The tax on selling shares or mutual funds depends entirely on how long you held them and whether STT was paid — get the holding period wrong and you'll misapply the rate entirely. Here's the complete breakdown with worked examples.
Capital gains tax on investments is one of the areas where getting the holding period classification wrong leads directly to using the wrong tax rate — the calculation itself is simple once the classification is correct.
Holding Period Classification
| Asset type | Short-term if held for | Long-term if held for |
| Listed equity shares | ≤ 12 months | > 12 months |
| Equity mutual funds (65%+ equity allocation) | ≤ 12 months | > 12 months |
| Debt mutual funds | Taxed at slab rate regardless of period (post-2023 rule change — no LTCG indexation benefit for debt funds acquired after 1 April 2023) | — |
| Unlisted shares | ≤ 24 months | > 24 months |
| Immovable property | ≤ 24 months | > 24 months |
Tax Rates on Listed Equity and Equity Mutual Funds
| Type | Rate | Condition |
| Short-Term Capital Gains (STCG) | 20% | Where Securities Transaction Tax (STT) has been paid on the transaction |
| Long-Term Capital Gains (LTCG) | 12.5% | On gains exceeding ₹1.25 lakh in a financial year; STT paid, no indexation benefit |
The ₹1.25 lakh LTCG exemption is an annual threshold across all your long-term equity/equity-fund gains combined — gains up to this amount in a year are entirely tax-free, and only the excess is taxed at 12.5%. This exemption resets each financial year; it isn't a lifetime limit.
Worked Example
| Shares purchased | ₹5,00,000 |
| Shares sold after 18 months (long-term) | ₹7,50,000 |
| Total gain | ₹2,50,000 |
| Exempt (first ₹1.25 lakh) | ₹1,25,000 |
| Taxable LTCG | ₹1,25,000 |
| Tax at 12.5% | ₹15,625 (plus applicable surcharge/cess) |
STCG on Non-STT-Paid Transactions
Where STT hasn't been paid (certain off-market transactions, some unlisted share sales), short-term gains on shares are taxed at your regular slab rate instead of the flat 20% — this is a meaningfully different (often higher) outcome for taxpayers in the top slab, so the STT-paid distinction matters beyond just the holding period.
Debt Mutual Funds — The 2023 Rule Change
For debt mutual funds acquired on or after 1 April 2023, all gains (regardless of holding period) are taxed at your applicable slab rate — the previous long-term indexation benefit for debt funds no longer applies to units acquired after this date. Debt fund units acquired before this date under the old rules retain their earlier tax treatment. This is a significant change that reduced debt funds' relative tax efficiency compared to before, and is worth checking carefully if you hold a mix of pre- and post-2023 debt fund units.
Setting Off Losses
Short-term capital losses can be set off against both short-term and long-term capital gains in the same year, and carried forward for 8 assessment years if not fully used. Long-term capital losses can only be set off against long-term capital gains — not against short-term gains — both in the current year and in carried-forward years. This asymmetry matters for tax-loss harvesting decisions near the financial year-end.
Reporting in Your ITR
Capital gains (of any kind) require ITR-2 at minimum (ITR-3 if there's also business/professional income) — ITR-1 and ITR-4 do not support capital gains reporting at all. The Capital Gains schedule requires scrip-wise/transaction-wise detail for equity, pulled from your broker's capital gains statement, not just an aggregate figure.
Reconciling your broker's capital gains statement, applying the correct holding-period classification, and computing the right STCG/LTCG split correctly is where most self-filed errors occur — our ITR filing service includes this reconciliation as a standard part of filing for taxpayers with investment income.
Frequently Asked Questions
Is the ₹1.25 lakh LTCG exemption available every year, or only once?
It's an annual exemption — every financial year, the first ₹1.25 lakh of long-term capital gains on listed equity shares and equity mutual funds (combined) is tax-free, and this resets each year. It is not a one-time or lifetime limit.
Can I offset short-term capital losses against long-term capital gains?
Yes — short-term capital losses can be set off against both short-term and long-term gains in the same year. However, long-term capital losses can only be set off against long-term gains, not short-term gains, in both the current and carried-forward years.
Do I need to report capital gains even if the total is below the ₹1.25 lakh exemption?
Yes — the exemption reduces the taxable amount to nil (or partially), but the transactions and gains still need to be reported in the Capital Gains schedule of ITR-2/ITR-3. The exemption isn't a reason to omit reporting the transactions themselves.
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