Capital Gains Tax on Equity and Mutual Funds in India — AY 2026-27 Complete Guide

1. The Two Rates: STCG 20% and LTCG 12.5%

The fundamental split in equity capital gains taxation is based on the holding period. If you sell equity shares, equity mutual fund units, or equity ETFs within 12 months of buying them, any gain is a Short-Term Capital Gain (STCG) taxed at a flat 20%.

If you hold for 12 months or more, the gain becomes a Long-Term Capital Gain (LTCG) taxed at 12.5% — but only on gains exceeding Rs 1,25,000 in the financial year. Gains up to Rs 1.25L are fully exempt from tax. A 4% health and education cess applies to both STCG and LTCG.

Budget 2024 (effective July 23, 2024) raised the STCG rate from 15% to 20% and the LTCG rate from 10% to 12.5%, while simultaneously raising the exemption from Rs 1L to Rs 1.25L. For FY 2025-26 (AY 2026-27), all equity gains are taxed under these new rates throughout the year.

2. What Counts as Long-Term vs Short-Term?

Listed equity shares: Holding period of 12 months or more is LTCG. Less than 12 months is STCG.

Equity Mutual Funds investing 65% or more in equities: Same 12-month rule applies.

Equity ETFs based on equity indices: Same 12-month rule.

Debt mutual funds purchased on or after April 1, 2023: No longer qualify for LTCG — gains are taxed at slab rates regardless of holding period.

For FY 2025-26 (AY 2026-27) there is no mid-year split in rates — the Budget 2024 rates apply uniformly for the full year.

3. The Rs 1.25 Lakh Annual LTCG Exemption — Tax Harvesting Strategy

The Rs 1,25,000 LTCG exemption resets every financial year on April 1. This creates a legal and widely used strategy called LTCG harvesting: selling enough equity holdings before March 31 to book long-term gains up to Rs 1.25L, paying zero tax, and immediately repurchasing the same units on April 1.

This strategy resets your cost basis for those units. Over time, it reduces the future taxable gain that would accumulate on a large corpus. It works especially well in a rising market where positions have grown significantly.

Example: You hold equity fund units worth Rs 10L with a purchase value of Rs 8L (unrealised LTCG of Rs 2L). If you sell units with gains up to Rs 1.25L, pay zero tax, and repurchase, your new cost basis is higher. Next year, the taxable gain on the same position is smaller by Rs 1.25L.

4. Tax-Loss Harvesting to Offset Gains

If you have positions showing losses, you can sell them to harvest those losses and offset against gains in the same financial year. Short-term losses can offset both STCG and LTCG. Long-term losses can only offset LTCG.

Remaining capital losses can be carried forward for up to 8 assessment years and set off against future capital gains of the same type. Importantly, you cannot carry forward losses if you miss filing your ITR by the due date.

Tax-loss harvesting is most valuable near the end of the financial year (January to March). Review your portfolio in February to March to identify candidates for loss booking.

5. Grandfathering Rule for Pre-2018 Equity

Equity investments held before February 1, 2018 benefit from a grandfathering rule. For these investments, the cost of acquisition is deemed to be the higher of the actual purchase price or the highest traded price on January 31, 2018 (for listed securities). This protects pre-2018 gains from LTCG tax.

Most long-term investors who held equity through 2018 without selling have already captured much of the grandfathered benefit. If you are still holding pre-2018 units, the grandfathered cost basis applies when you sell.

6. Buyback of Shares — Now Taxed as Dividend

Budget 2024 changed the tax treatment of share buybacks: proceeds from company buybacks are no longer tax-free in the investor's hands. Buyback income is now treated as dividend income and taxed at the investor's applicable income tax slab rate.

Previously, companies used buybacks as a tax-efficient way to return money to shareholders. That advantage has been removed. If a company announces a buyback and you participate, the income will appear in your AIS and must be declared under income from other sources in your ITR.

7. Which ITR Form to Use for Capital Gains?

If you have any capital gains — even a small profit from selling one mutual fund unit — you cannot use ITR-1. You must file ITR-2 for AY 2026-27.

Ensure you reconcile your capital gains data with your AIS (Annual Information Statement) and broker-issued capital gains statements. Discrepancies between what you report and what appears in AIS frequently trigger tax notices.

For equity mutual funds, the fund house provides a Capital Gains Statement accessible via the AMC or CAMS and KFin portals. Download this before filing and use it to prefill your ITR-2 data accurately.