Summary:The article explains the taxation of long-term capital gains (LTCG) on listed equity shares and equity-oriented mutual funds under the Income-tax Act, 2025, as applicable for Tax Year 2026-27. It clarifies that the annual exemption for equity LTCG has increased from Rs. 1 lakh to Rs. 1.25 lakh, while the tax rate has risen from 10% to 12.5%. Using an example of an investor earning Rs. 3.07 lakh in LTCG, it demonstrates that after claiming the Rs. 1.25 lakh exemption, tax is payable only on Rs. 1.82 lakh, resulting in a tax liability of Rs. 23,660 including 4% Health and Education Cess. The article also explains the distinction between long-term and short-term gains, the availability of set-off of short-term capital losses against LTCG, annual tax-free gain harvesting, broker statement verification, grandfathering provisions for pre-31 January 2018 holdings, and advance tax obligations where total tax liability exceeds Rs. 10,000, highlighting practical tax planning opportunities for equity investors.
“I have been investing in the stock market for about 4 years. This year I sold some shares and my broker’s statement shows a long-term capital gain of INR 3,07,000. I thought gains up to INR 1 lakh were tax-free, but my friend says the limit has changed. How much do I actually owe?” — Priya, 31, software engineer, Bengaluru
Priya is right to double-check. The equity LTCG rules changed in Budget 2024 and these changes apply fully for Tax Year 2026-27 (the first year under the Income-tax Act, 2025). The old INR 1 lakh exemption became INR 1.25 lakh, and the rate went up from 10% to 12.5%. Let us walk through exactly what Priya owes — and some perfectly legal ways to reduce it next year.
What Is “Long-Term” for Listed Shares and Equity Mutual Funds?
For listed equity shares and equity-oriented mutual funds (including ELSS), the holding period threshold for long-term status is 12 months. If you hold for more than 12 months and sell with STT (Securities Transaction Tax) having been paid, you get LTCG treatment.
If you sell within 12 months, it is Short-Term Capital Gain (STCG) — taxed at a flat 20% under the rules now in force (up from 15% pre-Budget 2024).
The Current Rates at a Glance
| Type of Gain | Holding Period | Rate | Annual Exemption |
| LTCG — listed equity / equity MF | More than 12 months | 12.5% | INR 1,25,000 per tax year |
| STCG — listed equity / equity MF | 12 months or less | 20% | None |
| LTCG — debt MF / other listed assets | Varies (often 12 months) | 12.5% | None |
| STCG — any other asset | Up to 24 or 36 months | Slab rate | None |
The INR 1,25,000 exemption applies per tax year (1 April to 31 March) and is only available to resident individual taxpayers. NRIs do not get this exemption on equity LTCG.
Lets look at Priya’s Tax Calculation — Step by Step
Priya’s total long-term capital gain from shares: INR 3,07,000.
| Step | Particulars | Amount |
| 1 | Total LTCG from equity shares | INR 3,07,000 |
| 2 | Less: Annual exemption (Tax Year 2026-27) | INR 1,25,000 |
| 3 | Taxable LTCG | INR 1,82,000 |
| 4 | Tax @ 12.5% | INR 22,750 |
| 5 | Add: Health & Education Cess @ 4% | INR 910 |
| 6 | Total Tax Payable | INR 23,660 |
So Priya’s actual tax on INR 3.07 lakh gain is just INR 23,660 — roughly 7.7% effective rate, not 12.5%, because of the exemption. No surcharge applies here since her total income (salary + LTCG) is unlikely to exceed INR 50 lakh.
Does the INR 1.25 Lakh Exemption Reset Every Year?
Yes — it is per tax year. This is why smart investors use a technique called “harvesting” — selling enough shares before 31 March each year to realise up to INR 1.25 lakh in gains, paying zero tax, and then buying the same shares back. Over 10 years, this can save significant amounts by “stepping up” your cost basis.
Example: You hold 500 shares with LTCG potential of INR 2 lakh in March 2027. You sell 200 shares (gain INR 1.25 lakh) before 31 March, incur zero tax, and buy them back the next day at the new higher price. Your remaining holding now has a higher cost, reducing future taxable gains.
What If Priya Also Has Short-Term Losses?
A short-term capital loss (STCL) can be set off against both STCG and LTCG in the same year. So if Priya also had an STCL of INR 50,000 from another stock this year, she could reduce her LTCG to INR 2,57,000 before applying the exemption:
| Particulars | Amount |
| LTCG from shares | INR 3,07,000 |
| Less: STCL set-off | INR 50,000 |
| Net LTCG after set-off | INR 2,57,000 |
| Less: Annual exemption | INR 1,25,000 |
| Taxable LTCG | INR 1,32,000 |
| Tax @ 12.5% + 4% cess | INR 17,160 |
What Does Your Broker Statement Actually Show?
Most brokers provide a Capital Gains Statement at year-end that segregates STCG and LTCG. Key things to check:
1. Grandfathering: If you held shares before 31 January 2018, their “Fair Market Value” as on that date (not original purchase price) is your cost of acquisition for LTCG calculation. Your broker usually accounts for this automatically, but verify.
2. STT confirmation: LTCG at 12.5% rate is only for STT-paid transactions. Shares not purchased on a recognised stock exchange do not qualify for this concessional rate.
3. Multiple accounts: If you trade through more than one broker or demat account, aggregate all gains before computing tax.
When Do You Need to Pay Advance Tax?
If your total capital gains tax (along with any other taxes) exceeds INR 10,000 in a year, you must pay advance tax. For Tax Year 2026-27, the instalments (under Section 408 of the Income-tax Act, 2025) are due:
| Instalment | Due Date | Cumulative % of Total Tax |
| 1st | 15 June 2026 | 15% |
| 2nd | 15 September 2026 | 45% |
| 3rd | 15 December 2026 | 75% |
| 4th | 15 March 2027 | 100% |
Since capital gains often arise at unpredictable times, you can pay advance tax within 15 days of the quarter in which the gain occurred and interest under Sections 424/425 of the 2025 Act will still not apply.
The key takeaway for equity investors: the 12.5% LTCG rate stings a little more than the old 10%, but the INR 1.25 lakh exemption (up from INR 1 lakh) softens the blow for most retail investors. Plan your sales around tax years, harvest gains up to the exemption limit, and you will maximise your after-tax returns legally.
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About the Author: Sonia Dawar is a Chartered Accountant and founder of Dawar & Co., a boutique tax and advisory firm. With over 18 years of hands-on experience, she specialises in capital gains planning, business taxation, and cross-border tax matters. She is known for translating complex tax law into practical, actionable guidance for individuals and businesses. Reach her at sonia@dawarandco.com.
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