Capital Gains Tax on Shares and Mutual Funds in India: A Plain Guide
Know how much of a profit you keep before you decide when to sell.
When you sell shares or mutual fund units at a profit, the gain is taxed. The rate depends on how long you held the investment. This guide covers the rules for listed equity shares and equity-oriented mutual funds for the financial year 2026-27, with worked examples. Tax laws change, so confirm current rules on the Income Tax Department's website or with a chartered accountant before acting.
Short term and long term
For listed equity shares and equity-oriented mutual funds, a holding period of up to 12 months is short term. Longer than 12 months is long term. The holding period runs from the purchase date to the sale date.
| Short-term gain | Long-term gain | |
|---|---|---|
| Holding period | Up to 12 months | More than 12 months |
| Tax rate | 20% | 12.5% on gains above Rs 1.25 lakh in the year |
Surcharge (for higher incomes) and 4 percent health and education cess are added to these rates. Indexation is not available for these gains.
Worked example: the same profit, two holding periods
Suppose you invest Rs 5 lakh in an equity fund and the units are worth Rs 6.5 lakh when you sell. The gain is Rs 1.5 lakh.
- Sold after 8 months (short term): tax at 20 percent on Rs 1.5 lakh is Rs 30,000, or about Rs 31,200 with cess.
- Sold after 14 months (long term): the first Rs 1.25 lakh of long-term gains in the year is exempt, so the taxable part is Rs 25,000. Tax at 12.5 percent is Rs 3,125, or about Rs 3,250 with cess.
The difference is large. It is not a reason to hold an investment you no longer believe in, but it is a cost you should know about when you decide.
The Rs 1.25 lakh limit
The exemption applies to your total long-term gains on listed equity and equity-oriented funds in a financial year, not to each stock or fund separately. Unused exemption does not carry forward to the next year. Some investors book long-term gains in stages across years so that each year's gains stay within the limit, but each case depends on the person's circumstances.
Plan the sale, not just the purchase
Tax is one input to a decision, not the whole decision. Before selling a long-held investment, ask whether the reason to sell is stronger than the tax cost. Before selling one held for ten and a half months, ask whether waiting a few weeks changes the outcome, and whether the investment is still one you want to own for those weeks. A sale driven only by tax can be as poor a decision as a sale driven by fear.
What you can deduct
Brokerage and other expenses incurred only in connection with the sale can be deducted from the gain. Securities Transaction Tax (STT) is not deductible. Keep contract notes and statements so the numbers can be traced.
Setting off losses
A short-term capital loss can be set off against both short-term and long-term gains. A long-term capital loss can be set off only against long-term gains. Losses that cannot be set off in the year can generally be carried forward for up to eight years, but only if you file your return by the due date and report the loss. This is a good reason to file even in a year when no tax is due.
Dividends and other income
Dividends from shares and funds are added to your income and taxed at your slab rate. Profits from intraday equity trading and from futures and options are treated as business income and reported differently, so people who trade frequently should take advice on how to file.
What to keep and where to find it
- Your broker's profit and loss statement for the financial year.
- The capital gains statement from the fund registrars for mutual funds.
- Your Annual Information Statement on the income tax portal, to cross-check what has been reported against you.
- Contract notes and purchase records, especially for investments held across many years.
Common questions
Do I pay tax if I do not sell?
No capital gains tax arises until you sell. Dividends received are taxed in the year of receipt.
Does switching between funds count as a sale?
Yes. A switch is treated as a redemption of one scheme and a purchase of another, so it can create a gain or loss.
Are the rules the same for every kind of fund?
No. The rates above are for equity-oriented funds. Other categories, such as debt funds, are taxed differently.
Source for rates: Income Tax Department, section on tax in special cases (listed equity shares and equity-oriented funds). Worked examples are illustrations, not tax advice.
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