Sold Shares & Equity Mutual Funds? Here’s Your Tax Liability

I Sold Shares and Equity Mutual Funds This Year – How Much Tax Will I Actually Pay?

Summary: The content explains the taxation of capital gains on listed equity shares and equity-oriented mutual funds under the Income-tax Act, 1961 for Financial Year 2025-26 (Assessment Year 2026-27). For equity investments on which Securities Transaction Tax (STT) is paid, gains from holdings of 12 months or less are treated as short-term capital gains (STCG) and taxed at a flat 20%, while gains from holdings exceeding 12 months are treated as long-term capital gains (LTCG) and taxed at a flat 12.5%, with the first Rs. 1,25,000 of LTCG exempt each year. An illustration shows tax computation where Rs. 2,00,000 of STCG attracts Rs. 40,000 tax and Rs. 3,00,000 of LTCG is reduced by the Rs. 1,25,000 exemption, leaving Rs. 1,75,000 taxable at 12.5%, resulting in Rs. 21,875 tax before cess. The content states that the Section 87A rebate under Section 115BAC does not apply to these special-rate capital gains. It also notes that dividends are taxed at the applicable slab rate, with 10% TDS if dividends from a single payer exceed Rs. 10,000, and that SIP redemptions follow the first-in-first-out (FIFO) method, with each instalment having its own holding period.

“I booked some profit on Infosys and redeemed two equity funds this year. My friend says short-term is taxed one way and long-term another, and I honestly can’t keep it straight. How much do I actually owe?” – A 34-year-old techie who invests every month but dreads July

It is one of the most common questions I hear from investors, and the confusion is understandable. The taxman does not treat all your stock-market profit the same way. Two things decide your tax bill: how long you held the investment, and whether it is an equity or a non-equity asset. Get those two right and the rest is simple arithmetic. Let us walk through it using the rules of the Income-tax Act, 1961, which governs Financial Year 2025-26 (Assessment Year 2026-27).

Step 1: Short-term or long-term?

For listed equity shares and equity-oriented mutual funds (funds with 65%+ in Indian equities) on which Securities Transaction Tax is paid, the dividing line is 12 months. Hold for 12 months or less and your gain is short-term (STCG). Hold for more than 12 months and it is long-term (LTCG). This holding-period test decides everything that follows.

Step 2: Apply the right rate

Under the Income-tax Act, 1961, the rates on STT-paid equity are:

Two points investors miss. First, these flat rates apply regardless of which tax slab your salary falls in – a 30%-slab investor and a 5%-slab investor both pay 12.5% on equity LTCG. Second, LTCG no longer enjoys indexation; the flat 12.5% is applied to the plain difference between sale price and cost.

Let’s understand this better with a real example with numbers – 

Meet Rohan. In Financial Year 2025-26 he makes two exits:

• Sold Infosys shares held for 8 months – profit of Rs 2,00,000 (short-term).
• Redeemed an equity mutual fund held for 3 years – profit of Rs 3,00,000 (long-term).

His tax on these gains works out as follows:

Rohan’s total tax on capital gains is Rs 40,000 + Rs 21,875 = Rs 61,875, plus 4% health and education cess of about Rs 2,475, taking it to roughly Rs 64,350. Notice how the Rs 1.25 lakh exemption quietly saved him Rs 15,625 of tax on the long-term side. That exemption resets every year – use it.

What about the Rs 12 lakh rebate – does it cover this?

A frequent hope: “my total income is under Rs 12 lakh, so the Section 87A rebate makes it tax-free, right?” Unfortunately no. The rebate that makes resident income up to Rs 12 lakh tax-free under the new regime (Section 115BAC) does not apply to these special-rate capital gains. STCG at 20% and LTCG at 12.5% are taxed on their own, outside the slab rebate. So even a modest-income investor pays tax on equity gains beyond the Rs 1.25 lakh LTCG cushion.

Three practical takeaways

• Holding just past 12 months converts a 20% short-term hit into a 12.5% long-term rate – timing your exit matters.
• Harvest up to Rs 1.25 lakh of long-term equity gains every year tax-free, then re-buy, to reset your cost base.
• Keep contract notes and fund statements; the cost of acquisition is what stands between you and an over-stated gain.

The equity investor’s tax playbook has become refreshingly flat and predictable under the 1961 Act. Once you internalise the 12-month line and the two rates, filing season stops being a guessing game.

A quick note on dividends and SIPs

Two related situations confuse investors. First, dividends from your shares and funds are no longer tax-free in your hands – they are added to your total income and taxed at your slab rate, and the company deducts 10% TDS if your dividend crosses Rs 10,000 from a single payer. Keep that TDS in mind; it is adjusted against your final tax bill. Second, if you invest through a Systematic Investment Plan, each monthly installment has its own purchase date and therefore its own holding period. When you redeem, the tax office applies the first-in-first-out method: your earliest units are treated as sold first. So a partial redemption may be entirely long-term even if your most recent installments are only a few months old. Pull an accurate capital-gains statement from your fund house or platform – it does this FIFO maths for you and is the document your return should mirror.

******

Disclaimer – This article is for general information based on the Income-tax Act, 1961 (governing Financial Year 2025-26, i.e. Assessment Year 2026-27) and is not a substitute for personalised professional advice.

About the Author: Sonia Dawar is a Chartered Accountant and the founder of Dawar & Co. She advises resident and non-resident investors on capital gains planning, reinvestment exemptions, and stress-free ITR filing. She writes to turn dense tax law into decisions people can actually act on. Reach her at sonia@dawarandco.com.