Key takeaways
- Equity mutual funds and listed stocks held over 12 months qualify for LTCG, taxed at 12.5% on gains above ₹1.25 lakh a year
- Sell before 12 months and it's STCG instead — a flat 20%, with no exemption, from the first rupee of gain
- Debt mutual funds bought on or after 1 April 2023 don't get any LTCG benefit at all — they're taxed at your income slab rate regardless of how long you hold them
- SIP redemptions aren't taxed as one block — each instalment is treated as a separate investment with its own holding period, calculated on a first-in-first-out basis
- Capital gains tax rates are set by the Union Budget and do get revised — always check the current rate before filing rather than relying on a number from an old article
Quick answer
Held your equity fund or stock for more than 12 months? That's LTCG — 12.5% tax, but only on gains above ₹1.25 lakh in a financial year.
Held it for 12 months or less? That's STCG — a flat 20% tax on the entire gain, no exemption.
Holding a debt mutual fund bought after April 2023? Neither of the above applies — it's taxed at your regular income slab rate no matter how long you hold it.
LTCG vs STCG: the core difference
The tax you pay on a stock or mutual fund sale depends almost entirely on one thing: how long you held it before selling. Cross the 12-month mark on an equity investment, and the tax treatment changes completely — both the rate and whether you get any exemption at all.
The line is exactly 12 months, not "about a year." Sell an equity fund at 11 months and 29 days, and it's STCG at 20%. Wait two more days and cross into month 12, and the same gain could qualify for LTCG treatment instead — with a lower rate and an exemption. That timing gap matters more than most investors realise.
How each is taxed
- STCG (Short-Term Capital Gains): equity shares and equity-oriented mutual funds sold within 12 months are taxed at a flat 20%, under Section 111A. There's no exemption threshold — the entire gain is taxable from the first rupee.
- LTCG (Long-Term Capital Gains): the same assets sold after 12 months fall under Section 112A, taxed at 12.5% — but only on the portion of gains above ₹1.25 lakh in that financial year. Gains up to that limit are tax-free.
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Side-by-side comparison
| Feature | STCG (12 months or less) | LTCG (over 12 months) |
|---|---|---|
| Applies to | Equity shares, equity mutual funds | Equity shares, equity mutual funds |
| Tax rate | 20% flat | 12.5% on gains above the exemption |
| Exemption | None — taxed from the first rupee | ₹1.25 lakh per financial year |
| Legal section | Section 111A | Section 112A |
| Indexation benefit | Not applicable | Not available for equity |
A real-life example
Arjun invested ₹4 lakh in an equity mutual fund 14 months ago. Today it's worth ₹5.5 lakh — a gain of ₹1.5 lakh. Since he's held it over 12 months, this qualifies as LTCG.
LTCG exemption for the year: ₹1.25 lakh
Taxable LTCG: ₹1.5 lakh − ₹1.25 lakh = ₹25,000
Tax at 12.5%: ₹3,125 (before cess)
Separately, Arjun also sells another equity fund he bought just 8 months ago, with a gain of ₹40,000. This is STCG — taxed at a flat 20% on the full amount, no exemption applied.
Tax on that gain: ₹8,000
Same investor, same asset class, two very different tax outcomes — purely because of holding period.
What about debt mutual funds?
This is where a lot of older articles and forwarded messages give outdated advice. Debt mutual funds used to have a long-term indexation benefit — but that changed with the Finance Act, 2023.
The rule that trips people up: for debt mutual fund units bought on or after 1 April 2023, there's no LTCG benefit at all. Every gain, regardless of how many years you've held the fund, is added to your income and taxed at your regular income slab rate.
This makes the holding-period math irrelevant for these funds — a debt fund held for 7 years is taxed exactly the same way as one held for 7 months: at your slab rate.
Tax treatment by fund type
| Fund type | Short-term treatment | Long-term treatment |
|---|---|---|
| Equity mutual funds (65%+ in equity) | 20% flat, under 12 months | 12.5% above ₹1.25 lakh, over 12 months |
| Equity-oriented hybrid funds (65%+ equity) | Same as equity funds | Same as equity funds |
| Debt funds (bought on/after 1 Apr 2023) | Slab rate, always | Slab rate, always — no LTCG benefit |
| Listed equity shares | 20% flat, under 12 months | 12.5% above ₹1.25 lakh, over 12 months |
| Gold ETFs (listed units) | Slab rate, under 12 months | 12.5%, over 12 months — no ₹1.25 lakh exemption |
How is a SIP actually taxed at redemption?
This surprises almost every SIP investor the first time they see their capital gains statement. A SIP isn't one lump investment — each monthly instalment is treated by tax law as its own, separate purchase, with its own 12-month clock.
Priya starts a SIP in an equity fund and invests every month for exactly 12 months, then redeems the entire investment on the anniversary of her first instalment.
Only her first instalment has actually completed 12 months and qualifies for LTCG treatment.
Her remaining 11 instalments — each started later — haven't crossed the 12-month mark yet, so they're all taxed as STCG.
This is calculated on a first-in-first-out (FIFO) basis: the oldest units are treated as the ones sold first.
Practical takeaway: if you're planning to exit a SIP investment, staggering your redemption — rather than pulling everything out on one date — can let more of your instalments cross into LTCG territory over time, rather than most of them landing in STCG.
Can you offset gains against losses?
Yes — this is one of the most underused parts of capital gains planning.
- Short-term losses can be set off against both short-term and long-term gains in the same year.
- Long-term losses can only be set off against long-term gains, not short-term ones.
- Unused losses can be carried forward for up to 8 assessment years, provided the loss is reported in a return filed on time.
Rohit has a long-term gain of ₹2 lakh on one equity fund, and a long-term loss of ₹60,000 on another he sold at a loss. He can offset the loss against the gain, bringing his taxable LTCG down to ₹1.4 lakh before applying the ₹1.25 lakh exemption.
Common mistakes to avoid
Common mistake: assuming all your equity fund gains in a year are automatically tax-free if they're under ₹1.25 lakh. The exemption applies to your total long-term gains across all equity investments combined for the year, not per fund.
- Redeeming a SIP investment all at once without checking which instalments have actually crossed 12 months
- Assuming debt funds still get an LTCG benefit, based on old rules that no longer apply to post-April 2023 purchases
- Forgetting to report and carry forward capital losses, which can only be claimed if you file your return on time
- Not accounting for surcharge and cess on top of the headline 20%/12.5% rates when estimating actual tax due
Myths vs facts
| Myth | Fact |
|---|---|
| All mutual fund gains are tax-free below ₹1.25 lakh | The ₹1.25 lakh exemption applies only to long-term gains on equity-oriented investments — short-term gains and debt fund gains get no such exemption |
| A SIP redeemed after 1 year is fully long-term | Each instalment has its own 12-month clock; only instalments that have individually crossed 12 months qualify as LTCG |
| Debt funds are always more tax-efficient long-term | Since April 2023, debt funds have no LTCG benefit and are taxed at slab rate regardless of holding period |
Frequently asked questions
What is the current LTCG tax rate on mutual funds in India?
For equity-oriented mutual funds held over 12 months, LTCG is taxed at 12.5% on gains above ₹1.25 lakh in a financial year. This rate applies under Section 112A and has been in effect since the Finance (No. 2) Act, 2024 — worth confirming against the latest Budget since rates are periodically revised.
What is the STCG tax rate on stocks and equity funds?
A flat 20% under Section 111A, applied to the entire gain with no exemption threshold, for equity shares or equity-oriented mutual funds sold within 12 months of purchase.
How are SIP investments taxed when I redeem them?
Each SIP instalment is treated as a separate investment with its own 12-month holding period, calculated on a first-in-first-out basis. This means a SIP redeemed exactly one year after it started usually has only its earliest instalments qualifying for LTCG, while later ones are taxed as STCG.
Do debt mutual funds get any long-term tax benefit?
Not for units purchased on or after 1 April 2023. These are taxed at your income slab rate regardless of holding period, following changes introduced by the Finance Act, 2023.
Is the ₹1.25 lakh LTCG exemption per fund or total for the year?
It's a combined annual exemption across all your long-term equity gains for the financial year — from stocks and equity mutual funds together — not a separate ₹1.25 lakh allowance for each individual fund.
Can I offset a mutual fund loss against a stock market gain?
Yes, capital losses and gains are pooled by type rather than by asset. Short-term losses can offset both short-term and long-term gains; long-term losses can only offset long-term gains, whether from stocks or mutual funds.
One last thing to keep in mind: capital gains tax rates and exemption limits are set by the Union Budget and have changed more than once in recent years. This article reflects rates confirmed for FY 2026-27, but it's worth checking the current rate on the Income Tax Department's website or with a tax professional before filing, rather than relying on any article's numbers alone.
