Tax & Savings
LTCG vs STCG on Equity
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Hold for 12 months vs sell early — how the 12.5% vs 20% tax rate gap affects your net profit.
What LTCG and STCG Actually Mean
LTCG. Long-term capital gain on listed equity shares and equity-oriented mutual funds arises where the units or shares were held for twelve months or more. It is taxed under section 112A at 12.5%, and only on the amount above ₹1.25 lakh of such gains in a financial year.
STCG. Short-term capital gain arises where the holding period was less than twelve months. It is taxed under section 111A at 20%, with no exemption threshold at all — the first rupee of gain is taxable.
The rate gap is the obvious part. The part that costs people more is the ₹1.25 lakh exemption, which applies only to long-term gains, resets every financial year, and is lost if unused. A holding sold at eleven months is taxed at 20% from the first rupee; the same holding sold a month later is taxed at 12.5% and only above ₹1.25 lakh. On a ₹2 lakh gain that is a substantial difference for the sake of four weeks.
Key Differences
| Feature | LTCG (Hold 12+ months) | STCG (Sell < 12 months) |
|---|---|---|
| Applicable when | Equity held > 12 months | Equity held < 12 months |
| Tax rate | 12.5% above ₹1.25L exemption | 20% on entire gain |
| Exemption | ₹1.25 lakh/year tax-free | None |
| Surcharge cap | 15% | 15% |
| Securities | Listed equity, equity MF | Listed equity, equity MF |
| Holding period | 12 months or more | Less than 12 months |
| Section | 112A | 111A |
| Rate | 12.5% | 20% |
| Annual exemption | ₹1.25 lakh of gains | None |
| Set-off of losses | Long-term loss against long-term gain only | Short-term loss against either short-term or long-term gain |
| Carry forward of losses | Eight assessment years, if the return is filed on time | Same |
When to Choose Which
Choose LTCG (Hold 12+ months)
- Investment horizon > 12 months
- You can plan exit timing
- Building wealth systematically
- STCG tax would significantly erode returns
Choose STCG (Sell < 12 months)
- Need liquidity within 12 months
- Short-term trading strategy
- Booked profits to re-balance portfolio
- Loss harvesting (STCL can offset STCG)
Worked Examples
Assume a gain of ₹3 lakh on listed equity in one financial year.
| Scenario | LTCG | STCG |
|---|---|---|
| Held 13 months | Taxed on ₹1.75 lakh at 12.5% | — |
| Held 11 months | — | Taxed on the whole ₹3 lakh at 20% |
| Gain of ₹1 lakh, held 13 months | No tax — below the ₹1.25 lakh threshold | — |
| Gain of ₹1 lakh, held 11 months | — | Taxed on the whole ₹1 lakh at 20% |
| Realised across two financial years | Two ₹1.25 lakh exemptions | No exemption in either year |
The last row is the most useful line on this page. The ₹1.25 lakh exemption is annual and does not carry forward. Splitting a large redemption across two financial years uses it twice. Equally, deliberately realising up to ₹1.25 lakh of long-term gain each year — and reinvesting immediately — resets your cost base upward at no tax cost. Neither is a loophole; both are simply using an allowance that otherwise expires.
Losses, Set-off and the Rules Around the Rates
The rates. Section 112A applies 12.5% to long-term gains above ₹1.25 lakh in a financial year, where securities transaction tax was paid. Section 111A applies 20% to short-term gains, with no threshold.
Losses are where the planning is. A short-term capital loss can be set off against either short-term or long-term gains, which makes it the more flexible of the two. A long-term capital loss can only be set off against long-term gains. Unabsorbed losses of either kind carry forward for eight assessment years — but only if you filed your return by the due date. That single procedural condition costs people real money every year: a loss you never reported is a loss you cannot use.
Order of redemption. Mutual fund redemptions follow first-in-first-out, so the oldest units go first. For a SIP this generally works in your favour, because the earliest instalments are the ones most likely to have crossed twelve months. It also means a partial redemption is not the same as selling “some of” your holding — you are selling specific, dated units, and their holding period is what determines the rate.
These rules apply to both FY 2025–26 and FY 2026–27 — Budget 2026 made no change to capital gains rates or holding periods.
Advantages and Limitations
LTCG
Works for you when
- A materially lower rate — 12.5% against 20%
- ₹1.25 lakh of gains exempt every financial year
- Rewards simply not selling, which is usually the better decision anyway
- The exemption resets annually
Watch out for
- Requires holding for twelve months, which may not suit the position
- Long-term losses can only offset long-term gains
- The exemption is per financial year and cannot be carried forward
- You may hold a deteriorating position purely for the rate
STCG
Works for you when
- No holding period constraint — you can act when you judge it right
- Short-term losses are more flexible and offset either type of gain
- Useful where the investment thesis has genuinely broken
- Liquidity when you need it
Watch out for
- 20% against 12.5%
- No exemption threshold at all
- Frequent trading compounds the tax drag
- Selling at eleven months is a common and entirely avoidable error
How to Decide
Tax should inform the decision, not make it. In that order:
- Check the holding period before you sell. If you are close to twelve months, the difference between 20% on everything and 12.5% above ₹1.25 lakh is usually worth waiting for.
- Has the investment case actually changed? If it has, sell and pay the tax. Holding a broken position to reach twelve months costs more than the rate difference saves.
- Are you near the end of the financial year? Splitting a large redemption across 31 March uses the ₹1.25 lakh exemption twice.
- Do you have losses available? Short-term losses offset either kind of gain; long-term losses only offset long-term. Plan realisations around what you actually hold.
- File on time. Carrying a loss forward for eight years requires the return to have been filed by the due date. Missing it forfeits the loss permanently.
The single most valuable habit here is checking the purchase date before placing a sell order. It takes a moment and it is the difference between two quite different tax bills.
Frequently Asked Questions
Sources and Method
Figures on this page are computed by the calculator above from the inputs you enter. Worked examples assume the stated return is earned evenly and ignore exit load, expense ratio and inflation, so treat them as illustrations of the mechanism rather than forecasts.
- Capital gains treatment — Income Tax Act, sections 111A and 112A, as amended by the Finance Act 2024 and unchanged by Budget 2026.
- Rupee cost averaging — AMFI investor education.
- Mutual fund product rules — SEBI (Mutual Funds) Regulations.
Last reviewed 17 August 2026. This page explains how two investment methods behave. It is general information, not investment advice, and mutual fund investments carry market risk.