LTCG and STCG on Stocks and Mutual Funds: A Plain-English Guide

If you have ever sold a share at a profit, redeemed an equity mutual fund, or booked gains during a market rally, you have created a capital gain — and the tax on it is one of the most misunderstood corners of personal finance in India. Budget 2024 reset the rates mid-year, leaving many investors unsure what they actually owe.

This is a plain-English guide to capital gains on listed shares and equity mutual funds — the assets most retail investors hold. We will cover the holding period that decides everything, the current rates, the ₹1.25 lakh exemption, how losses work, and a worked example you can copy.

The One Rule That Decides Everything: Holding Period

Capital gains tax on equity hinges on a single number — how long you held the asset before selling.

• Hold listed shares or equity mutual fund units for more than 12 months, and the gain is long-term (LTCG).
• Hold for 12 months or less, and the gain is short-term (STCG).

That is the whole distinction for equity. Twelve months is the dividing line. The date of purchase and the date of sale both matter, and for SIPs each instalment carries its own clock. (Note: debt mutual funds, property, and gold follow different holding-period rules; this guide focuses on equity. For the broader picture across all assets, see our capital gains tax in India guide.)

The Rates for FY 2025-26

Following Budget 2024, the rates effective from 23 July 2024 are:

Type	Holding period	Tax rate	Exemption
Equity LTCG	More than 12 months	12.5%	First ₹1,25,000 of gains per year exempt
Equity STCG	12 months or less	20%	None

A few crucial points:

The 12.5% LTCG rate applies without indexation. For listed equity and equity mutual funds, you do not get to inflate your purchase cost. The gain is simply sale price minus actual purchase cost.

The ₹1.25 lakh exemption is annual and aggregated. Across all your equity long-term gains in a financial year, the first ₹1.25 lakh is tax-free. Only the portion above ₹1.25 lakh is taxed at 12.5%. This was raised from ₹1 lakh in Budget 2024.

STCG has no exemption threshold. The entire short-term gain is taxed at 20% from the first rupee.

Cess applies on top. A 4% health and education cess is added to the tax. So effective LTCG is 12.5% × 1.04 = 13% and effective STCG is 20% × 1.04 = 20.8%, before any surcharge for very high incomes.

Your Regime Choice Does Not Matter Here

A point that confuses many people: capital gains on equity are taxed at these special rates regardless of whether you are on the old or new tax regime. The regime you pick — old with deductions, or new with lower slabs — only changes how your salary, business income, and interest income are taxed. Equity LTCG stays at 12.5% above ₹1.25 lakh, and equity STCG stays at 20%, in both regimes.

So when you read our old vs new tax regime guide, remember that your stock-market gains are taxed identically either way. They simply sit on top, taxed at their own rates.

A Worked Example: Priya's Portfolio

Priya, a marketing manager in Hyderabad, makes the following equity transactions in FY 2025-26:

1. Infosys shares: bought March 2023 for ₹3,00,000, sold November 2025 for ₹4,40,000. Held over 12 months → LTCG of ₹1,40,000.
2. An equity mutual fund: bought January 2025 for ₹2,00,000, redeemed October 2025 for ₹2,55,000. Held 9 months → STCG of ₹55,000.
3. A small-cap stock: bought June 2024 for ₹1,00,000, sold September 2025 for ₹85,000. Held over 12 months → long-term capital loss of ₹15,000.

Step 1 — Net the long-term items: LTCG ₹1,40,000 minus long-term loss ₹15,000 = net LTCG of ₹1,25,000.

Step 2 — Apply the LTCG exemption: Net LTCG ₹1,25,000 minus the ₹1,25,000 annual exemption = ₹0 taxable LTCG. The whole long-term gain is wiped out by the exemption and the loss. Tax on LTCG: nil.

Step 3 — Tax the STCG: STCG ₹55,000 × 20% = ₹11,000, plus 4% cess = ₹11,440.

Priya's total capital gains tax = ₹11,440. Notice how the long-term loss was used against the long-term gain, and the ₹1.25 lakh exemption absorbed the rest. Had she sold the small-cap stock within 12 months instead, the ₹15,000 loss would have been short-term and could have offset her STCG too — a reminder that loss timing matters.

How Capital Losses Work

Losses are not just disappointing — they are a tax asset if you handle them correctly.

Loss type	Can be set off against	Carry forward
Short-term capital loss	Both STCG and LTCG	Up to 8 assessment years
Long-term capital loss	Only LTCG	Up to 8 assessment years

The asymmetry is important: a short-term loss is more flexible because it can offset both short-term and long-term gains, while a long-term loss can only shelter long-term gains.

The non-negotiable condition: to carry a loss forward to future years, you must file your ITR on or before the due date. Miss the deadline and the carry-forward is lost — one of the most expensive consequences of late or belated filing.

Tax Harvesting: A Legitimate Strategy

Because the ₹1.25 lakh LTCG exemption resets every financial year, long-term investors often harvest gains deliberately. The idea: each year, sell enough long-term holdings to realise gains up to ₹1.25 lakh, pay zero tax on them, and immediately reinvest. Over time this resets your purchase cost upward, so a smaller taxable gain remains when you eventually sell for real.

This is entirely legal and distinct from "wash sale" concerns that exist in some other countries. It does involve transaction costs and a day or two out of the market, so it suits patient investors rather than active traders. For a deeper look at how this plays across fund types, see our guide on tax on mutual funds.

Grandfathering: The 31 January 2018 Rule

If you have held shares or equity funds since before 1 February 2018, a special "grandfathering" provision protects gains that accrued up to 31 January 2018. When LTCG on equity first became taxable, the law ensured you would not be taxed on appreciation that happened before the tax existed.

The mechanics: for assets bought before 1 February 2018, your cost of acquisition is taken as the higher of (a) the actual cost, and (b) the lower of the fair market value on 31 January 2018 and the actual sale price. In plain terms, gains built up before that date are shielded, and only gains after it are taxed.

This matters for long-term holders sitting on old positions. If you bought a stock in 2012 and it had already multiplied several times by January 2018, much of that gain is grandfathered and effectively tax-free. Your broker's capital gains statement usually applies this automatically, but it is worth understanding why an old holding shows a smaller taxable gain than the raw purchase-to-sale difference suggests.

Dividends, Buybacks, and Other Equity Income

Capital gains are not the only way equity puts money in your pocket, and the other routes are taxed differently:

• Dividends are no longer tax-free in your hands. They are added to your total income and taxed at your slab rate — not at the capital gains rate. If your dividend income is significant, this is taxed like salary, and TDS may be deducted by the company.
• Share buybacks have their own evolving treatment; amounts received are increasingly taxed in the shareholder's hands rather than via a company-level tax. The exact mechanism has shifted recently, so verify the current position before relying on a buyback for tax planning.

The key point: do not assume everything from your shares is taxed at the gentle 12.5% LTCG rate. Dividends, in particular, can be taxed at up to 30% if you are in the top slab.

The Surcharge Cap on Capital Gains

High earners face a surcharge on top of income tax, but capital gains get a measure of protection. The surcharge on LTCG and STCG on equity is capped at 15%, even if your overall income would otherwise attract a higher surcharge rate (25% or 37%). This cap means very large equity gains are not loaded with the steepest surcharge slabs. For most retail investors below the surcharge thresholds this is irrelevant, but for those with incomes above ₹2 crore it materially limits the tax on equity gains — a deliberate concession to keep India's equity markets attractive to large investors.

STT, Brokerage, and the Cost of Acquisition

Two small but real adjustments:

Securities Transaction Tax (STT) is charged on equity trades and is not deductible against your capital gains — it is a separate levy you simply pay. However, the LTCG concessional rate is only available because STT was paid on the transaction, so it is the price of the lower rate.

Brokerage and statutory charges on the buy and sell legs can be added to your cost of acquisition and deducted from sale proceeds respectively, reducing the taxable gain slightly. Keep your contract notes.

Common Mistakes

Thinking the regime changes the rate. It does not. Equity capital gains are taxed at the same special rates in both the old and new regimes.

Assuming ₹1.25 lakh applies per stock. It is an annual aggregate across all your equity long-term gains, not a fresh allowance for each holding.

Forgetting SIP units are FIFO. When you redeem a SIP-built corpus, the oldest units sell first and may be long-term while recent ones are short-term. The platform's capital gains statement usually does this calculation for you — use it.

Mixing up STCG flexibility. A long-term loss cannot offset a short-term gain. Only short-term losses are fully flexible.

Filing late and losing the carry-forward. Unabsorbed losses vanish if the ITR is filed after the due date.

Ignoring the AIS. Your broker reports transactions to the tax department, and they appear in your Annual Information Statement. Reconcile your gains with the Form 26AS and AIS to avoid mismatches and notices.

What to Do Next

• Download your capital gains statement from each broker and mutual fund platform for FY 2025-26.
• Separate gains into long-term (held over 12 months) and short-term (12 months or less).
• Net any capital losses correctly — short-term losses against both, long-term losses only against LTCG.
• Apply the ₹1.25 lakh LTCG exemption to your aggregate long-term equity gain.
• Calculate tax: 12.5% on LTCG above the exemption, 20% on all STCG, plus 4% cess.
• Reconcile every transaction against your AIS and Form 26AS.
• Use the income tax calculator to see how the gains sit on top of your salary income.
• File your ITR on time so any losses carry forward for up to 8 years.
• Consider harvesting up to ₹1.25 lakh of long-term gains before 31 March if you have unrealised winners.

A final note on record-keeping. The single most useful habit for any equity investor is to keep every contract note, capital gains statement, and broker report in one place, year after year. When you eventually sell a long-held position, you will need the original purchase date and cost — and for pre-2018 holdings, the fair market value for grandfathering. Brokers usually retain a few years of statements, but holdings can span decades. A simple annual download saved to a folder, cross-checked against your Form 26AS and AIS, means you can compute and defend any gain without scrambling. The tax itself is rarely the hard part; reconstructing a missing cost basis years later is.

Capital gains tax on equity is far simpler than it looks once you anchor on the 12-month holding period and the ₹1.25 lakh exemption. Get those two right, reconcile against your AIS, and file on time — and the rest follows.

Disclaimer: This article is for educational purposes only and is not tax advice. Tax rules change frequently — verify current provisions on the official income tax portal or with a qualified CA before filing.