Equity Capital Gains Tax: Complete Guide for FY 2025-26
Capital gains on equity investments are among the most common and consequential tax obligations for the growing population of Indian retail investors. Following the significant changes introduced by the Finance Act 2024 (effective 23 July 2024), the tax landscape for equity investments has been substantially altered — higher rates, a raised exemption threshold, and no indexation for equity assets. Understanding these rules precisely is essential for both short-term tax planning and long-term wealth building.
As of FY 2025-26, there are an estimated 16 crore demat accounts in India, and equity mutual fund folios have crossed 9 crore. For the millions of investors who actively buy and sell shares or redeem mutual fund units, accurate knowledge of capital gains tax — including the grandfathering clause for legacy investments — is no longer optional. This guide covers the complete legal framework with examples, strategies, and the important distinctions that determine your actual tax bill.
LTCG vs STCG: The Critical 12-Month Threshold
For listed equity shares and equity-oriented mutual funds (funds that invest 65% or more of their assets in Indian equities), the holding period threshold for long-term classification is 12 months. Shares or fund units held for more than 12 months from the date of purchase generate Long-Term Capital Gains (LTCG) — taxed under Section 112A. Those sold within 12 months attract Short-Term Capital Gains (STCG) — taxed under Section 111A.
This 12-month rule applies only to listed equity and equity-oriented funds. Other asset classes have different thresholds: immovable property (land, buildings) requires 24 months for long-term classification; unlisted shares and debt mutual funds require 24 months; physical gold and gold ETFs also require 24 months post-Finance Act 2024. The equity-specific 12-month threshold reflects the government's policy of encouraging long-term equity investment as a wealth creation mechanism.
Updated Tax Rates Post July 2024
The Finance Act 2024 substantially revised equity capital gains tax rates. For transactions executed on or after 23 July 2024 (the date of the Budget's effectiveness):
LTCG on listed equity and equity mutual funds is now taxed at 12.5% (increased from 10%), with an annual exemption of Rs 1,25,000 (increased from Rs 1,00,000). STCG on the same assets is taxed at 20% (increased from 15%). A 4% Health and Education Cess is levied on the tax amount. Surcharge applies at normal rates for high-income individuals — however, the surcharge on LTCG under Section 112A is capped at 15% regardless of the taxpayer's total income.
Notably, indexation benefit is not available for equity assets — there was no indexation even under the earlier regime. The cost of acquisition is used without adjustment for inflation. This is a fundamental difference from debt assets where indexation using the Cost Inflation Index (CII) was historically available (and has now also been removed for most debt assets from FY 2024-25 onwards).
The Rs 1.25 Lakh LTCG Annual Exemption
Section 112A provides an exemption of Rs 1,25,000 per financial year on aggregate LTCG from listed equity shares and equity mutual funds. This exemption is available to each individual taxpayer — Rs 1.25 lakh per person, per year. For a couple (husband and wife), if both hold investments individually, each can claim the Rs 1.25 lakh exemption separately, providing a combined exemption of Rs 2.5 lakh.
Strategic use of this exemption is one of the most powerful legal tax minimisation tools available to equity investors. If you have a portfolio with unrealised LTCG of Rs 10 lakh, selling positions to book Rs 1.25 lakh of gains each year over 8 years results in zero LTCG tax. Selling all in one year results in tax of approximately Rs 1.09 lakh (12.5% on Rs 8.75 lakh plus cess). The annual exemption harvesting strategy — selling long-term equity to book exactly Rs 1.25 lakh in gains and immediately repurchasing — resets the cost basis at the higher current price, thereby reducing future gains.
The Grandfathering Clause for Pre-2018 Investments
When LTCG tax on equity was reintroduced in Budget 2018 (after having been exempt for 14 years), the government included a grandfathering clause to protect gains accumulated before the tax's introduction. Under the grandfathering provision, for equity shares purchased before 1 February 2018, the cost of acquisition for LTCG computation is the higher of: (a) the actual purchase price, or (b) the Fair Market Value (FMV) on 31 January 2018 — but the FMV is capped at the actual sale price.
The FMV on 31 January 2018 for listed shares is defined as the highest price quoted on any recognised stock exchange on that date. For equity mutual fund units, it is the NAV on 31 January 2018 (since the last day of the previous financial year). This means gains that had already accrued before 31 January 2018 are effectively exempt from the LTCG tax, regardless of when the shares are sold in the future.
A practical example: You purchased 100 shares of a company at Rs 200 each in 2014 (total cost Rs 20,000). The FMV on 31 January 2018 was Rs 500 per share (total Rs 50,000). You sell in FY 2025-26 at Rs 800 per share (total Rs 80,000). Your LTCG = Rs 80,000 minus Rs 50,000 (grandfathered cost) = Rs 30,000. Without grandfathering, LTCG would have been Rs 60,000. The grandfathering saves you tax on Rs 30,000 of gains that accrued before 1 February 2018.
STT Requirement for Concessional Rate
The concessional LTCG rate of 12.5% under Section 112A applies only when Securities Transaction Tax (STT) has been paid at both the time of purchase and sale of the equity shares. For equity mutual funds, STT is paid at the time of redemption. If STT is not paid — for example, in off-market transactions, overseas transfers, or certain inheritance scenarios — the gains may not qualify for the Section 112A concessional rate and could be taxed under Section 112 at a potentially different rate.
F&O Taxation: Not Capital Gains
A critically important distinction is that income from Futures and Options (F&O) trading is not classified as capital gains — even though F&O are exchange-traded financial instruments. Under the Income Tax Act, F&O is treated as non-speculative business income under Section 43(5), taxable at slab rates. This means F&O profits are added to your total income and taxed at your marginal rate, with expenses incurred for F&O trading (brokerage, internet, etc.) deductible as business expenses. F&O losses can be set off against other business income and carried forward for 8 years. The capital gains provisions including the Rs 1.25 lakh LTCG exemption do not apply to F&O income.
Tax Harvesting Opportunity Using the Rs 1.25L Exemption
LTCG exemption harvesting — selling equity to realise exactly Rs 1.25 lakh in gains and immediately buying back — is a legitimate and powerful strategy unique to India. Unlike the United States, India has no "wash sale" rule that prohibits claiming losses or benefits when the same security is repurchased within a short window. You can sell a mutual fund on day 1 and buy the identical fund on the same day, booking the Rs 1.25 lakh in gains tax-free and resetting your cost to the current NAV.
The best time for this strategy is January to March, when the full financial year's picture is clear. However, if a market rally early in the year pushes your portfolio's unrealised LTCG above Rs 1.25 lakh, considering early harvesting in April or May and again in January-March gives two opportunities. Use our Tax Harvesting Calculator to quantify the exact benefit for your portfolio.
Disclaimer
This calculator applies to listed equity shares and equity-oriented mutual fund units where STT is paid. It does not cover unlisted shares, preference shares, business trust units (REITs, InvITs have different holding period thresholds), or F&O income. The grandfathering calculation requires the actual FMV of shares as on 31 January 2018, which should be sourced from BSE or NSE historical data. Consult a CA for complex transactions involving corporate actions such as bonus issues, stock splits, rights issues, or mergers that affect the cost basis and holding period.