Capital gains tax on mutual funds and stocks, explained

An investor who sells ₹15 lakh of equity mutual fund units in one financial year, with ₹5 lakh of that as long-term gains, owes ₹48,750 in tax today. Before the July 2024 Budget, the same sale would have cost ₹41,600 (ClearTax Advisors, 2026). That gap is the most consequential capital gains change in years: the Finance (No. 2) Act, 2024 raised both the long-term and short-term rates on listed equity and equity mutual funds in a single day, and the rules now differ sharply by asset type and holding period. This piece has been checked against the Finance Act text as reported across multiple independent tax-advisory and news sources, and flags the one area where sources still disagree. Here's what the current rates actually are, and where investors most often get them wrong.

Key Takeaways

• Equity LTCG is 12.5% above a ₹1.25 lakh annual exemption; equity STCG is a flat 20%, both effective 23 July 2024 (ClearTax Advisors, 2026)

• Debt mutual funds bought on or after 1 April 2023 never qualify for long-term treatment; gains are always taxed at slab rate (Section 50AA, 2026)

• Indexation, which adjusted purchase cost for inflation, was removed for nearly all assets sold on or after 23 July 2024 (Finnovate, 2025)

• Resident investors face no TDS on mutual fund capital gains; funds withhold TDS only on dividend payouts, per a 2020 CBDT clarification (Business Standard, 2020)

What are the current capital gains tax rates on stocks and equity mutual funds?

Listed shares and equity-oriented mutual funds, those holding at least 65% in domestic equity, follow the same two rates. Short-term gains on units held 12 months or less are taxed at a flat 20% under Section 111A, while long-term gains on units held over 12 months are taxed at 12.5% above a ₹1.25 lakh annual exemption under Section 112A, both effective for any sale from 23 July 2024 onward (ClearTax Advisors, 2026).

Both rates moved up in the same Budget announcement, and by a meaningful margin. STCG rose from 15% to 20%, and LTCG rose from 10% to 12.5%, though the annual exemption also grew from ₹1 lakh to ₹1.25 lakh to partly offset the increase for smaller investors (Business Standard, 2024). These concessional rates apply only when securities transaction tax, STT, was paid on the transaction, which is the default for nearly all trades on Indian stock exchanges and equity mutual fund redemptions.

How are debt mutual funds taxed differently from equity funds?

Debt funds lost their long-term tax advantage entirely for anything bought recently, and this is where the rules diverge most sharply from equity. Under Section 50AA, introduced by the Finance Act 2023, gains on debt-oriented and other "specified mutual funds", those holding less than 35% in domestic equity, acquired on or after 1 April 2023 are always classified as short-term and taxed at the investor's income slab rate, no matter how many years the units were held (TaxGarden, 2026).

That rule doesn't reach backward. Debt fund units bought before 1 April 2023 keep their original long-term treatment, since Section 50AA explicitly excludes purchases made before that date (Bajaj Finserv, 2026).  Sources disagree on the exact holding period that now separates short and long-term for these older, grandfathered debt fund units after the July 2024 indexation changes, with some citing the pre-2024 36-month threshold and others applying the newer 24-month rule that governs most other non-equity assets. This detail affects the tax computation directly, so anyone holding pre-April-2023 debt fund units should confirm the applicable threshold and rate with a chartered accountant or their fund house's capital gains statement before filing.

What happened to indexation, and does it still apply to anything?

Indexation, which let investors inflate their purchase cost to account for years of price rises before calculating the taxable gain, was withdrawn for almost every asset class in one sweep. For any transfer on or after 23 July 2024, capital gains are computed on the actual purchase price with no inflation adjustment, whether the asset is equity, debt, gold, or unlisted shares (Finnovate, 2025).

Property carries the sole meaningful exception. For real estate acquired before 23 July 2024, the seller can choose between the new 12.5% rate without indexation or the older 20% rate with indexation, whichever produces the lower tax bill; property bought after that date only has the 12.5% no-indexation option (Online Legal India, 2026). No equivalent choice exists for equity or debt mutual fund units.

The indexation removal matters more for assets that tend to sit for a decade or longer, gold and property being the clearest examples, because that's where years of inflation adjustment used to shrink the taxable gain the most. For equity, which already carried a lower flat rate, the practical difference is smaller.

What mistakes do investors commonly make when calculating this tax?

Assuming mutual fund gains are tax-free below some familiar threshold is the most common error, and it isn't accurate for any category. The ₹1.25 lakh figure is an annual exemption on long-term equity gains specifically, not a blanket allowance across fund types, and short-term equity gains and all debt fund gains have no equivalent exemption at all (TaxFetch, 2026).

A second common mix-up involves TDS. Resident investors sometimes expect mutual funds to withhold tax on capital gains the way banks withhold TDS on fixed deposit interest, but a 2020 CBDT clarification settled this: mutual funds deduct TDS only on dividend payouts for resident investors, never on capital gains, which the investor must instead calculate and pay directly when filing (Business Standard, 2020). A third mistake shows up around SIP redemptions: each instalment is treated as a separate purchase for tax purposes under the FIFO method, so a partial redemption of a long-running SIP can mix short-term and long-term units in the same transaction, each taxed differently (TaxGarden, 2026). 

How is capital gains tax actually calculated and reported?

The mechanics differ by whether the gain is short or long-term, but both start from the same two numbers: sale price and purchase price. For equity, short-term gains get no exemption and no deduction under Chapter VI-A, so the entire gain above cost is taxed at 20%; long-term gains subtract the ₹1.25 lakh annual exemption first, and only the remainder is taxed at 12.5% (ClearTax Advisors, 2026).

Most fund houses provide a capital gains statement each year listing gains by ISIN, with FIFO-based cost matching and any grandfathered cost basis, such as the January 2018 grandfathering clause that set a floor cost for equity shares and equity fund units already held on that date, applied automatically. These statements, along with the Annual Information Statement on the income tax e-filing portal, are the practical starting point for reporting gains in Schedule CG of the income tax return, rather than reconstructing each transaction manually.

Frequently asked questions

Does the ₹1.25 lakh exemption apply separately to stocks and mutual funds?

No. The ₹1.25 lakh annual exemption under Section 112A is a combined limit across all long-term equity gains in a financial year, listed shares and equity mutual funds together, not a separate allowance for each.

Is there a way to avoid capital gains tax on equity legally?

Not entirely, but harvesting gains within the annual exemption is a common legal approach: selling and immediately repurchasing equity holdings each year to realise gains up to ₹1.25 lakh tax-free resets the cost basis without changing the actual investment position.

Do capital losses offset capital gains?

Yes, with rules on which losses can offset which gains. Long-term capital losses can only be set off against long-term gains, while short-term losses can be set off against both short-term and long-term gains, and unused losses can generally be carried forward for up to eight assessment years.

Are international mutual funds and gold ETFs taxed like equity or debt?

Like debt, in most cases. Funds investing less than 35% in domestic equity, which includes most international equity funds and gold funds bought after 1 April 2023, fall under Section 50AA and are always taxed at slab rate regardless of holding period, the same as debt funds.

The bottom line

Equity capital gains tax rose meaningfully in the July 2024 Budget, to 20% short-term and 12.5% long-term above ₹1.25 lakh, while debt funds bought since April 2023 lost long-term treatment entirely and indexation disappeared for nearly everything. The rates themselves are now consistent across most sources checked for this piece, with one open question around the exact holding period for older, grandfathered debt fund units, which is worth confirming directly before filing rather than assuming either threshold applies.

Vijay InvestEdge Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-1777). Mutual Funds are subject to market risks. Please read all scheme related documents carefully before investing. This is general information on Indian capital gains tax rules, not personalised tax advice. Confirm current rates and thresholds with a chartered accountant or the income tax e-filing portal before filing.