If listed shares are sold within 12 months, the gains are classified as short-term and a tax rate of 15 per cent (plus surcharge and cess), under Section 111A will be applicable on such gains.
Investing in mutual funds and stocks remains a popular wealth-building strategy in India. However, if the investment in such specified mutual funds was made before April 1, 2023, then the concept of long-term capital gains will still be applicable. In such a case, to qualify as a long-term asset, the investor should have held the units for more than 24 months from the date of acquisition. The gains will be taxed at 12.5 per cent and indexation will not be available.
What Are Capital Gains?
According to CA Ruchika Bhagat, MD, Neeraj Bhagat & Co., capital gains refer to the profit earned from the sale of a capital asset such as stocks, mutual funds, or real estate. These gains are categorised based on the holding period of the asset into:
• Short-Term Capital Gains (STCG)
• Long-Term Capital Gains (LTCG)
“The applicable tax rate depends on whether the gain is short-term or long-term,” Bhagat said.
Capital Gains on Stocks
1. Listed Equity Shares
• Short-Term Capital Gains (STCG): If listed shares are sold within 12 months, the gains are classified as short-term.
◦ Tax Rate: 15 per cent (plus surcharge and cess), under Section 111A.
• Long-Term Capital Gains (LTCG): If held for more than 12 months.
◦ Tax Rate: 10 per cent (plus surcharge and cess) on gains exceeding Rs 1 lakh in a financial year under Section 112A.
◦ Note: No indexation benefit is allowed for listed equity LTCG.
2. Unlisted Shares
• STCG: Taxed at the applicable slab rate.
• LTCG: Taxed at 20 per cent with indexation benefit.
Capital Gains on Mutual Funds
According to Ruchika Bhagat, the tax treatment depends on the type of mutual fund – equity or debt.
Equity-Oriented Mutual Funds
Funds where at least 65 per cent of assets are invested in equities.
• STCG: Holding period less than 12 months. Taxed at 15 per cent.
• LTCG: Holding period more than 12 months. Taxed at 10 per cent on gains exceeding Rs 1 lakh.
Debt-Oriented Mutual Funds
From April 1, 2023, indexation benefits on LTCG for debt mutual funds were removed.
• All capital gains (STCG & LTCG) are taxed as per the investor’s income tax slab rate.
• Holding period classification (short vs. long) is no longer relevant from FY 2023-24 onwards.
This means investors in debt mutual funds pay tax at their slab rate, regardless of how long they hold the investment.
Securities Transaction Tax (STT)
• STT is applicable on the sale of listed equity shares and equity mutual funds on recognized stock exchanges.
• STT is already deducted at the time of transaction and is a prerequisite for LTCG exemption under Section 112A.
Taxation for NRIs
Non-resident Indians (NRIs) are subject to the same capital gains tax rates as residents but with Tax Deducted at Source (TDS):
• STCG (Equity Funds): 15 per cent TDS
• LTCG (Equity Funds): 12.5 per cent TDS
• Other Funds: TDS at 30 per cent or 20 per cent depending on the type and holding period
NRIs can claim a refund or tax credit under the Double Taxation Avoidance Agreement (DTAA) if applicable.
Set-Off and Carry Forward of Capital Losses
• Short-term capital losses can be set off against both short-term and long-term capital gains.
• Long-term capital losses can only be set off against long-term gains.
• Unutilized capital losses can be carried forward for up to 8 assessment years, provided the ITR is filed before the due date.
Capital gains taxation has undergone significant changes in recent years, particularly for mutual funds.
As of 2025, the simplified structure—especially the elimination of indexation for debt funds—means investors must be more strategic in their choices. Equity investments continue to enjoy preferential tax treatment, encouraging long-term investing.
