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TaxIntermediate• 5 min read

Understanding LTCG and STCG Tax Rules on Equities & Mutual Funds

A complete guide to the latest budget tax rates: 12.5% LTCG with ₹1.25 Lakh exemption, 20% STCG, and tax harvesting strategies.

Written by MicroInvestments Editorial Team
Reviewed by Editorial Review Board
Published: 2026-03-25 · Last Updated: 2026-08-20
Direct Answer / Key Takeaway

For listed equities and equity mutual funds in India: (1) Long-Term Capital Gains (LTCG) apply to investments held for more than 12 months, taxed at 12.5% on net gains exceeding ₹1.25 Lakhs per financial year, (2) Short-Term Capital Gains (STCG) apply to units sold within 12 months, taxed at 20%, and (3) Debt mutual funds are taxed at your applicable income tax slab rates regardless of holding period.

Latest Equity Capital Gains Tax Structure

Under the revised Finance Act regulations: - Long-Term Capital Gains (LTCG - Holding > 12 Months): - Gains up to ₹1.25 Lakhs per financial year are 100% TAX-FREE. - Any gains exceeding ₹1.25 Lakhs are taxed at a flat rate of 12.5% (without indexation). - Short-Term Capital Gains (STCG - Holding < 12 Months): - Taxed at a flat rate of 20% (plus applicable surcharge & cess).

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What Is Annual Tax Loss / Gain Harvesting?

You can use the ₹1.25 Lakh annual tax-free LTCG exemption to permanently reduce your lifetime taxes through Tax Harvesting: 1. Every year in March, sell equity mutual fund units with unrealized long-term gains of up to ₹1.25 Lakhs. 2. Because gains are under ₹1.25 Lakhs, zero tax is owed. 3. Immediately reinvest the proceeds back into the same or similar fund on the next business day. 4. Result: Your acquisition cost base is reset higher, eliminating future tax liability on that ₹1.25 Lakh gain forever!

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Set-Off and Carry Forward of Losses

- Short-Term Capital Losses (STCL): Can be set off against both STCG and LTCG. - Long-Term Capital Losses (LTCL): Can only be set off against LTCG. - Unadjusted capital losses can be carried forward for up to 8 consecutive financial years, provided you file your Income Tax Return on or before the due date.
Capital Gains Tax Matrix for Indian Investors
Asset CategoryHolding Period ThresholdShort-Term Tax RateLong-Term Tax RateAnnual Tax Exemption
Listed Stocks & Equity Mutual Funds> 12 Months20%12.5%₹1.25 Lakhs tax-free per year
Unlisted Equity / Startups> 24 MonthsSlab Rate12.5%Nil
Debt Mutual Funds (Post-2023)Any durationIncome Slab RateIncome Slab RateNil
Gold ETFs / Sovereign Gold Bonds (Secondary)> 12 MonthsIncome Slab Rate12.5%Nil
Real Estate / Immovable Property> 24 MonthsIncome Slab Rate12.5% (No indexation)Exempt if reinvested under 54/54F
Practical Example

An investor has ₹3.00 Lakhs of long-term capital gains in an equity fund after 3 years. Option A: Sells everything at once in Year 3. Option B: Harvested ₹1.00 Lakh gains in Year 1, ₹1.00 Lakh in Year 2, and ₹1.00 Lakh in Year 3.

Option A Tax = 12.5% on (₹3.00L - ₹1.25L) = ₹21,875 tax. Option B Tax = ₹0 every year (All gains remained under ₹1.25L annual limit).

💡 Takeaway: Annual tax harvesting saves thousands of rupees legally.

Common Mistakes to Avoid

⚠️ Churning equity mutual funds frequently within 12 months

Triggers a high 20% STCG tax penalty and 1% exit load, creating friction that hurts compounding.

⚠️ Failing to file ITR on time when you have stock market losses

If you file after the ITR deadline, you lose the legal right to carry forward capital losses for 8 years.

Action Checklist

  • Download your Capital Gains Statement from CAMS / Zerodha / Groww before filing ITR.
  • Harvest up to ₹1.25 Lakhs of LTCG every financial year in March.
  • File your ITR before July 31st to preserve loss carry-forward benefits.
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Frequently Asked Questions

Do I pay tax on unrealized gains if I do not sell my mutual fund?

No! You only pay capital gains tax when you actually redeem or switch your mutual fund units. As long as you stay invested, unrealized gains compound 100% tax-free.

Sources & References:
  • Income Tax Act, Section 112A and 111A — Statutory provisions governing taxation of equity capital gains.(Official Link )
Educational Notice:This guide is written for educational and informational purposes only and does not constitute investment advice, endorsement, or recommendation of any specific security or scheme. Investments in securities are subject to market risks.

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