LTCG and STCG: Key tax rules for equity shares and mutual fund investors in FY 2025-26

The government of India has recently clarified that it has no plans to tinker with or abolish the Long-Term Capital Gains (LTCG) tax on equities for retail and domestic investors, putting to rest market speculation on the issue.

The clarification comes at a crucial time, with the last date for filing income tax returns on 31 July, just a week away. It underscores the need for investors to understand how capital gains are taxed, the changes introduced in the July 2024 budget, and what it means for future investment decisions.

Taxes directly affect investor returns and shape the outlook of both domestic and foreign investors in India's equity markets. For listed shares and equity-oriented mutual funds, the tax treatment depends entirely on the holding period before sale.

How much has government earned from LTCG?

The government's LTCG tax collections on equity transactions surged nearly 79% year-on-year, increasing from ₹72,249 crore in AY 2024-25 (FY 2023-24) to ₹1,29,158 crore in AY 2025-26 (FY 2024-25).

Across the two assessment years, the government collected ₹2.01 lakh crore in LTCG tax from equity transactions.

What are LTCG and STCG tax rules for equity investments?

For equity shares and all equity-oriented mutual funds, the holding period determines whether gains are classified as long-term or short-term.

In case you sell your equity shares or equity mutual funds before the completion of 12 months of holding period, the gains from such a sale are treated as STCG. These gains are subject to a 20% tax, plus applicable surcharges and cesses.

If you hold on to these investments for more than 12 months, the gains will qualify as LTCG. Any gains made from such a sale are tax-free up to ₹1.25 lakh in a financial year, and any gains over this figure are taxed at 12.5%. It is important to note that the exemption limit applies to the total eligible LTCG earned by an individual during the year, rather than to each investment separately.

What are key points for investors to remember?

For SIPs, each instalment is treated as a separate investment with its own purchase date and holding period. Mutual funds generally use the First-In, First-Out (FIFO) method for redemptions, meaning a single withdrawal may include both short- and long-term gains.

For example, if you redeem your mutual fund SIP units today, on 21 July, any SIP investments made before 21 July 2025 will be considered long-term investments, whereas any investments made after 21 July 2025, and redeemed within 12 months of investment, will be considered short-term investments.

Before redeeming any investments, you should check whether the one-year holding period has been satisfied.

Tax savings should not be the only factor driving investment and mutual fund or stock redemption decisions; sensible asset allocation, long-term economic objectives and risk profile analysis should also be considered before taking redemption calls.

The tax structure for equities and mutual fund investments provides a lower tax rate for long-term holdings and offers an annual LTCG exemption of ₹1.25 lakh.