Capital Gains Tax on Shares & Mutual Funds

Capital Gains Tax on Shares & Mutual Funds

When you sell shares or mutual funds for a profit, that profit is a capital gain — and how much tax you pay depends on what you sold and how long you held it. After the 2024 Budget overhauled the rules, the rates changed for everyone, so it's worth getting them right before you sell or file. This guide explains capital gains tax on shares and mutual funds in plain language for FY 2025-26 (AY 2026-27).

The two things that decide your tax: the type of asset (equity vs debt) and your holding period (short-term vs long-term). Get those two right and the rest follows.

Short-Term vs Long-Term: It's About the Holding Period

For listed equity shares and equity mutual funds, the dividing line is 12 months:

• Sold within 12 months → short-term capital gain (STCG)
• Held for more than 12 months → long-term capital gain (LTCG)

(For most other assets, like property or gold, the long-term line is 24 months — but this guide focuses on shares and mutual funds.)

Tax on Equity Shares & Equity Mutual Funds

These are the rates for listed shares and equity-oriented mutual funds where Securities Transaction Tax (STT) has been paid (which is the normal case when you buy and sell on an exchange):

Gain type	Holding period	Tax rate
STCG (Section 111A)	12 months or less	20% (raised from 15% in Budget 2024)
LTCG (Section 112A)	More than 12 months	12.5% on gains above ₹1.25 lakh a year

Two important points about equity LTCG:

• The first ₹1.25 lakh of long-term gains every financial year is tax-free (up from ₹1 lakh earlier). You only pay 12.5% on the amount above it.
• There is no indexation — you can't inflate your purchase cost to reduce the gain.

Tax on Debt Mutual Funds

Debt mutual funds changed dramatically. For units bought on or after 1 April 2023, there is no long-term benefit at all — the entire gain is added to your income and taxed at your slab rate, no matter how long you hold the fund. So a debt fund held for one year and one held for ten years are taxed the same way.

If you bought debt fund units before 1 April 2023, the older rules still apply to those units: held for more than 24 months, they qualify as long-term and are taxed at 12.5% (without indexation if sold on or after 23 July 2024); otherwise at your slab rate.

Dividends from mutual funds (IDCW) are also added to your income and taxed at your slab rate, with 10% TDS if they cross ₹5,000 in a year from one fund house.

The ₹1.25 Lakh Exemption: Use It Every Year

Because the ₹1.25 lakh equity LTCG exemption resets every financial year, many investors book some long-term gains each year to use it up — a strategy known as tax harvesting. Selling and rebuying equity holdings so your yearly long-term gain stays under ₹1.25 lakh can keep that portion completely tax-free.

Worked Examples

Example 1: Long-term equity gain of ₹3 lakh

You redeem an equity mutual fund after 2 years with a ₹3 lakh long-term gain. The first ₹1.25 lakh is exempt, so you pay 12.5% on the remaining ₹1.75 lakh = ₹21,875 (about ₹22,750 with 4% cess).

Example 2: Short-term equity gain of ₹1 lakh

You sell shares after 8 months with a ₹1 lakh gain. As STCG, you pay 20% = ₹20,000 (plus cess).

Example 3: Debt fund gain of ₹50,000

You sell a debt fund (bought in 2024) after 3 years with a ₹50,000 gain. It's taxed at your slab rate — so if you're in the 20% slab, that's ₹10,000, with no long-term benefit despite holding it for years.

Want to estimate your overall tax? Use our Income Tax Calculator.

How to Report Capital Gains

Capital gains can't be reported in the simple ITR-1. You'll usually need ITR-2 (or ITR-3 if you also have business income). Before filing, cross-check your share and mutual fund transactions in your AIS, which now captures securities and mutual fund sales, and then file your return with the correct figures.

Common Mistakes to Avoid

• Assuming equity LTCG is still taxed at 10% or that STCG is 15% — both rates went up in Budget 2024.
• Expecting a long-term benefit on debt funds bought after April 2023 — there isn't one.
• Filing ITR-1 when you have capital gains — you need ITR-2.
• Forgetting the ₹1.25 lakh yearly exemption, or not reconciling gains with your AIS.

Frequently Asked Questions

What is the tax on selling shares within a year?

Short-term capital gains on listed shares and equity mutual funds (with STT paid) are taxed at 20% under Section 111A, regardless of your income slab.

How much capital gain is tax-free on shares and mutual funds?

Up to ₹1.25 lakh of long-term equity gains per financial year is exempt. Above that, long-term gains are taxed at 12.5%. There is no such exemption for short-term gains.

How are debt mutual funds taxed now?

For units bought on or after 1 April 2023, the entire gain is taxed at your income tax slab rate with no long-term benefit, however long you hold them. Older units (bought before April 2023) can still qualify for long-term treatment.

Which ITR form do I use for capital gains?

You generally need ITR-2 (or ITR-3 if you also have business income). Capital gains cannot be reported in ITR-1.

Do I pay capital gains tax on SIP redemptions?

Yes. Each SIP instalment is treated as a separate purchase with its own holding period, so when you redeem, some units may be short-term and others long-term — and each is taxed accordingly.

Disclaimer: This article is for educational purposes only and reflects capital gains rules for FY 2025-26 (AY 2026-27). Tax laws change and individual situations vary. Please verify the latest rules on the official Income Tax Department website or consult a qualified tax advisor before making decisions.