LTCG Tax on Mutual Funds & Stocks: Complete Guide for FY 2026-27
12.5% on equity gains above ₹1.25 lakh, 20% STCG, debt funds taxed at slab rate — learn all capital gains rules, grandfathering, indexation, and tax loss harvesting strategies.
Tax & Investment · 11 min read · By FinCal Hub Team
Understanding Capital Gains Tax on Your Investments
When you sell mutual fund units, stocks, or property for a profit, that gain is subject to capital gains tax in India. The tax rate and treatment depend on the type of asset and how long you held it before selling. For equity mutual fund investors, the Long-Term Capital Gains (LTCG) tax reintroduced in Budget 2018 is a key consideration — it taxes gains above ₹1 lakh per financial year at 12.5% (plus cess and surcharge if applicable) for holdings over 1 year. Short-Term Capital Gains (STCG) on equity funds held less than 1 year are taxed at 15%.
Debt mutual funds, real estate, gold, and other assets have different rules and rates. Understanding the distinction between long-term and short-term, the grandfathering provision for equity investments made before January 31, 2018, and the indexation benefit for certain assets is essential for tax-efficient investing. Our Capital Gains Tax Calculator models the exact tax liability for equity, debt, and property sales.
Equity Mutual Funds & Stocks
Equity-oriented mutual funds (those investing at least 65% of their portfolio in Indian equities) and direct stock investments follow these tax rules:
| Holding Period | Classification | Tax Rate |
|---|---|---|
| Less than 12 months | Short-Term Capital Gains (STCG) | 20% + 4% cess |
| 12 months or more | Long-Term Capital Gains (LTCG) | 12.5% on gains above ₹1 lakh/year + 4% cess |
The ₹1.25 lakh LTCG exemption threshold applies per financial year, across all equity investments combined. If you realise ₹1,80,000 in long-term equity gains in a year, only ₹55,000 is taxable at 12.5% (plus cess), resulting in ₹6,875 tax plus ₹275 cess = ₹10,400 total.
Grandfathering provision: Investments made on or before January 31, 2018, are protected. The cost of acquisition for such investments is deemed to be the higher of (a) the actual cost, or (b) the fair market value as on January 31, 2018, or the sale price (whichever is lower). This means gains accrued before February 1, 2018, are effectively tax-free.
Debt Mutual Funds
From FY 2023-24 onwards, debt mutual funds (those with less than 35% equity exposure) lost their long-term capital gains benefit and indexation advantage. All gains from debt funds are now taxed at the investor's slab rate, regardless of the holding period. This is a significant change that makes debt funds less tax-efficient compared to FDs for investors in higher tax brackets.
For investments made before April 1, 2023, the old rules still apply: gains on holdings over 3 years qualify as LTCG taxed at 20% with indexation benefit. Indexation adjusts the purchase price for inflation using the Cost Inflation Index (CII) published by the CBDT each year, reducing the taxable gain substantially.
Other Asset Classes
- Real Estate: Held less than 24 months = STCG at slab rate. Held 24+ months = LTCG at 20% with indexation. Section 54 allows exemption if gains are reinvested in another residential property within specified time limits. Section 54EC allows exemption up to ₹50 lakh if invested in specified bonds (NHAI, REC) within 6 months.
- Gold (physical, ETF, SGB): Physical gold and gold ETFs held less than 36 months = STCG at slab rate. Held 36+ months = LTCG at 20% with indexation. Sovereign Gold Bonds (SGBs) held until maturity have tax-free redemption gains, making them the most tax-efficient way to hold gold.
- International Funds: Funds that invest primarily in foreign stocks are taxed as debt funds (slab rate regardless of holding period) from FY 2023-24 onwards.
Tax Loss Harvesting: A Legitimate Strategy
Tax loss harvesting is the practice of selling investments that have declined in value to realise a capital loss, which can then be set off against capital gains realised elsewhere in the same financial year or carried forward for up to 8 years.
For example, if you realise ₹2 lakh in LTCG from selling one equity fund but also have another equity fund showing ₹80,000 in losses, you can sell the losing fund to realise the loss. Your net taxable LTCG becomes ₹1.2 lakh, and after the ₹1 lakh exemption, only ₹20,000 is taxable at 12.5%. This saves you roughly ₹10,000 in tax that you would otherwise have paid.
Important rules for set-off:
- Short-term losses can be set off against both short-term and long-term gains.
- Long-term losses can only be set off against long-term gains.
- Unabsorbed losses can be carried forward for 8 assessment years.
- You must file your ITR on time to carry forward losses.
Wash sale rule: The Income Tax Act does not explicitly have a "wash sale" rule like the US, meaning you could theoretically sell a fund to book a loss and immediately buy it back. However, tax officers may scrutinise transactions that appear to have no commercial purpose other than tax avoidance. Most tax planners recommend waiting at least a few weeks before repurchasing, or buying a different but similar fund to maintain your asset allocation.
Tax-Efficient Investment Strategies
- Hold equity funds for at least 1 year. Selling before 1 year attracts 15% STCG instead of 12.5% LTCG (with ₹1 lakh exemption). The difference is meaningful.
- Use the ₹1.25 lakh LTCG exemption every year. If your portfolio has appreciated significantly, you can book up to ₹1.25 lakh in LTCG each year completely tax-free and immediately reinvest. This resets your cost basis higher for future tax calculations.
- Match asset type to account type. Hold debt funds (which generate interest income taxed at slab rate) in your PPF or NPS account where applicable, and hold equity funds in taxable accounts where they benefit from lower LTCG rates.
- Choose SGBs for gold exposure. Sovereign Gold Bonds offer tax-free gains on redemption plus 2.5% annual interest — a better tax profile than physical gold or gold ETFs.
- Be strategic about redemptions near the ₹1 lakh threshold. If you are planning a redemption that would take you just over ₹1.25 lakh in LTCG, consider splitting it across two financial years (March and April) to utilise two years' worth of exemptions.
Common Mistakes to Avoid
1. Forgetting about the grandfathering date. Many long-term investors who bought equity funds before 2018 fail to properly calculate the January 31, 2018, NAV when filing their tax returns, resulting in overpayment of tax.
2. Missing the indexation benefit on pre-2023 debt funds. If you hold debt fund units purchased before April 1, 2023, and have held them for over 3 years, you are still entitled to 20% tax with indexation. Ensure your fund house or CA calculates this correctly.
3. Not filing ITR to carry forward losses. If you have realised capital losses in a year, you must file your ITR on or before the due date (typically July 31) to be eligible to carry those losses forward for up to 8 years. Missing the deadline means the losses expire worthless.
4. Treating all mutual funds the same. Equity funds, debt funds, international funds, and hybrid funds each have different tax treatments. A balanced advantage fund or arbitrage fund may be taxed as equity (65%+ equity), while a conservative hybrid fund is taxed as debt. Check the fund's categorisation.
Last updated: November 2026. Sources: CBDT notifications, RBI, Department of Posts, SEBI.