Last reviewed: 25 September 2026. The way shares and mutual funds are taxed changed materially from 23 July 2024, and many investors are still filing on the old assumptions. This guide walks through the current rules for FY 2025-26 (AY 2026-27) in full: holding periods, the exact rates, the Rs 1.25 lakh exemption, grandfathering for older holdings, loss set-off and carry-forward, advance tax timing, and how to report it all correctly, with worked examples throughout. The section numbers used are from the Income-tax Act, 1961, which governs FY 2025-26; the new numbers for FY 2026-27 are noted at the end.
Filing status on 25 September 2026: the 31 July 2026 due date for ITR-2 has passed. A belated return can still be filed until 31 December 2026 (with a late fee, and without carrying forward the year's capital losses), and a return filed on time can be revised until 31 March 2027.
At a glance
Short-term or long-term? Start with the holding period
Whether a gain is short-term or long-term depends only on how long you held the asset. For listed equity shares, equity-oriented mutual funds and units of a business trust, the cut-off is 12 months. For unlisted shares, immovable property and most other assets it is 24 months. The 2024 reform simplified holding periods to just these two buckets and removed the earlier 36-month category.
The rates for FY 2025-26
| Asset | Short-term | Long-term |
|---|---|---|
| Listed equity shares / equity MF (STT paid) | 20% (Section 111A), held ≤ 12 months | 12.5% (Section 112A) above Rs 1.25 lakh, > 12 months |
| Unlisted shares | Slab rate, ≤ 24 months | 12.5%, > 24 months |
| Specified (debt) mutual funds bought on/after 1 Apr 2023 | Slab rate, treated as short-term regardless of holding period | |
| Immovable property and other assets | Slab, ≤ 24 months | 12.5%, > 24 months. For land or buildings acquired before 23 July 2024, a resident individual or HUF can instead pay 20% with indexation, whichever gives lower tax |
A 4% health and education cess applies on top, along with surcharge where your income crosses the thresholds, though surcharge on 111A and 112A gains is capped at 15%. The 20% and 12.5% equity rates apply only where Securities Transaction Tax has been paid on the sale. The 20%-with-indexation option for older land and buildings is not available to non-residents.
The Rs 1.25 lakh exemption, explained
For long-term equity gains, the first Rs 1,25,000 of gains in a financial year is exempt. This is an annual, per-taxpayer figure aggregated across all your equity holdings, not per scrip or per trade. Only the amount above Rs 1.25 lakh is taxed at 12.5%.
Grandfathering for holdings before February 2018
If you bought listed equity before 1 February 2018, your cost for the long-term computation is protected: it is the higher of your actual cost and the lower of (a) the fair market value on 31 January 2018 and (b) the sale value. In effect, gains that had already accrued up to 31 January 2018 are not taxed under Section 112A. This matters most for long-held blue-chip portfolios.
Worked examples
Long-term equity
You sell listed shares after three years for a long-term gain of Rs 3,00,000. The first Rs 1,25,000 is exempt; tax applies on Rs 1,75,000 at 12.5% = Rs 21,875, plus 4% cess = about Rs 22,750.
Short-term equity
You sell equity mutual funds after 8 months for a gain of Rs 2,00,000. As short-term under 111A, tax is 20% = Rs 40,000 plus cess; there is no Rs 1.25 lakh exemption for short-term gains.
Set-off and carry-forward of losses
Losses are valuable if you use them correctly. A short-term capital loss can be set off against both short-term and long-term gains; a long-term capital loss only against long-term gains. Capital losses cannot reduce salary or other income. Unadjusted losses carry forward for 8 assessment years, but only if you file the return by the due date, which is a common and costly thing to overlook.
Advance tax on gains
Capital gains form part of advance tax. Because a gain cannot be forecast, the law does not charge Section 234C interest on the shortfall it causes, provided the tax on the gain is paid in the remaining advance-tax instalments due after the gain arises (or by 31 March if no instalment is left). For a gain made in November, for example, the tax can be spread over the 15 December and 15 March instalments. Section 234B interest still applies if the total advance tax paid by 31 March is below 90% of the tax assessed.
Reporting it correctly
ITR-1 and ITR-4 can be used only where the capital gain is long-term under Section 112A, does not exceed Rs 1.25 lakh, and there are no losses to carry forward. Otherwise, individuals use Schedule CG in ITR-2 (or ITR-3 with business income). Before filing, reconcile every entry against your broker and AMC capital-gains statements and the Annual Information Statement (AIS); mismatches here are a frequent trigger for notices.
NRIs face tax deducted at source on redemptions and may claim treaty relief; our DTAA relief guide for NRIs covers the TRC and Form 10F process (section 159 of the Income-tax Act, 2025, old section 90, from tax year 2026-27), and our CA for NRIs service handles refund claims where the TDS exceeds the final tax.
From FY 2026-27: the Income-tax Act, 2025
Gains arising from 1 April 2026 are taxed under the Income-tax Act, 2025. The rates discussed above continue, but the sections move: short-term gains on listed equity are taxed under section 196 (old 111A) and long-term gains under section 198 (old 112A). FY 2025-26 gains, reported in AY 2026-27 returns, stay under the 1961 Act sections used in this guide.
Frequently asked questions
What is the tax on short-term capital gains from shares?
Listed shares and equity mutual funds sold within 12 months are short-term and taxed at a flat 20% under Section 111A (plus 4% cess and any surcharge), provided Securities Transaction Tax was paid. This replaced the earlier 15% rate from 23 July 2024.
What is the long-term capital gains tax on equity?
Listed shares and equity mutual funds held for more than 12 months are long-term. Gains are exempt up to Rs 1,25,000 in a financial year; the balance is taxed at 12.5% under Section 112A, without indexation.
Is the Rs 1.25 lakh exemption per year or per transaction?
It is per financial year and per taxpayer, aggregated across all your equity long-term gains, not per transaction or per scrip. Only the amount above Rs 1.25 lakh is taxed.
What is grandfathering for shares bought before 2018?
For equity acquired before 1 February 2018, the cost for computing long-term gains is the higher of the actual cost and the lower of (a) the fair market value on 31 January 2018 and (b) the sale value. This protects gains that accrued up to 31 January 2018 from the LTCG tax.
How are debt mutual funds taxed now?
Units of specified (debt) mutual funds bought on or after 1 April 2023 are taxed at your slab rate irrespective of holding period, with no indexation and no 12.5% long-term benefit.
How are unlisted shares taxed?
Unlisted shares are short-term if held up to 24 months (taxed at slab rate) and long-term if held longer (taxed at 12.5%). The 20%/112A equity rates apply to listed securities on which STT is paid.
Is there a surcharge on capital gains?
Yes, where your income crosses surcharge thresholds, but surcharge on gains taxed under Sections 111A and 112A is capped at 15%, even if your other income attracts a higher surcharge.
Can I set off capital losses?
Short-term capital losses can be set off against both short-term and long-term gains. Long-term capital losses can be set off only against long-term gains. You cannot set capital losses against salary or other heads.
Can I carry forward capital losses?
Yes, for up to 8 assessment years, but only if you file your income tax return by the due date. Carried-forward short-term losses can offset future short- or long-term gains; long-term losses only future long-term gains.
Do I have to pay advance tax on capital gains?
Yes. Capital gains are included in advance tax. Because a gain cannot be foreseen, no interest under Section 234C arises on the shortfall caused by it if the tax on the gain is paid in the remaining advance-tax instalments after the gain arises (or by 31 March if no instalment is left). Section 234B interest still applies if total advance tax paid by 31 March is below 90% of the assessed tax.
Which ITR do I file for capital gains?
ITR-1 and ITR-4 can be used only where the capital gain is long-term under Section 112A, does not exceed Rs 1.25 lakh, and there are no losses to carry forward. Otherwise use Schedule CG of ITR-2, or ITR-3 if you also have business income. Reconcile your figures with the broker/AMC statement and the AIS before filing.
How are capital gains of NRIs treated?
NRIs are also taxed at 20% (STCG) and 12.5% (LTCG above Rs 1.25 lakh) on listed equity, but tax is often deducted at source on redemptions, and Double Taxation Avoidance Agreement relief may apply. The Rs 1.25 lakh exemption is available; the basic exemption limit cannot be adjusted against these special-rate gains for NRIs.
I missed the 31 July 2026 due date. Can I still report my FY 2025-26 capital gains?
Yes. A belated return for AY 2026-27 can be filed until 31 December 2026 with a late fee, but capital losses of the year cannot be carried forward from a belated return. If you filed on time and need to correct your capital-gains schedule, a revised return can be filed until 31 March 2027.
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