Capital Gains on Equity & Mutual Funds India 2026 - STCG, LTCG Tax Rates Explained

Holding Period: What Qualifies as Long-Term?

The classification of gains as short-term (STCG) or long-term (LTCG) depends on how long you hold the asset:

• Listed equity shares: More than 12 months = LTCG. 12 months or less = STCG.
• Equity-oriented mutual funds (funds with ≥65% in domestic equities): More than 12 months = LTCG. 12 months or less = STCG.
• Debt mutual funds (funds with <65% in equity, purchased from April 2023): Taxed at slab rate regardless of holding period - no LTCG/STCG distinction for post-April 2023 purchases.
• Hybrid/Balanced Advantage Funds: Classification as equity or debt fund depends on average equity allocation across the year. Most BAFs qualify as equity-oriented.

Tax Rates: Complete Summary for FY 2025-26

Note: All rates above are exclusive of 4% Health and Education Cess. Effective STCG = 20.8%; effective LTCG = 13%.

Grandfathering: Pre-January 2018 Equity Gains

When LTCG tax on equity was reintroduced in Budget 2018 (effective April 1, 2018), a grandfathering provision was included to protect investors who had built up gains before that date. The rule works as follows:

For equity shares or equity mutual fund units bought before 1 February 2018, the cost of acquisition is deemed to be the higher of:

1. Actual purchase price, or
2. Fair market value (lowest traded price on a recognised stock exchange, or NAV for mutual funds) as on 31 January 2018

Example: You bought 1,000 units of an equity fund at NAV ₹100 (total cost: ₹1 lakh) in 2015. NAV on 31 January 2018 was ₹150. You sell in FY 2025-26 at NAV ₹300 (sale value: ₹3 lakh). The deemed cost = ₹150 (higher of ₹100 actual vs ₹150 Jan 31 2018 NAV). LTCG = ₹3 lakh − ₹1.5 lakh = ₹1.5 lakh. Exempt up to ₹1.25 lakh; taxable LTCG = ₹25,000 × 12.5% = ₹3,125. Gains accrued before Jan 31 2018 (₹50,000) are permanently excluded from taxation.

SIP Redemption and FIFO: How Capital Gains Are Calculated

When you start a Systematic Investment Plan (SIP), each monthly instalment is treated as a separate purchase with its own holding period and cost. When you redeem, the First-In First-Out (FIFO) rule applies by default: the oldest units are redeemed first.

This is significant for tax planning because:

• SIP units bought more than 12 months before redemption qualify for LTCG at 12.5% (above ₹1.25 lakh threshold).
• More recent SIP instalments (within 12 months) are classified as STCG at 20%.

Practical tip: If possible, defer redeeming your SIP for 12 months minimum from the most recent instalment date to ensure all units qualify for LTCG treatment (at 12.5% vs 20% STCG).

Debt Mutual Funds After April 2023: Tax Parity with FDs

Until March 2023, debt mutual funds enjoyed a significant tax advantage over FDs: after 3 years, LTCG was taxed at only 20% with indexation (effectively often <5% tax). The Finance Act 2023 ended this advantage for new purchases from 1 April 2023:

• Post-April 2023 debt fund purchases: All gains (whether held 1 month or 10 years) are taxed at your applicable income tax slab rate (20%, 30%, etc.).
• Pre-April 2023 purchases: The old rules apply - gains on holdings >3 years are taxed at 20% with indexation as LTCG.
• Implication: For investors in the 30% tax bracket, debt funds are now nearly as tax-inefficient as FD interest. Tax-saving advantage is gone for new investments.

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