Say you bought shares worth ₹2 lakh three years ago and sold them this month for ₹3.4 lakh. The ₹1.4 lakh profit is a capital gain, and how much of it goes to the government depends on two things: how long you held the shares and what kind of asset they were. This guide explains capital gains tax on listed shares and mutual funds for tax year 2026-27, the first year under the Income-tax Act, 2025.
The good news is that the new Act did not reset the basic rules. The rates and the exemption that applied after July 2024 carry on, and the Finance Act, 2026 refers to them under new section numbers. What follows covers holding periods, rates, the ₹1.25 lakh exemption, debt funds, old shares bought before 2018, losses and securities transaction tax (STT), with worked examples you can follow on paper.
What counts as a capital gain on shares and funds
A capital gain is the difference between what you receive when you sell (or redeem) an asset and what it cost you. For mutual fund units, the cost is simply the amount you paid for those particular units. When you sell for less than you paid, you have a capital loss, which has its own rules for adjustment.
The gain is taxed in the year you sell, not the year you buy, and not while the price simply rises on paper. A portfolio that has doubled but has not been sold carries no tax yet.
From tax year 2026-27, buybacks also fall into this head. The Finance Act, 2026 moved money received on a company’s buyback of its shares from dividend treatment to capital gains for all shareholders, with a higher effective rate for promoters (22% for promoter companies and 30% for other promoters).
Short-term or long-term: the holding period test
Every gain is either short-term or long-term, and the label decides the rate. Since 23 July 2024 there are only two holding periods, according to the CBDT’s FAQs on the change:
- Listed securities, such as shares listed on a recognised stock exchange in India: long-term if held for more than 12 months.
- Units of equity-oriented mutual funds: the same 12-month test applies.
- All other assets, including unlisted shares: long-term if held for more than 24 months.
The Income-tax Act, 2025 keeps this structure. Its definition of a short-term capital asset replaces the old section 2(42A) and, according to tax commentaries, sits in section 2(101) of the new Act.
Count the holding period from the date of purchase to the date of sale. If you invest through a SIP, each instalment buys a separate lot of units on its own date, so a single fund can hold some units that are long-term and some that are still short-term.
Capital gains tax rates for tax year 2026-27
The table below sets out the main capital gains tax rates for an individual investor. These are the rates the Finance Act, 2026 lists for gains under sections 196, 197 and 198 of the new Act, and they match the CBDT FAQs from 2024.
| Type of gain | Holding period | Rate |
|---|---|---|
| Short-term gain on listed equity shares, equity-oriented fund units and business trust units, where STT applies (section 196) | 12 months or less | 20% |
| Long-term gain on the same assets (section 198) | More than 12 months | 12.5% on gains above ₹1.25 lakh a year |
| Other long-term gains, such as listed bonds (section 197) | More than 12 or 24 months, by asset | 12.5%, no indexation |
| Short-term gains on other assets | Up to 12 or 24 months, by asset | Your normal slab rate |
| Gains on debt-heavy (specified) mutual funds and unlisted bonds | Any period | Your normal slab rate |
Indexation, which once let you raise your cost in line with inflation, is not available on these long-term gains. The CBDT’s reasoning was that the lower 12.5% rate leaves most investors better off, though it admitted the benefit may be limited where gains barely beat inflation.
The ₹1.25 lakh exemption on long-term equity gains
Long-term gains on listed equity shares, equity-oriented fund units and business trust units are tax-free up to ₹1.25 lakh in a year. The limit is an aggregate: it covers all such gains you make in the year put together, not ₹1.25 lakh per stock or per fund. Only the part above ₹1.25 lakh is taxed at 12.5%.
A worked example
As an illustration, say Meena sells equity fund units in tax year 2026-27 and books these gains:
- Long-term gain on units held for three years: ₹2,05,000.
- Short-term gain on units held for eight months: ₹40,000.
The long-term part above the exemption is ₹2,05,000 minus ₹1,25,000, which is ₹80,000. Tax at 12.5% comes to ₹10,000. The short-term gain is taxed at 20%, which is ₹8,000. Her capital gains tax before cess is ₹18,000. Add the 4% health and education cess and the total is ₹18,720. If her income were high enough to attract surcharge, that would be added before cess.
You can try your own numbers in the income tax calculator to see how the gains sit alongside your salary or other income.
Equity funds vs debt funds: different rules
Mutual funds are not taxed alike. What matters is what the fund holds, not its name.
Equity-oriented funds
Funds that qualify as equity-oriented under the tax law get the same treatment as listed shares: the 12-month test, 20% on short-term gains and 12.5% on long-term gains above the ₹1.25 lakh limit. Most diversified equity schemes fall here. The fund house states the tax category in its scheme documents.
Debt-heavy funds
The Finance Act, 2023 brought in a rule that gains on “specified mutual funds” are always treated as short-term, whatever the holding period, and taxed at your slab rate. The 2024 Budget redefined a specified mutual fund as one that invests more than 65% of its money in debt and money market instruments, or a fund that puts 65% or more into such a fund. Earlier, the test had been equity of 35% or less, which also caught gold funds and some ETFs; the change was meant to fix that.
In practice this means a long-term holder of a pure debt fund pays tax on gains as if they were extra income. Funds that fall between the two groups, such as some hybrid schemes, can be taxed differently again, so check the scheme document or ask the fund house before assuming a rate. The 2024 Budget also put unlisted bonds and debentures under the same slab-rate treatment.
Grandfathering for shares bought before February 2018
Long-term gains on listed shares were tax-free until the 2018 Budget. When the tax returned, the government protected gains built up until then. The then Finance Minister said all gains up to 31 January 2018 would be grandfathered.
In the return, this works through the cost figure. For shares or equity fund units bought before 1 February 2018, your cost is taken as the higher of:
- what you actually paid, and
- the lower of the fair market value on 31 January 2018 and your sale price.
As an illustration, if you bought a share for ₹100 in 2015, it was worth ₹250 on 31 January 2018, and you sold it for ₹400, your cost becomes ₹250 and the taxable gain is ₹150. If you sold it for ₹200 instead, the cost becomes ₹200 (the lower of ₹250 and ₹200, which is still higher than ₹100), and the gain is nil rather than a loss. The return forms still ask for the 31 January 2018 value for such holdings.
Setting off and carrying forward losses
Losses reduce your capital gains tax, but only in a set order. The Income Tax Department’s e-filing help pages explain the rules this way.
Within the same year
A short-term capital loss can be set off against both short-term and long-term gains. A long-term capital loss can be set off only against long-term gains. Keep this order in mind when you decide which holdings to sell in a year.
Carrying losses forward
A capital loss you cannot use this year can be carried forward for eight years after the year in which it arose, and used only against capital gains in those years, with the same short-term and long-term restriction. There is a condition people miss: you must file the return for the loss year by the due date. A late return means the loss cannot be carried forward.
The move to the new Act does not wipe out old losses. The department’s FAQs say losses determined for assessment year 2026-27 under the old Act can be carried into tax year 2026-27 and later years under the new Act, subject to the conditions, and the eight-year clock does not restart.
What STT is and why it matters
Securities transaction tax is charged on trades in listed shares, equity fund units and derivatives through recognised stock exchanges and fund houses. You see it on your contract note. Its link to capital gains is simple: the 20% short-term rate and the 12.5% long-term rate with the ₹1.25 lakh exemption apply to gains where STT is charged on the transaction. That is why off-market transfers and some unlisted deals fall under different rules.
The 2026 Budget raised STT on derivatives from 1 April 2026: on futures from 0.02% to 0.05% of the traded price, on sale of options from 0.1% to 0.15% of the premium, and on options that are exercised from 0.125% to 0.15%. For active traders, that is a real cost on top of any tax on profits.
Surcharge, cess and the new Act
Two add-ons apply to capital gains tax. First, surcharge for higher incomes: for tax year 2026-27, the surcharge on the part of tax relating to gains under sections 196, 197 and 198, and on dividends, cannot exceed 15%, even when other income attracts a higher rate. Second, a 4% health and education cess on the tax plus surcharge.
Two more changes from the 2026 Budget are worth knowing. Sovereign Gold Bonds remain exempt on redemption only if you subscribed at the original issue and held them until maturity; bonds bought later on the exchange do not get the exemption. And because tax year 2026-27 runs under the new Act, your return for this year will use new forms notified under the new rules, while the return for income of 2025-26 is filed under the old Act.
Key takeaways on capital gains tax
- Listed shares and equity fund units become long-term after 12 months; most other assets need more than 24 months.
- Short-term gains on STT-paid equity are taxed at 20%; long-term gains at 12.5% above ₹1.25 lakh a year.
- Debt-heavy funds are taxed at your slab rate however long you hold them.
- Shares bought before 1 February 2018 keep the gain built up until 31 January 2018 out of tax.
- Short-term losses offset any capital gain; long-term losses offset only long-term gains; carry-forward is eight years if you file on time.
- Add 4% cess, and surcharge capped at 15% on these gains, to get your final bill.
Capital gains tax is easier to manage when you know your holding dates and keep your broker and fund statements together. If your gains are large or unusual, speak to a qualified tax professional before you sell. This guide is general information, not personal tax advice.
