Capital gains tax on investments changed meaningfully from July 23, 2024, and a lot of investors are still working with the old numbers in their head. If you're selling mutual funds or stocks in FY 2025-26, here's what actually applies now.
Equity Mutual Funds and Direct Stocks
For equity-oriented mutual funds and shares held directly, the holding period that separates short-term from long-term is 12 months.
Short-term capital gains (STCG), on units or shares held for 12 months or less, are taxed at a flat 20% under Section 111A.
Long-term capital gains (LTCG), on units or shares held for more than 12 months, are taxed at 12.5% under Section 112A, but only on the amount above ₹1.25 lakh in a financial year. The first ₹1.25 lakh of long-term equity gains in any year is completely tax-free.
Both rates exclude applicable surcharge and cess, which apply on top depending on your total income level.
A Worked Example
Say you sold equity mutual fund units this year with a total long-term gain of ₹3 lakh (held over 12 months). Your tax works out as: ₹3,00,000 − ₹1,25,000 (exemption) = ₹1,75,000 taxable at 12.5% = ₹21,875, before cess. If instead that same ₹3 lakh gain came from units held for only 8 months, the entire amount is short-term and taxed at 20%, giving you ₹60,000 in tax, nearly three times as much, purely because of the holding period.
This gap is the single biggest reason "just wait a bit longer before selling" is often genuinely good tax advice, not just a platitude, if you're close to the 12-month mark on a profitable holding.
Debt Mutual Funds: A Different, Less Favourable Set of Rules
Since April 2023, debt mutual funds (funds with less than 35% allocation to equity) lost their long-term capital gains benefit entirely. Regardless of how long you hold a debt fund, gains are added to your total income and taxed at your applicable income tax slab rate. There's no separate LTCG rate, no indexation benefit, and no ₹1.25 lakh exemption for debt funds anymore. This makes debt funds considerably less tax-efficient than they were before 2023, and worth reconsidering if you're holding them purely for the old tax advantage rather than the underlying investment case.
How This Affects ELSS (Tax-Saving Mutual Funds)
ELSS funds carry a mandatory 3-year lock-in, so by the time you're allowed to redeem, you've automatically crossed the 12-month threshold for equity LTCG treatment. Gains on ELSS redemption after the lock-in are taxed at the same 12.5% LTCG rate above ₹1.25 lakh, exactly like any other equity fund.
What About Gold, Real Estate, and International Funds?
These don't fall under the equity treatment above. Physical gold, gold funds, real estate, and international equity funds (which are treated as non-equity for Indian tax purposes since they don't meet the domestic equity allocation requirement) follow different holding periods and rates, generally aligned closer to the debt fund treatment for anything held short of 24 or 36 months depending on the asset class. If you hold any of these, check the specific rules separately rather than assuming equity treatment applies.
Practical Tax Planning Around Capital Gains
- Harvest gains within the ₹1.25 lakh exemption every year if you have long-term equity holdings with unrealised gains, selling and immediately reinvesting resets your cost basis and can shelter future gains from tax entirely, up to the annual exemption. This is legal and commonly recommended by financial planners.
- Check your holding period before selling, especially if you're within a few weeks of crossing 12 months. The tax difference alone can justify waiting.
- Don't let tax rules alone drive investment decisions, a bad investment held longer for tax reasons is still a bad investment.
Use our capital gains calculator to work out your exact liability before selling, particularly useful when you're deciding whether to wait out a holding period.
Frequently Asked Questions
Do I pay capital gains tax on SIP investments the same way as a lump sum?
Each SIP instalment is treated as a separate purchase with its own holding period. If you've been investing monthly for three years and redeem everything at once, the units from your most recent instalments may still be short-term even though your overall SIP has run for years, while older instalments qualify as long-term.
Is there any way to avoid capital gains tax entirely?
Beyond the annual ₹1.25 lakh equity LTCG exemption, there's no blanket way to avoid capital gains tax on mutual funds or stocks for individual investors. Certain exemptions exist for capital gains from selling residential property if reinvested under Sections 54 and 54F, but these don't apply to mutual fund or stock gains.
How do I report capital gains in my ITR?
Capital gains from mutual funds and stocks are reported in Schedule CG of your ITR, typically ITR-2 or ITR-3 depending on your other income sources. Your broker or mutual fund platform's annual capital gains statement (available for download) has the figures you need, matched to short-term and long-term categories.
What tax rate applies if I have both short-term and long-term losses along with gains?
Losses can offset gains within the same category first (short-term losses against short-term gains, long-term against long-term), and long-term losses can also offset short-term gains in some cases. Unused losses can be carried forward for up to 8 assessment years, provided you file your ITR on time in the year the loss occurs.
