Lead Developer & Quantitative Analyst
Executive Summary
The Indian Union Budget introduced the most significant overhaul of the capital gains tax regime in over two decades. The revisions unified holding periods and eliminated indexation benefits across multiple asset classes while creating two primary long-term and short-term tiers: Long-Term Capital Gains (LTCG) on listed equity now sit at 12.5% (with an expanded annual exemption of ₹1.25 Lakhs), while Short-Term Capital Gains (STCG) on equity rose to 20%. Understanding these statutory changes is essential for optimizing portfolio rebalancing, tax-loss harvesting, and mutual fund withdrawals.
1. Master Summary of Capital Gains Tax Rates
The table below summarizes the statutory holding period thresholds and applicable tax rates across major financial asset classes:
| Asset Class | Holding Period for LTCG | Short-Term Rate (STCG) | Long-Term Rate (LTCG) |
|---|---|---|---|
| Listed Equity Shares & Equity Mutual Funds (>65% equity) | > 12 Months | 20% (Sec 111A) | 12.5% (Sec 112A) above ₹1.25L exemption |
| Debt Mutual Funds (≤35% equity acquired post April 1, 2023) | N/A (No LTCG status) | Applicable Slab Rate | Applicable Slab Rate (Sec 50AA) |
| Gold ETFs, Sovereign Gold Bonds & Physical Gold | > 24 Months (12m for listed ETFs) | Applicable Slab Rate | 12.5% without indexation |
| Unlisted Shares & Startup Equity | > 24 Months | Applicable Slab Rate | 12.5% (down from 20%) |
2. Equity LTCG: The ₹1.25 Lakh Exemption & Tax-Gain Harvesting
Under Section 112A, Long-Term Capital Gains on listed equities and equity-oriented mutual funds are exempt up to ₹1,25,000 per financial year across all combined capital gains.
Tax-Gain Harvesting Strategy
Because unused annual exemption limits do not carry forward to future financial years, smart retail investors utilize tax-gain harvesting:
- Before March 31 each financial year, identify equity mutual fund units with unrealized long-term gains up to ₹1,25,000.
- Redeem those units at zero tax liability.
- Immediately reinvest the proceeds back into the same or comparable fund the following trading day.
- This resets your cost of acquisition higher, permanently shielding that ₹1.25 Lakh from future 12.5% tax!
3. Set-Off and Carry Forward of Losses
Understanding the statutory rules for setting off capital losses against gains is vital for minimizing your final tax outflow:
Short-Term Capital Loss (STCL)
Can be set off against BOTH Short-Term Capital Gains and Long-Term Capital Gains from any capital asset class in the current assessment year.
Long-Term Capital Loss (LTCL)
Can ONLY be set off against Long-Term Capital Gains. You cannot set off long-term losses against short-term gains or salary income.
Frequently Asked Questions
Is Securities Transaction Tax (STT) mandatory to claim the 12.5% LTCG rate?
Yes. Under Section 112A, the concessional 12.5% rate applies only if Securities Transaction Tax (STT) was paid at both the time of acquisition and sale (for listed equity shares), or at the time of sale/redemption (for equity-oriented mutual fund units).
Can I adjust my basic tax exemption limit against capital gains?
Yes. If you are a resident individual or HUF and your total income from other sources (salary, interest, etc.) is less than the basic exemption threshold (e.g. ₹3 Lakhs under the New Regime), the unexhausted basic exemption limit can be adjusted against LTCG or STCG.
Are dividends from mutual funds and stocks taxed under capital gains?
No. Dividends are treated as "Income from Other Sources" and taxed at your normal personal slab rates. Mutual fund AMCs and companies deduct a 10% TDS on dividend payouts exceeding ₹5,000 in a financial year.