STCG: 20%. LTCG: 12.5%. Exemption: ₹1.25 Lakh. That’s the Summary. Here’s What Actually Matters.
Every stock investor in India pays two types of capital gains tax. The rates are simple. The rules that determine how much you actually pay — set-off sequences, grandfathering clauses, transaction cost breakdowns, and the annual harvesting trick — are not.
This guide covers the exact tax rates for FY 2025-26 and FY 2026-27 (no changes in Budget 2026), the ₹1.25 lakh harvesting strategy with real after-cost savings calculations, and the set-off rules that most online calculators get wrong.
Capital Gains Tax Rates on Stocks and Equity Mutual Funds (FY 2025-26 & 2026-27)
| Asset Type | Holding Period | Classification | Tax Rate | Exemption |
|---|---|---|---|---|
| Listed equity shares (STT paid) | Up to 12 months | STCG — Section 111A | 20% | None |
| Listed equity shares (STT paid) | More than 12 months | LTCG — Section 112A | 12.5% | ₹1.25 lakh/year |
| Equity mutual funds (65%+ equity) | Up to 12 months | STCG — Section 111A | 20% | None |
| Equity mutual funds (65%+ equity) | More than 12 months | LTCG — Section 112A | 12.5% | ₹1.25 lakh/year |
| Debt mutual funds (bought after 1 Apr 2023) | Any duration | STCG — Section 50AA | Income tax slab rate | None |
| Debt mutual funds (bought before 1 Apr 2023) | More than 24 months | LTCG | 12.5% | None |
| Unlisted shares | More than 24 months | LTCG | 12.5% | None |
Both STCG and LTCG rates were revised effective 23 July 2024. STCG went from 15% to 20%. LTCG went from 10% to 12.5%. The exemption limit went from ₹1 lakh to ₹1.25 lakh. Budget 2026 made zero changes — these rates continue into FY 2026-27.
Effective Tax Rates After Surcharge and Cess
The 12.5% and 20% are base rates. Add surcharge (income-dependent) and 4% health and education cess to get your actual rate.
| Your Total Income | Effective LTCG Rate (12.5% base) | Effective STCG Rate (20% base) |
|---|---|---|
| Up to ₹50 lakh | 13.00% | 20.80% |
| ₹50 lakh – ₹1 crore | 14.30% | 22.88% |
| ₹1 crore – ₹2 crore | 14.30% | 22.88% |
| Above ₹2 crore | 14.30% | 22.88% |
Capital gains under Sections 111A, 112, and 112A have a maximum surcharge cap of 15%. Even if your total income exceeds ₹5 crore (where surcharge is normally 37%), your capital gains surcharge stays at 15%. This cap is why the effective LTCG rate never crosses ~14.4%.
The ₹1.25 Lakh Harvesting Trick — How It Works
Every financial year, each PAN holder can book up to ₹1.25 lakh in LTCG on equity shares and equity mutual funds with zero tax. The harvesting trick uses this exemption annually to avoid a large accumulated tax bill at exit.
Step-by-step
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Identify holdings with unrealized long-term gains. The stock or MF unit must have been held for more than 12 months.
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Calculate how many units to sell. Sell only enough to realize approximately ₹1.25 lakh in LTCG. Your LTCG = (sell price - cost of acquisition) × number of shares. For mutual funds, check the statement for FIFO-based lot-level gains.
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Sell on the exchange. Execute the sell order through your broker on NSE/BSE.
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Rebuy immediately. India has no wash-sale rule. You can buy back the same shares on the same day or the next trading day. Your new cost basis resets to the higher current price.
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File ITR by July 31. Report the LTCG under Section 112A. The first ₹1.25 lakh is exempt. If you also have losses to carry forward, timely filing is mandatory.
What you save each year
₹1.25 lakh × 12.5% = ₹15,625 in LTCG tax saved per year (before transaction costs).
What you actually save after transaction costs
A ₹10 lakh sell-and-rebuy round-trip on a discount broker costs approximately:
| Cost Component | Sell Side | Buy Side |
|---|---|---|
| STT (0.1% on sell) | ₹1,000 | — |
| Stamp duty (0.015% on buy) | — | ₹150 |
| Brokerage (Zerodha: ₹0, Groww: ₹20/order) | ₹0–20 | ₹0–20 |
| GST (18% on brokerage + exchange charges) | ~₹6 | ~₹6 |
| Exchange transaction charges | ~₹32 | ~₹32 |
| Total round-trip | ₹1,250–₹1,300 |
Net saving: ₹14,300 – ₹14,375 per year.
For mutual fund investors, add 1% exit load if any units were purchased within the last 12 months. On ₹1.25 lakh of recent SIP units, that’s ₹1,250 in exit load — eating another 8% of your saving.
The breakeven threshold
Harvesting makes financial sense only when your LTCG exceeds approximately ₹10,400. Below that, the transaction costs (₹1,300) exceed the tax saved (12.5% × ₹10,400 = ₹1,300).
Why the Trick Compounds Over 20 Years
The real power of annual harvesting is not ₹15,625 per year. It’s the cost-basis reset.
When you sell and rebuy, your new purchase price equals the current market price. Future gains are calculated from this higher base. Over 20 years in a 12-15% CAGR equity portfolio, this compounding effect saves over ₹3 lakh in present-value terms compared to a single lump-sum exit.
Without harvesting, a ₹50 lakh portfolio growing at 15% CAGR for 20 years reaches ₹8.18 crore. The entire ₹7.68 crore gain is taxed at 12.5% = ₹95.6 lakh in LTCG tax (after ₹1.25L exemption in the exit year).
With annual harvesting of ₹1.25 lakh each year, you systematically book ₹25 lakh in tax-free gains over 20 years and reset cost bases throughout. Your cumulative LTCG tax at exit drops to approximately ₹92.5 lakh — a saving of ₹3.1 lakh in real terms, growing each year you continue the strategy.
The lesson: harvesting is a wealth compounding strategy, not a one-time trick.
The Set-Off Rules Most Calculators Get Wrong
The sequence in which exemptions and losses are applied matters. Getting it wrong changes your tax liability.
The correct sequence under Section 112A
Step 1: Calculate gross LTCG from all equity sales
Step 2: Apply ₹1.25 lakh exemption → this reduces gross LTCG to taxable LTCG
Step 3: Set off LTCL (long-term capital loss) against remaining taxable LTCG
Step 4: Set off STCL against remaining STCG first, then any leftover LTCG
Step 5: Carry forward any unused LTCL or STCL for up to 8 assessment yearsExample: Why order matters
- Gross LTCG: ₹2,00,000
- LTCL from other stocks: ₹1,00,000
Correct calculation (exemption first): ₹2,00,000 – ₹1,25,000 exemption = ₹75,000 taxable → offset ₹75,000 with LTCL → ₹0 tax, ₹25,000 LTCL carried forward
Incorrect calculation (loss first): ₹2,00,000 – ₹1,00,000 LTCL = ₹1,00,000 → apply ₹1,25,000 exemption → ₹0 tax, ₹0 LTCL carried forward
Both show zero tax this year, but the correct method preserves ₹25,000 in carry-forward losses worth up to ₹3,125 in future tax savings.
STCL vs LTCL: Which Losses to Harvest First
Not all losses are equal. STCL is strictly more valuable than LTCL because of set-off flexibility.
| Loss Type | Can Offset STCG (20%) | Can Offset LTCG (12.5%) | Can Offset Other Income |
|---|---|---|---|
| STCL (Short-term capital loss) | Yes | Yes | No |
| LTCL (Long-term capital loss) | No | Yes | No |
Practical implication: If you hold two losing stocks — one bought 8 months ago (short-term) and one bought 18 months ago (long-term) — sell the short-term loser first. Its loss can offset your STCG taxed at 20%, saving you ₹20 per ₹100 of loss. The long-term loss can only offset LTCG, saving ₹12.50 per ₹100.
Carry-forward rule: Both STCL and LTCL can be carried forward for 8 assessment years. But you must file your ITR before July 31 of the relevant assessment year. Miss the deadline and you permanently lose the right to carry forward that year’s losses.
The Grandfathering Clause: Stocks Bought Before 31 January 2018
When LTCG tax on equity was reintroduced in 2018, a grandfathering clause protected gains earned before 31 January 2018 from taxation.
How cost of acquisition is calculated
For stocks bought before 31 January 2018, your cost of acquisition for Section 112A is:
Cost = Higher of (actual purchase price) or (lower of [FMV on 31 Jan 2018, actual sale price])
FMV = highest traded price on BSE or NSE on 31 January 2018. If the stock didn’t trade that day, use the highest price on the immediately preceding trading day.
Example
| Detail | Value |
|---|---|
| Purchase price (2015) | ₹200 |
| FMV on 31 Jan 2018 | ₹1,100 |
| Sale price (2026) | ₹2,500 |
Lower of (FMV ₹1,100, Sale ₹2,500) = ₹1,100
Higher of (Purchase ₹200, ₹1,100) = ₹1,100 → this is your cost basis
LTCG = ₹2,500 – ₹1,100 = ₹1,400 per share (not ₹2,300)
The common mistake
Many broker P&L reports calculate cost basis from your original purchase price, not the grandfathered FMV. If you bought stocks before January 2018, manually verify your cost basis against the FMV on 31 January 2018 before filing ITR. Overpaying ₹1,400 vs ₹2,300 per share in the example above is a 65% overstatement of your taxable gain.
India Has No Wash-Sale Rule — But GAAR Exists
Unlike the US (which disallows losses if you rebuy within 30 days), India has no statutory wash-sale rule. You can sell a stock to book a loss, buy it back one minute later, and the loss is fully valid for tax purposes.
However, the General Anti-Avoidance Rules (GAAR) under Chapter X-A of the Income Tax Act give the assessing officer discretion to disallow transactions with no commercial substance beyond tax savings.
When GAAR actually applies
- GAAR has a ₹3 crore threshold — the expected tax benefit must exceed ₹3 crore in a financial year for GAAR scrutiny
- In September 2025, a High Court ruled that GAAR does not apply merely because shares were bought and sold in the same financial year
- The first GAAR case (2024, Telangana HC) involved bonus-stripping — a scheme to artificially create losses through bonus share issuance, not simple sell-and-rebuy
For retail investors doing annual harvesting of ₹1.25 lakh in gains or booking losses under ₹50 lakh: GAAR is practically irrelevant. The strategy is legal, established, and judicially tested.
Family Tax Harvesting: ₹2.5 Lakh for Couples, ₹5 Lakh for Families of Four
The ₹1.25 lakh LTCG exemption is per PAN. It’s not per demat account, not per broker — per individual.
| Family Structure | Annual Tax-Free LTCG | Annual Tax Saved |
|---|---|---|
| Individual | ₹1.25 lakh | ₹15,625 |
| Married couple (separate PANs) | ₹2.50 lakh | ₹31,250 |
| Family of 4 (with adult children) | ₹5.00 lakh | ₹62,500 |
Each family member must own the investments in their own demat account. You cannot use your spouse’s exemption on stocks held in your name.
Common misconception: Investors with demat accounts at both Zerodha and Groww sometimes think each account gets a separate ₹1.25 lakh exemption. It doesn’t. The limit is aggregated across all accounts linked to a single PAN.
Debt Mutual Funds: The Two-Tier Tax Trap After 2023
The Finance Act 2023 removed LTCG treatment for debt mutual fund units purchased on or after 1 April 2023. This created two parallel tax regimes for the same asset class.
| Purchase Date | Holding Period | Tax Treatment | Rate |
|---|---|---|---|
| Before 1 April 2023 | More than 24 months | LTCG | 12.5% (no indexation) |
| Before 1 April 2023 | 24 months or less | STCG | Income tax slab rate |
| On or after 1 April 2023 | Any duration | STCG (Section 50AA) | Income tax slab rate |
What this means: If you’re in the 30% tax bracket, gains on post-April 2023 debt MF purchases are taxed at 30% + cess = 31.2%, regardless of how long you hold them. Pre-April 2023 holdings still get the 12.5% LTCG rate after 24 months — a 18.7 percentage point advantage.
If you hold pre-2023 debt MF units, do not redeem them without understanding this tax differential. The older units have significant embedded tax efficiency that new purchases cannot replicate.
NRI Tax Harvesting: Why the Economics Change
NRIs investing in Indian stocks face the same STCG/LTCG rates but with a critical operational difference: TDS is deducted at source.
- LTCG TDS: 12.5% on gains (no exemption applied at source)
- STCG TDS: 20%
Even if an NRI’s total LTCG is below ₹1.25 lakh, the broker deducts TDS on the full gain. The NRI must file an Indian ITR, claim the exemption, and wait 3–9 months for a refund.
For NRIs with LTCG under ₹2 lakh, the time-value cost of locked capital and ITR filing effort often makes harvesting a net-negative strategy. The ₹15,625 saving is offset by the opportunity cost of ₹25,000–₹1 lakh locked in refund processing for months.
DTAA (Double Taxation Avoidance Agreement) provides credit for taxes paid in India — not an exemption. NRIs must still pay the tax upfront and claim credit in their country of residence.
Tax Harvesting Checklist: What to Do Before March 31 Each Year
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Pull your broker’s unrealized P&L report — filter for holdings older than 12 months with positive gains
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Check lot-level gains for mutual funds — SIPs create 12 lots per year; the oldest lots likely have the most gains and are past the exit load window
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Calculate how many units to sell — target ₹1.25 lakh in LTCG, not ₹1.25 lakh in sale proceeds (common error)
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Factor in transaction costs — STT, stamp duty, brokerage, GST. Don’t harvest if your LTCG is under ₹10,400
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Check exit loads on MF units — units bought within the last 12 months typically carry 1% exit load; FIFO means you may not be able to avoid them
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Sell and rebuy — legal in India, no waiting period required
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Harvest short-term losses first — STCL offsets both STCG (20%) and LTCG (12.5%); LTCL only offsets LTCG
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Verify grandfathered cost basis — if you hold pre-January 2018 stocks, check that your broker uses FMV on 31/1/2018, not original purchase price
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File ITR by July 31 — mandatory to carry forward any unused capital losses; miss it and the losses are permanently forfeited
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Keep records — save contract notes, buy/sell confirmations, and MF statements for at least 8 years (the loss carry-forward window)
What Budget 2026 Changed (Nothing)
Budget 2026 made no changes to capital gains tax rates, holding periods, or exemption limits. AMFI lobbied to increase the LTCG exemption from ₹1.25 lakh to ₹2 lakh — the government did not accept it.
The current regime continues for FY 2026-27 (AY 2027-28):
- STCG on equity: 20% (Section 111A)
- LTCG on equity: 12.5% (Section 112A)
- LTCG exemption: ₹1.25 lakh per year
- Holding period for long-term classification: 12 months for listed equity
- Surcharge cap on capital gains: 15%
The Income Tax Bill 2025 restructures section numbering but does not change the substantive rates or rules for equity capital gains.
Internal Links
- Real cost of trading on Zerodha, Groww, and Angel One — exact STT, DP charges, and brokerage breakdowns that affect your harvesting costs
- How to start investing in stocks with ₹500 — getting started before you need to worry about capital gains tax
- How to read a balance sheet in 15 minutes — PE, ROE, debt-to-equity decoded using Reliance’s FY25 annual report
- What happens to your stocks if your broker shuts down — 32 brokers defaulted since 2019, IPF claims, and what’s actually at risk
- Blue-chip balance sheet comparison: Reliance vs TCS vs HDFC Bank vs Infosys — know what you own before you harvest gains
- TCS Q4 FY26: 94% payout ratio and $2.3B AI revenue — dividend tax implications for India’s biggest payout machine
- Dividend investing is dead for high earners — why LTCG at 12.5% beats dividend income taxed at slab rate for anyone above ₹10L income
- How many stocks should you own? — portfolio size determines how often you trigger taxable events
- The real cost of stock investing — every hidden fee beyond brokerage, including STT drag on harvesting round-trips