STCG vs LTCG on Shares and Equity Funds: The Same ₹3 Lakh Profit Can Cost ₹62,400 or ₹22,750.
Capital Gains Tax on Shares and Equity Mutual Funds in India: STCG, LTCG and the ₹1.25 Lakh Exemption
Guide: How Holding Period, Losses and the Timing of a Sale Change the Tax on the Same Profit
Two investors make the same ₹3,00,000 profit on the same stock. One sells at 11 months. The other waits two more months. One pays ₹62,400 in tax. The other pays ₹22,750. The stock did the same thing. The calendar did the rest.
ABHYUDAYA VIKRAM SINGH
October 2026 · DhanSutra.co.in · Stock Market Last reviewed: October 2026
8 MIN READ
Educational guide. Based on capital gains rules for listed equity as understood for FY 2026 27. Tax law changes, so verify before you sell. Not tax or investment advice.
For listed shares and equity oriented mutual funds, profit on units held for 12 months or less is a short term gain taxed at 20%. Profit on units held more than 12 months is a long term gain taxed at 12.5% on the amount above ₹1,25,000 of gains in a financial year, which is exempt. A 4% cess applies on top. A ₹3,00,000 gain costs about ₹62,400 if short term and about ₹22,750 if long term.
THE NUMBERS AT A GLANCE
SHORT TERM GAIN TAX (STCG)
20%
On listed equity and equity funds sold within 12 months, plus 4% cess. No exemption limit
LONG TERM GAIN TAX (LTCG)
12.5%
On gains above ₹1,25,000 in a financial year, for holdings of more than 12 months, plus 4% cess
TAX ON A ₹3,00,000 SHORT TERM GAIN
₹62,400
₹60,000 tax plus ₹2,400 cess
TAX ON THE SAME ₹3,00,000 AS LONG TERM
₹22,750
₹21,875 tax on ₹1,75,000 taxable, plus ₹875 cess. A saving of ₹39,650
THE FREE ZONE
₹1,25,000 of long term gains a year
Tax free every financial year across all your listed equity and equity fund sales combined
THE TWO IDEAS THAT EXPLAIN IT
THE TRAP
The Eleven Month Exit
Selling early feels harmless because the profit feels real and the market feels uncertain. But the tax on a short term gain is far higher than on a long term one. The decision to sell can come from the news, while the cost of selling comes from the calendar.
Term coined by Abhyudaya Vikram Singh · DhanSutra.co.in
THE FIX
The Exemption Reset
The first ₹1,25,000 of long term gains each financial year is tax free, and the allowance resets every April. Booking long term gains up to that limit each year, in line with your plan, uses an allowance that disappears if you do not use it.
Term coined by Abhyudaya Vikram Singh · DhanSutra.co.in
The Two Rates, Side by Side
Short term (STCG)
Long term (LTCG)
Holding period
12 months or less
More than 12 months
Tax rate
20%
12.5%
Exemption
None
First ₹1,25,000 of gains in a financial year
Cess
4% on the tax
4% on the tax
Applies to
Listed equity shares, equity oriented mutual funds and equity ETFs
The same
These are the rates that have applied since 23 July 2024. Most commentary on FY 2026 27 confirms they remain in force, but tax rules change in every Budget, so confirm the current position before acting on a large sale. Higher income earners may also pay a surcharge.
The Same Profit, Two Tax Bills
An investor buys shares for ₹5,00,000 and sells them for ₹8,00,000. The gain is ₹3,00,000. The only variable is the holding period.
Sold within 12 months
Sold after 12 months
Gain
₹3,00,000
₹3,00,000
Exempt amount
₹0
₹1,25,000
Taxable gain
₹3,00,000
₹1,75,000
Tax at the rate
₹60,000 (20%)
₹21,875 (12.5%)
Cess at 4%
₹2,400
₹875
Total tax
₹62,400
₹22,750
Waiting a few more weeks saved ₹39,650 of tax on the same trade. No fund manager can add that much to your return by being clever.
The ₹1,25,000 Rule, in Practice
The ₹1,25,000 exemption applies to your total long term gains from listed equity and equity funds in a financial year, not per fund or per stock. If your gains in a year are ₹1,25,000 or less, you pay no tax on them. If they are ₹2,00,000, tax applies only on ₹75,000.
A short term gain of ₹1,25,000 on the same shares would have cost ₹26,000 with cess. Long term, the same gain costs nothing.
Using the Exemption Every Year
Some investors sell units each year to book up to ₹1,25,000 of long term gains and immediately buy them back. This resets the purchase price higher, so a future sale shows a smaller gain, and it uses up the tax free allowance that would otherwise lapse. At the 12.5% rate with cess, ₹1,25,000 of gains that would otherwise have been taxable is worth about ₹16,250 of tax.
This is sometimes called tax gain harvesting. It works only when the numbers justify the transaction costs, and a sale and repurchase carries a small market risk in between. It is not an obligation, and for smaller portfolios it may add effort without adding much. Ask a tax professional whether it suits you.
What Counts as a Sale
1
Selling shares or redeeming units for cash.The usual case. The gain is the sale value minus the purchase cost.
2
Switching from one equity fund to another.A switch is treated as a redemption and a fresh purchase, so it can trigger tax even if you never see any cash.
3
Changing from a regular plan to a direct plan.This is also treated as a redemption in most cases, so check the tax effect first.
4
Systematic withdrawals from a fund.Each withdrawal is a sale of units, and each batch has its own holding period and gain or loss.
Losses Can Reduce the Tax
A loss on one sale can reduce the tax on another gain, if you handle it correctly.
Type of loss
Can be set off against
Carry forward
Short term capital loss
Both short term and long term gains
Up to 8 assessment years, if the return is filed on time
Long term capital loss
Long term gains only
Up to 8 assessment years, if the return is filed on time
Losses can be carried forward only if you file your income tax return before the due date and report them. Many investors lose this benefit by not filing, or by filing late.
What This Guide Does Not Cover
This guide covers listed equity shares and equity oriented mutual funds that attract securities transaction tax. Debt mutual funds bought on or after 1 April 2023, gold, property, unlisted shares and derivatives are taxed under different rules. Dividends are taxed as income at your slab rate, not under capital gains rules.
The Income Tax Act has also been rewritten, and the new Act takes effect from 1 April 2026, with provisions renumbered. Older articles refer to Sections 111A and 112A, while new material may cite new section numbers. The substance, the rates and the holding periods, is what matters, and you should confirm the current references when you file.
A Simple Process Before You Sell
1
Check the purchase date of each lot.For funds bought through a SIP, every instalment has its own date. Selling the oldest units first is usually the default, but confirm how your platform treats it.
2
If a lot is close to 12 months, check what waiting a few more days would save.Do the sum above. The saving can be larger than a small market move.
3
Add up your long term gains for the year so far.See how much of the ₹1,25,000 allowance remains.
4
Check for losses to set off or carry forward.A loss you booked earlier can reduce tax today.
5
Keep records.Statements from your broker or fund house show gains and losses by lot. You will need them when you file.
My Honest Take
Most investors spend hours choosing what to buy and minutes deciding when to sell. But the sale date can change the tax on a gain by more than half.
I would never hold a stock only for tax, because a bad investment held for a lower tax bill is still a bad investment. But when the decision is close, and the question is whether to sell this week or in a month, look at the calendar before you look at the news. It is the only part of the return you fully control.
WANT THIS RUN ON YOUR OWN NUMBERS
Your holdings, purchase dates and gains are different from this example. If you want your own portfolio reviewed for tax efficient timing, a 30 minute session goes through your actual statements. For a final tax filing, confirm with a chartered accountant.
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Book Your Portfolio Tax Check Session
30 minutes, your actual holdings, one clear plan for when to sell
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FREQUENTLY ASKED QUESTIONS
Short term capital gains apply to listed shares and equity mutual funds held for 12 months or less and are taxed at 20%. Long term capital gains apply to holdings of more than 12 months and are taxed at 12.5% on gains above ₹1,25,000 in a financial year, plus 4% cess.
The first ₹1,25,000 of long term capital gains from listed equity shares and equity oriented mutual funds in a financial year is exempt. It is a combined limit across all your sales in that year.
Gains on listed shares held for 12 months or less are taxed as short term capital gains at 20%, plus 4% cess. There is no exemption limit for short term gains.
Each SIP instalment is a separate purchase with its own holding period. Units from instalments older than 12 months are long term, while newer units are short term. Your fund house statement shows the date of each lot.
Yes. A switch is generally treated as a redemption from one fund and a fresh purchase in another, so the gain on the units switched out can be taxable, even though you receive no cash.
A short term capital loss can be set off against both short term and long term capital gains. A long term capital loss can be set off only against long term capital gains. Unused losses can be carried forward for 8 assessment years if you file your return on time.
Index funds and ETFs that invest mainly in listed equity are generally taxed like equity funds. Debt, gold and international funds follow different rules, so check the classification of the fund before you assume.
It means selling units to book long term gains up to the ₹1,25,000 exemption each year and buying them back, so the purchase price resets higher. It can reduce future tax, but costs and market movement between the sale and repurchase need to be weighed.
No. Dividends from shares and mutual funds are taxed as income at your slab rate. Capital gains rules apply only when you sell the shares or units.
Long term gains up to ₹1,25,000 in a financial year are exempt from tax. Short term gains have no such exemption. Even if no tax is due, you may still need to report the gains when you file your return.
AS
Abhyudaya Vikram Singh
AMFI Registered Mutual Fund Distributor (EUIN: E420092). Writes DhanSutra to explain money decisions with real numbers. Try the free financial calculators to run your own.
Tax rates and rules shown are as understood for listed equity in FY 2026 27 and can change with each Budget. This guide is educational and does not replace advice from a chartered accountant. Abhyudaya Vikram Singh is an AMFI-Registered Mutual Fund Distributor (EUIN: E420092), not a SEBI-Registered Investment Adviser. All content on DhanSutra is for educational purposes only and is not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.
If this changed when you will sell your next holding, share it with someone who sells the moment a stock is up. Every DhanSutra article shows its numbers so you can check them yourself.
