- Short-term or long-term: the 12-month line
- What counts as an equity-oriented fund
- The two rates side by side
- Worked example 1: a salaried investor
- Worked example 2: the cost of selling a month early
- Worked example 3: low income and the basic exemption limit
- Shares and units bought before 1 February 2018
- Losses on shares and funds
- Dividends and IDCW are not capital gains
- Year labels
- Where this fits
For tax year 2026-27, gains on listed equity shares and equity-oriented mutual fund units are taxed in two ways, provided securities transaction tax (STT) applies. Units or shares held for 12 months or less produce short-term gains taxed at 20% under section 196 of the Income-tax Act, 2025. Held for more than 12 months, the first ₹1,25,000 of long-term gains in the year is untaxed and the rest is taxed at 12.5% under section 198, without indexation. Cess at 4% applies to both. Neither Chapter VIII deductions nor the new-regime rebate can reduce this tax.
Short-term or long-term: the 12-month line
Section 2(101) treats a capital asset as short-term if it is held for not more than 24 months. For these assets the period is 12 months:
- securities listed on a recognised stock exchange in India;
- units of the Unit Trust of India;
- units of an equity-oriented fund;
- zero-coupon bonds.
Held for 12 months or less, the gain is short-term; held for longer, it is long-term. With SIPs, each instalment is a separate purchase with its own holding period.
What counts as an equity-oriented fund
Under section 198(8), a mutual fund scheme is equity-oriented if at least 65% of its total proceeds is invested in equity shares of domestic companies listed on a recognised stock exchange. The percentage is measured as the annual average of monthly opening and closing figures.
A fund of funds qualifies if two conditions are both met:
- at least 90% of its proceeds is invested in units of another exchange-traded fund;
- that other fund in turn holds at least 90% in listed domestic equity.
International equity funds, gold funds and most hybrid funds with less than 65% domestic equity fall outside this definition. So do debt funds, which are covered in debt mutual fund tax under section 76.
The two rates side by side
| Short-term (section 196) | Long-term (section 198) | |
|---|---|---|
| Assets | Equity shares, equity-oriented fund units, business trust units | Same |
| STT condition | Sale chargeable to STT | Shares: STT paid on acquisition and transfer (subject to notified exceptions); fund units: STT paid on transfer |
| Rate | 20% | 12.5% on gains above ₹1,25,000 a year |
| Indexation | No | No |
| Chapter VIII deductions (such as section 123, earlier 80C) | Not against these gains (section 196(4)) | Not against these gains (section 198(6)) |
| Surcharge | Capped at 15% | Capped at 15% |
STT itself is not deductible in computing the gain (section 72(3)(b)). Brokerage and other expenses incurred wholly and exclusively for the transfer are deductible under section 72(1)(a).
Worked example 1: a salaried investor
Arjun is a resident on the new regime with ₹18 lakh of taxable salary. In tax year 2026-27 he makes two sales:
- equity fund units held for three years, with a gain of ₹2,00,000;
- listed shares held for seven months, with a gain of ₹80,000.
| Item | Computation | Tax |
|---|---|---|
| Long-term gain, section 198 | 12.5% × (₹2,00,000 − ₹1,25,000) | ₹9,375 |
| Short-term gain, section 196 | 20% × ₹80,000 | ₹16,000 |
| Cess at 4% | 4% × ₹25,375 | ₹1,015 |
| Tax on the gains | ₹26,390 |
This is on top of the tax on his salary, which is computed on the salary alone at slab rates.
Worked example 2: the cost of selling a month early
A gain of ₹1,00,000 on equity fund units, for an investor with no other long-term equity gains that year:
- Sold after 11 months: short-term, 20% × ₹1,00,000 = ₹20,000, plus ₹800 cess.
- Sold after 13 months: long-term and within the ₹1,25,000 threshold, so no tax.
The ₹1,25,000 is an annual threshold across all section 198 gains in the tax year, not a per-sale allowance.
Worked example 3: low income and the basic exemption limit
Kavita is a resident on the new regime. Her only other income is ₹2,00,000 of interest, and she has a short-term gain of ₹5,00,000 on shares.
- Section 196(2) lets a resident individual use any unused basic exemption against the short-term gain.
- Under the new regime the nil band is ₹4,00,000. Her other income leaves ₹2,00,000 of it unused.
- The taxable short-term gain becomes ₹3,00,000, and tax is 20% of that, ₹60,000, plus ₹2,400 cess.
Her total income is only ₹7 lakh, yet the section 156 rebate does not help. Section 156(3) limits the new-regime rebate to tax at the section 202(1) slab rates, and her slab tax is nil. Long-term gains work the same way, through section 198(3), and section 198(7) expressly keeps the rebate away from tax on those gains.
Section 90(7) preserves the 2018 grandfathering. For listed equity shares and equity-oriented fund units acquired before 1 February 2018, the cost of acquisition is the higher of:
- the actual cost; and
- the lower of the fair market value on 31 January 2018 and the sale price.
For listed shares, fair market value means the highest price quoted on the exchange on 31 January 2018. For unlisted fund units it means the net asset value on that date.
So gains that built up before February 2018 remain outside tax, but a loss cannot be manufactured from the higher 2018 value.
Under section 108(2), a short-term capital loss can be set off against any capital gain, and a long-term capital loss only against long-term gains. Unused losses carry forward for eight tax years if the return is filed on time. The order of set-off can change the tax; see capital loss set-off and carry forward.
Dividends and IDCW are not capital gains
Dividends from shares, and income distributions from mutual funds, are taxed as income from other sources at slab rates. From tax year 2026-27 no expense, including interest, can be deducted against them.
Year labels
This page covers sales on or after 1 April 2026, under the Income-tax Act, 2025. Sales in FY 2025-26 are reported in the AY 2026-27 return under the Income-tax Act, 1961, where the corresponding provisions were sections 111A and 112A.
Where this fits
- Compute a gain: capital gains calculator
- Set losses against gains: capital loss set-off planner
- A larger profit worked through: LTCG tax on ₹5 lakh of equity fund profit
- Choosing between holding periods: LTCG vs STCG on equity
- High incomes: surcharge and marginal relief for 2026-27
Sources. Income-tax Act, 2025, sections 2(101), 72, 90(7) and (8), 108, 156, 196 and 198, Gazette of India, 21 August 2025. Finance Act, 2026, sections 3(4) and 44 and First Schedule Part I-B, Gazette of India, 30 March 2026.