Capital Gains on Equity and Mutual Funds in India: STCG and LTCG Explained

When you sell a share or a mutual fund unit for more than you paid for it, the profit is a capital gain — and it is taxable. India taxes equity and equity-oriented mutual funds differently from debt funds, with distinct rates for short-term and long-term holding periods under the Income Tax Act 2025 (Section 112A for LTCG, Section 111A for STCG).

Equity — what the Act taxes

For tax purposes, equity includes:

• Listed equity shares on a recognized Indian stock exchange (NSE, BSE)
• Equity-oriented mutual fund units — any fund where more than 65% of the corpus is invested in equity shares
• Units of Business Trust (REITs, InvITs) that invest primarily in equity

Debt mutual funds, fixed deposits, bonds, and property are taxed under separate rules.

Short-term capital gains (STCG) — Section 45

If you sell equity shares or equity mutual funds within 12 months of buying them, the profit is a short-term capital gain.

Tax rate: 20% (plus 4% cess, so effective rate 20.8%)

There is no basic exemption limit for STCG on equity. Even a ₹50,000 short-term gain is taxed at 20%.

Example:

You buy 500 shares of a company at ₹200 each on 1 April 2026 and sell them at ₹260 each on 1 September 2026 (within 12 months).

• Purchase price: 500 × ₹200 = ₹1,00,000
• Sale price: 500 × ₹260 = ₹1,30,000
• STCG: ₹30,000
• Tax at 20%: ₹6,000
• Cess at 4%: ₹240
• Total tax: ₹6,240

This ₹6,240 is added to your total income and taxed at your slab rate — but the Act requires you to compute it separately at 20% rather than mixing it with salary or rental income.

Long-term capital gains (LTCG) — Section 112A

If you sell equity shares or equity mutual funds after holding them for more than 12 months, the profit is a long-term capital gain.

Tax rate: 12.5% (plus 4% cess, so effective rate 13%)

Exemption threshold: Gains up to ₹1.25 lakh per year across all equity transactions are exempt. Anything above this threshold is taxed at 12.5%.

Example:

You buy 1,000 shares at ₹150 each and sell them at ₹280 each after 18 months.

• Purchase price: 1,000 × ₹150 = ₹1,50,000
• Sale price: 1,000 × ₹280 = ₹2,80,000
• Total gain: ₹1,30,000
• Less exemption threshold: ₹1,25,000
• Taxable LTCG: ₹5,000
• Tax at 12.5%: ₹625
• Cess at 4%: ₹25
• Total tax: ₹650

The ₹1.25 lakh exemption is a per-person annual exemption, not per transaction. It resets every financial year.

How Section 112A applies to mutual funds

Section 112A of the Income Tax Act 2025 specifically covers equity-oriented mutual funds. The holding period for long-term classification is the same as shares: more than 12 months.

If you hold equity mutual fund units for more than 12 months, the gains are taxed at 12.5% (above the ₹1.25 lakh exemption). STCG (within 12 months) is taxed at 20%.

Equity vs debt mutual funds — the tax difference:

Feature	Equity mutual fund	Debt mutual fund
STCG holding period	12 months	36 months
STCG rate	20%	At slab rate
LTCG holding period	>12 months	>36 months
LTCG rate	12.5% (above ₹1.25L)	12.5% with indexation
Indexation benefit	No	Yes

Indexation adjusts the purchase price for inflation, reducing the taxable gain on debt funds. Equity funds do not get indexation — the face value of the gain is what matters.

How to calculate capital gains — practical steps

Step 1 — Find your cost of acquisition:

For shares bought on or after 1 February 2018, the government has prescribed a fair market value as the cost, to prevent shell companies from inflating losses. The official closing price on NSE/BSE on 31 January 2018 is used as the cost for those shares. Your actual purchase price (if bought before 31 January 2018) is used as-is.

For mutual funds, the NAV on the date of redemption is compared to the NAV on the date of purchase.

Step 2 — Determine the holding period:

Count from the date of purchase to the date of sale (both days excluded). More than 365 days = long-term.

Step 3 — Calculate the gain:

Gain = Sale price − Cost of acquisition

For listed securities, you also subtract brokerage and STT (Securities Transaction Tax) paid on the sale.

Step 4 — Apply the exemption:

For LTCG, subtract ₹1.25 lakh. The remainder is taxed at 12.5%.

Step 5 — Add to your ITR:

Report STCG in ITR-2 or ITR-3 as “Short-term capital gains from specified property.” Report LTCG in the same form. You must also fill out Schedule FA (foreign assets) if you hold overseas securities.

STT — the transaction tax that affects your net return

Securities Transaction Tax is levied on every equity transaction you make:

Transaction	STT rate
Delivery-based equity buy	0.1% of value
Delivery-based equity sell	0.1% of value
Equity futures sell	0.05% of value
Equity options sell	0.125% of value

STT is not a deduction from capital gains, but it reduces your net return. A delivery-based share sale of ₹2,00,000 carries ₹200 in STT — this comes out of your gross sale proceeds before the capital gain is computed.

Dividend income from equity — taxed separately

Dividends received from equity shares and equity mutual funds are not part of capital gains. They are taxed as “Income from other sources” at your slab rate, and the company or mutual fund has already deducted TDS at 10% if the dividend exceeds ₹5,000.

Tax-loss harvesting — reducing your equity tax bill

If you have both gains and losses in equity in the same financial year, you can set off losses against gains:

• Short-term losses can be set off against short-term or long-term gains
• Long-term losses can be set off against long-term gains only
• Up to ₹10,000 of excess losses can be carried forward for 8 years

Example — tax-loss harvesting:

You sell shares for a ₹20,000 short-term loss in June and shares for a ₹60,000 short-term gain in December. Net gain = ₹40,000. Tax = ₹40,000 × 20% = ₹8,000.

Without the loss set-off, the full ₹60,000 would have been taxed = ₹12,000. The harvest saved ₹4,000 in tax.

Points to watch

• Equity-oriented fund classification: A mutual fund is equity-oriented only if at least 65% of its assets are in equity shares. Hybrid funds with lower equity ratios are taxed as debt funds.
• NRI taxation: NRIs pay STCG on equity at 20% and LTCG at 12.5% (without the ₹1.25 lakh exemption). TDS is deducted at the time of sale by the broker.
• New regime: Under the new tax regime (default from FY 2026-27), capital gains on equity remain taxed at the same rates — the regime does not alter equity capital gains rates.
• Gains in your demat account: Your broker reports all equity transactions to the Income Tax Department via the AIR (Annual Information Return) system. The department already knows your gains before you file.

Sources

• Income Tax Act 2025, Section 45 — Capital gains (verified 2026-10-08)
• Income Tax Act 2025, Section 112A — LTCG on equity (verified 2026-10-08)
• SEBI — STT rates (verified 2026-10-08)
• CBDT circular on capital gains computation (verified 2026-10-08)