If you sold listed shares or equity mutual funds in FY 2025-26, the bottom line is this: long-term gains above Rs. 1.25 lakh are taxed at a flat 12.5%, short-term gains are taxed at 20%, and if you have been holding since before 2018 a “grandfathering” rule quietly wipes out a chunk of the gain the tax department will never touch. Getting these three numbers right is the difference between an accurate return and a notice under section 143(1).
The rules changed materially on 23 July 2024, and a lot of the calculators and blog posts still floating around use the old 10% / Rs. 1 lakh figures. This article uses only the law as it stands for FY 2025-26 (AY 2026-27), works through the grandfathering formula that trips up most filers, and shows exactly where the tax lands with real numbers.
The two rates that apply, and the date that splits them
Equity taxation runs on the “special rate” sections, not your slab. What matters is (a) how long you held, and (b) whether Securities Transaction Tax (STT) was paid — which it almost always is for anything bought and sold on an Indian exchange.
A listed equity share or a unit of an equity-oriented mutual fund is long-term if held for more than 12 months, and short-term if held for 12 months or less. Long-term gains fall under section 112A and short-term gains under section 111A.
| Situation | Section | Rate (from 23 July 2024) | Rate (before 23 July 2024) |
|---|---|---|---|
| LTCG on listed equity / equity MF (held > 12 months) | 112A | 12.5% on gains above Rs. 1.25 lakh | 10% on gains above Rs. 1 lakh |
| STCG on listed equity / equity MF (held ≤ 12 months) | 111A | 20% | 15% |
Two things people miss. First, no indexation is available on equity — the 12.5% is a flat rate on the plain gain. Second, the Rs. 1.25 lakh exemption is an annual, aggregate figure across all your 112A gains put together, not a per-share or per-fund allowance. Sell shares and redeem an equity fund in the same year and you get one Rs. 1.25 lakh shield between them, not two.
Grandfathering: the 31 January 2018 fair market value
Before 2018, long-term equity gains were fully exempt. When section 112A was introduced, Parliament chose not to tax the gains that had accrued up to 31 January 2018. It did this through a special cost-of-acquisition rule for anything bought before 1 February 2018.
The grandfathered cost is the higher of:
- your actual purchase price; and
- the lower of (i) the fair market value (highest quoted price) on 31 January 2018, and (ii) the actual sale consideration.
In plain terms: the market value on 31 January 2018 is treated as your cost, so the run-up before that date escapes tax — but this uplift can never turn a real gain into a loss, and it can never be higher than what you actually sold for.
Worked example 1 — an old holding with grandfathering
Suppose you bought 1,000 shares of a listed company on 10 June 2015 at Rs. 100 each (cost Rs. 1,00,000). The highest quoted price on 31 January 2018 was Rs. 250. You sold all 1,000 on 15 May 2025 at Rs. 400 each (Rs. 4,00,000).
| Step | Working | Amount |
|---|---|---|
| Actual cost | 1,000 × Rs. 100 | Rs. 1,00,000 |
| FMV on 31 Jan 2018 | 1,000 × Rs. 250 | Rs. 2,50,000 |
| Sale consideration | 1,000 × Rs. 400 | Rs. 4,00,000 |
| Grandfathered cost | Higher of Rs. 1,00,000 and [lower of Rs. 2,50,000 & Rs. 4,00,000] | Rs. 2,50,000 |
| Long-term capital gain | Rs. 4,00,000 − Rs. 2,50,000 | Rs. 1,50,000 |
| Less: 112A exemption | — | Rs. 1,25,000 |
| Taxable LTCG | — | Rs. 25,000 |
| Tax @ 12.5% | plus 4% cess | Rs. 3,125 (Rs. 3,250 with cess) |
Without grandfathering your gain would have been Rs. 3,00,000 and your tax roughly Rs. 21,875. The 31 January 2018 uplift saved you nearly Rs. 19,000 on this one holding. You can sanity-check numbers like these with our Capital Gains Tax Calculator before you file.
Worked example 2 — the 23 July 2024 rate change in one year
Because the rate changed mid-year, a single financial year can carry two rates. Take an investor who booked two long-term equity gains: Rs. 2,00,000 on a sale in June 2024 (before the change) and Rs. 3,00,000 on a sale in December 2024 (after the change), all bought after 2018 so no grandfathering applies.
| Transaction | LTCG | Exemption used | Taxable | Rate | Tax |
|---|---|---|---|---|---|
| June 2024 sale | Rs. 2,00,000 | Rs. 1,00,000 | Rs. 1,00,000 | 10% | Rs. 10,000 |
| December 2024 sale | Rs. 3,00,000 | Rs. 25,000 (balance) | Rs. 2,75,000 | 12.5% | Rs. 34,375 |
The Rs. 1.25 lakh exemption is first set against the gains taxed at the lower rate, and the balance against the higher-rate gains — that ordering is built into the ITR utility and is more favourable to you. This split only mattered for FY 2024-25. For FY 2025-26, every equity sale falls after 23 July 2024, so the whole year runs at 12.5% / 20% cleanly.
Short-term gains and set-off
Short-term equity gains are taxed at a flat 20% under section 111A — they do not get the Rs. 1.25 lakh exemption, which is a long-term-only benefit. A short-term capital loss can, however, be set off against either short-term or long-term gains, while a long-term loss can only be set off against long-term gains. Unabsorbed capital losses carry forward for eight assessment years, but only if you file your return by the due date. Missing the due date forfeits the carry-forward, which is often a costlier mistake than the tax itself.
A note on debt and other mutual funds
This 12.5% / Rs. 1.25 lakh regime is only for equity-oriented funds (broadly, those holding 65% or more in domestic equity). Debt funds and other “specified mutual funds” bought on or after 1 April 2023 are taxed at your slab rate regardless of holding period, with no long-term benefit and no indexation. If your portfolio mixes both, keep the two buckets separate when you compute — a common source of mismatched returns.
Key takeaways
- For FY 2025-26, LTCG on listed equity and equity mutual funds is 12.5% on gains above Rs. 1.25 lakh a year; STCG is a flat 20%.
- Long-term means held for more than 12 months; there is no indexation on equity.
- The Rs. 1.25 lakh exemption is a single annual pool across all your 112A gains — not per scrip or per fund.
- For anything bought before 1 February 2018, use the grandfathered cost (higher of actual cost and the lower of 31-Jan-2018 FMV and sale price) — it can meaningfully cut your gain.
- File on time to preserve the eight-year carry-forward of capital losses.
Frequently Asked Questions
Is the Rs. 1.25 lakh exemption available on both shares and mutual funds separately?
No. It is one combined annual exemption for all your section 112A long-term gains taken together, whether from listed shares, equity mutual funds or eligible units. You cannot claim it twice.
Do I need to apply grandfathering to shares bought after 1 February 2018?
No. Grandfathering and the 31 January 2018 fair market value only apply to units and shares acquired before 1 February 2018. For later purchases, your actual cost is the cost of acquisition.
Can indexation reduce my equity long-term gains?
No. Indexation is not available for listed equity or equity-oriented mutual funds under section 112A. The 12.5% rate applies to the plain gain after grandfathering, where relevant.
Is STCG on shares eligible for the Rs. 1.25 lakh exemption?
No. The Rs. 1.25 lakh exemption is only for long-term gains under section 112A. Short-term gains under section 111A are taxed at a flat 20% from the first rupee.
Which ITR form do I use to report these gains?
Capital gains cannot be reported in ITR-1. Salaried individuals with capital gains generally use ITR-2 (or ITR-3 if there is also business or F&O income). You can estimate your total liability with our Capital Gains Tax Calculator.