Capital Gains Tax on Stocks and Mutual Funds: The Basics

The core concept: holding period decides everything

When you sell a stock or equity mutual fund for a profit, that profit is a capital gain - and how it's taxed depends almost entirely on how long you held it, not just how much you made.

• Short-Term Capital Gains (STCG): for listed equity/equity mutual funds, this applies if you held the investment for 12 months or less before selling. Taxed at a flat 20%.
• Long-Term Capital Gains (LTCG): applies if you held it for more than 12 months. Taxed at 12.5%, but only on gains above ₹1.25 lakh in a financial year - the first ₹1.25 lakh of long-term equity gains each year is tax-free.

(Rates and the exemption threshold above were revised in the Budget presented in July 2024 and confirmed unchanged in the 2026 Budget, checked as of September 2026. Capital gains rules are a frequent Budget target - re-verify before relying on this for a real transaction.)

Why this matters practically

Two people can sell the exact same stock for the exact same profit and owe meaningfully different tax, purely because one held it for 11 months and the other for 13. If you're close to the 12-month mark on a profitable position, it's worth checking which side of that line you're on before selling.

Debt mutual funds are a different story

Debt-oriented mutual funds have their own, separate holding-period and taxation rules that have also changed in recent years - don't assume the equity rules above apply to a debt fund; check the current rules for that specific fund category separately.

Offsetting gains with losses

Capital losses can typically be set off against capital gains (short-term losses against both short and long-term gains; long-term losses only against long-term gains, subject to current rules), and unused losses can often be carried forward to future years if filed correctly - a legitimate way to reduce your tax bill, not a loophole, but the exact carry-forward rules and time limits should be confirmed against current tax law.

The takeaway

Before selling an investment purely for tax reasons ("selling now to book a loss," "waiting a few weeks to cross into long-term"), run the actual numbers for your holding period and current rates - the difference is often larger than people expect, in both directions.