surcharge are added on top; the e-filing portal notes that the higher 25% and 37% surcharge rates do not apply to gains taxed under sections 111A, 112 and 112A, so surcharge on such income is capped at 15% (Income Tax Department, AY 2026-27). The Finance Bill 2026 memorandum keeps the same 15% cap for sections 196, 197 and 198 under the new Act.

The STT condition

The concessional long-term rate applies only where securities transaction tax (STT) has been paid. For equity shares, STT must have been paid on both purchase and sale; for units of an equity-oriented fund, on the sale. The text of section 198 of the new Act, as reproduced by eztax.in, carries the same conditions, with exceptions the government can notify.

What counts as an equity-oriented fund

When the long-term regime for equity was introduced in 2018, the Finance Bill memorandum defined an equity-oriented fund as one that invests at least 65% of its total proceeds in equity shares of listed domestic companies; a fund of funds qualifies only if it invests at least 90% in such a fund, which in turn invests at least 90% in listed domestic equity (Memorandum explaining the Finance Bill 2018). Your fund's scheme information document states whether it is treated as equity-oriented for tax.

A worked example

Suppose in tax year 2026-27 you redeem equity fund units held for 18 months with a gain of ₹2,00,000, and shares held for 7 months with a gain of ₹50,000. Ignoring cess, surcharge and any other income:

• Long-term: ₹2,00,000 minus the ₹1,25,000 exemption leaves ₹75,000, taxed at 12.5% = ₹9,375.
• Short-term: ₹50,000 at 20% = ₹10,000.

The ₹1.25 lakh exemption is a single annual allowance across all your long-term gains on listed equity and equity-oriented funds, not a separate allowance per scheme. This example is illustrative only.

Shares bought before 1 February 2018

Long-term gains on listed equity were exempt until 2018. To protect gains made up to then, the 2018 memorandum provides that for shares and units bought before 1 February 2018, the cost is taken as the higher of (a) the actual cost, and (b) the lower of the fair market value on 31 January 2018 and the sale price. For listed securities, fair market value means the highest price quoted on the exchange on 31 January 2018 (source).

Example B shows that the rule protects past gains but cannot create an artificial loss. Figures are illustrative.

Debt funds and other non-equity funds

Debt funds follow different rules, and the date you bought matters.

• Specified mutual funds. The Finance Act 2023 introduced section 50AA, under which gains on units of "specified mutual funds" acquired on or after 1 April 2023 are deemed short-term and taxed at your slab rate, regardless of holding period. From FY 2025-26, AMFI explains, a specified mutual fund is one that invests more than 65% of its total proceeds in debt and money-market instruments, or a fund that invests 65% or more in such funds (AMFI). The 2024 memorandum explains that the earlier test, based on equity of not more than 35%, had caught gold funds, gold ETFs and some fund-of-funds that are not really debt funds.
• Debt fund units bought before 1 April 2023, and non-equity funds that are not specified mutual funds, are taxed as short-term at slab rates within the holding period, and as long-term at 12.5% without indexation after it, for transfers on or after 23 July 2024. AMFI gives the long-term treatment, and the 2024 memorandum confirms that other short-term capital gains continue to be taxed at applicable (slab) rates.
• Unlisted bonds and debentures are taxed at slab rates irrespective of holding period from 23 July 2024, per the 2024 memorandum.

Because the classification depends on a fund's portfolio, check the tax treatment stated in the scheme information document or your fund house's annual tax reckoner.

SIPs, switches and buybacks

• SIPs: each instalment is a separate purchase with its own holding period, and units are generally redeemed on a first-in, first-out basis, so one redemption can contain both short-term and long-term gains (DSP Mutual Fund). Our guide to SIP vs lump sum investing explains how this affects the choice between the two.
• Switches and STPs: moving money from one scheme to another is processed as a redemption from the first scheme, so it can trigger tax (DSP).
• Buybacks: the Finance Bill 2026 proposed that, from tax year 2026-27, money received by a shareholder on a company's buyback of shares be taxed as capital gains rather than as dividend income, with a higher effective rate for promoters (Finance Bill 2026 memorandum).

Setting off and carrying forward losses

The Income Tax Department's ITR-2 FAQ sets out the rules (source):

• A short-term capital loss can be adjusted against both short-term and long-term capital gains.
• A long-term capital loss can be adjusted only against long-term capital gains.
• Unadjusted capital losses can be carried forward for eight years after the year in which they arose.
• A loss can be carried forward only if the return for the loss year is filed on or before the due date.

A capital loss is only useful if you report it in a return filed on time; a late return can forfeit the right to carry it forward.

Which return form, and what to keep

For AY 2026-27, the e-filing portal states that ITR-1 can be used by eligible individuals with long-term capital gains under section 112A of up to ₹1,25,000, but not by anyone with short-term capital gains or with section 112A gains above that limit (Income Tax Department). Most people with share or fund sales above that will need a different form, such as ITR-2. Check the forms notified for the year you are filing.

Keep for each sale: the purchase and sale dates, the purchase cost, the sale value, STT paid, and for pre-2018 holdings the 31 January 2018 price. Consolidated capital gains statements from your broker and from the mutual fund registrars usually contain most of this.

Legal ways to manage the tax

• Hold for more than 12 months where it suits your plan, since the long-term rate is lower and comes with the annual exemption.
• Use the ₹1.25 lakh exemption deliberately. Some investors sell and buy back long-term equity holdings each year to realise gains within the exemption and raise their cost base. Weigh transaction costs, exit loads and the reset of the holding period before doing this.
• Realise and record losses in years when you have gains to absorb them, and always file on time to keep the carry-forward.
• Choose the fund type with tax in mind as one factor among several, not the only one.

If you are still deciding between the old and new slab regimes, which affects tax on slab-rate gains such as most debt fund redemptions, a Chartered Accountant can model both for your income.

The bottom line

For listed shares and equity-oriented funds, the rule of thumb is now simple: hold for more than 12 months and pay 12.5% on gains above ₹1.25 lakh a year; sell sooner and pay 20%. These rates apply to FY 2025-26 (AY 2026-27) under the 1961 Act and to tax year 2026-27 under the Income-tax Act, 2025. Debt-oriented funds bought from April 2023 are taxed at slab rates however long you hold them. Track every lot, use losses carefully and file on time.

Frequently asked questions

What is the LTCG tax rate on shares in India now?

For STT-paid listed shares and equity-oriented fund units sold on or after 23 July 2024 and held for more than 12 months, long-term gains above ₹1.25 lakh a year are taxed at 12.5%, plus cess and any surcharge.

Did the Income-tax Act, 2025 change capital gains rates?

No change to the rates was intended: the government said the rewrite made no modifications of tax rates. The main visible change is renumbering, with the equity capital gains rules now in sections 196 to 198, and the use of "tax year".

Is the ₹1.25 lakh exemption per fund or per year?

It is a single annual allowance covering all your long-term gains on listed equity shares, equity-oriented fund units and business trust units in the year.

How are debt mutual funds taxed?

Units of specified (debt-oriented) funds bought on or after 1 April 2023 are taxed at your slab rate whatever the holding period. Older units and other non-equity funds can qualify for 12.5% long-term treatment after the holding period.

Can I set off a loss on shares against my salary?

No. Capital losses can be set off only against capital gains: short-term losses against any capital gains, and long-term losses only against long-term gains.

Sources

1. The Income Tax Act, 2025: Reshaping Tax Framework, Press Information Bureau, 2025.
2. Memorandum Explaining the Provisions in the Finance Bill, 2026, Ministry of Finance, Government of India, 2026.
3. Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 2024, Ministry of Finance, Government of India, 2024.
4. Budget 2024-2025: Speech of Nirmala Sitharaman, Minister of Finance, Ministry of Finance, Government of India, 2024.
5. Memorandum Explaining the Provisions in the Finance Bill, 2018, Ministry of Finance, Government of India, 2018.
6. File ITR-2 Online FAQs, Income Tax Department, accessed 2026.
7. Salaried Individuals for AY 2026-27, Income Tax Department, 2026.
8. Tax Regime for Mutual Funds, Association of Mutual Funds in India, accessed 2026.
9. Section 198, Income-tax Act, 2025 (text), eztax.in, 2026.
10. Tax on SIP investments: how each instalment is taxed, DSP Mutual Fund, 2026.