If you’re confused about capital gains tax on your investments in listed shares, mutual funds, and ETFs, you’re in the right place. The rules have evolved significantly, especially with the Income-tax Act, 2025, now governing the Tax Year 2026-27. Let me take you through with a few examples so you know exactly what you owe.

The two sides of capital gains: short-term vs. long-term

The first thing you need to understand is that your tax rate depends entirely on how long you held the investment. The tax authorities reward patience.

1. What counts as short-term?

For listed equity shares and equity-oriented mutual funds, if you sell within 12 months or less, your profit is classified as a Short-Term Capital Gain (STCG). Under the current framework, this is taxed at a flat 20%.

Let me put this in perspective: If you bought shares for ₹1,00,000 and sold them 10 months later for ₹1,20,000, your STCG is ₹20,000. You’ll owe ₹4,000 in tax on that gain.

2. What counts as long-term?

If you hold those same equity investments for more than 12 months, your gains become Long-Term Capital Gains (LTCG). The rate here is 12.5% on gains exceeding ₹1.25 lakh in a financial year.

The ₹1.25 lakh annual exemption

The annual exemption of ₹1.25 lakh means you can make that much profit every single year completely tax-free. It resets every financial year. Let’s see this with an example.

Assuming you sold listed shares in January 2027 (Tax Year 2026-27) and made a total LTCG of ₹3,07,000.

Here’s how your tax is calculated:

• Total LTCG: ₹3,07,000

• Less: Annual exemption: ₹1,25,000

• Taxable LTCG: ₹1,82,000

• Tax @ 12.5%: ₹22,750

• Health & Education Cess @ 4%: ₹910

• Total tax payable: ₹23,660

Notice your effective tax rate is only about 7.7%, not 12.5%. The exemption reduces what you actually pay. So, you may consider selling enough long-term holdings each year to realize up to ₹1.25 lakh in gains. You pay zero tax, and when you buy them back, your new cost basis is higher, reducing future taxable gains. This is known as “tax harvesting.”

Not all mutual fund gains are taxed at the same rate

The tax treatment of mutual funds depends on what the fund actually holds. We can think of them as three distinct buckets.

1. Bucket 1 – Equity funds (≥65% equity)

These funds invest at least 65% in domestic equity shares. They enjoy the same favorable treatment as listed shares i.e. 20% STCG for holdings up to 12 months, and 12.5% LTCG for holdings beyond 12 months, with the ₹1.25 lakh exemption applying.

2. Bucket 2 – Hybrid funds (>35% to <65% equity)

These funds don’t qualify as equity. If you hold them for 24 months or less, gains are taxed at your slab rate. For holdings beyond 24 months, LTCG is taxed at 12.5%, but the ₹1.25 lakh exemption does not apply.

3. Bucket 3 – Debt funds (Specified Mutual Funds)

From FY 2025-26, any mutual fund investing more than 65% in debt and money-market instruments is classified as a “Specified Mutual Fund” under Section 76 of the Income-tax Act, 2025. Gains from these funds are treated as short-term capital gains, irrespective of how long you hold them. They are taxed at your applicable slab rate, even if you held them for a decade.

For tax treatment of ETFs check the underlying asset

The tax treatment of ETFs depends entirely on the scheme classification and the underlying assets.

Let me show how much tax you have to pay if you invest in Gold ETFs with an example.

Suppose you invested ₹2,00,000 in a Gold ETF in June 2026 and sold it in August 2027 for ₹2,50,000, after holding for 14 months. Sale value: ₹2,50,000. Gain: ₹50,000.

Here is how your tax is calculated:

Holding period: 14 months → LTCG

LTCG rate for Gold ETF: 12.5%

Gain: ₹50,000

Tax: 12.5% of ₹50,000 = ₹6,250

Health & Education Cess @ 4%: ₹250

Total tax payable: ₹6,500

Now, what if you had sold after just 10 months? Your gain would be a Short-Term Capital Gain, taxed at your income tax slab rate. If you fall in the 30% bracket, your tax would be ₹15,600 including cess, which is more than double the long-term tax amount. The lesson we can take from here is that Gold ETFs reward patience.

Also, notice that the ₹1.25 lakh annual exemption does not apply to gold ETFs. It is applicable to Equity ETF investments of more than 12 months.

Set-off and carry-forward in case of capital loss

Any loss on investment is bad news. But what many investors do not realise is that it can become a powerful tax-saving tool. The Income Tax Act allows you to set off capital losses against capital gains in the same year. Your Short-Term Capital Loss (STCL) can offset both STCG and LTCG. However, your Long-Term Capital Loss (LTCL) can offset only LTCG.

And if you can’t use the entire loss in one year, you can carry it forward for up to 8 years, provided you file your income tax return by the prescribed due date.

Let me show you how this works with an example.

Suppose you trade in stocks and mutual funds. In the financial year 2026-27, you have a mixed bag of results:

Your Gains:

• Short-Term Capital Gain (STCG) from selling shares held for 8 months: ₹3,00,000

• Long-Term Capital Gain (LTCG) from equity mutual funds held for 3 years: ₹2,00,000

Your Losses:

• Short-Term Capital Loss (STCL) from selling a stock: ₹1,50,000

• Long-Term Capital Loss (LTCL) from selling a property: ₹80,000

Here is how your tax is calculated:

Short-Term Capital Gain: ₹3,00,000

Set-off Short-Term Capital Loss: ₹1,50,000

Taxable STCG: ₹1,50,000

Tax payable (equity): 20% of ₹1,50,000 = ₹30,000

Long-Term Capital Gain: ₹2,00,000

Set-off Long-Term Capital Loss: ₹80,000

Annual exemption: ₹1,25,000

Taxable LTCG: ₹2,00,000 – ₹80,000 – ₹1,25,000 = ₹0

Tax payable: ₹0

Tax payable (STCG+LTCG): ₹30,000

Health & Education Cess @ 4%: ₹1200

Total tax payable: ₹31,200

What if you have more losses than gains and can’t fully set-off your losses in the current year? You can carry forward your losses to next year. So, keep track of your unadjusted losses year by year, don’t let them lapse.

Knowledge is your best strategy

Learning about taxes that affects your investment, shouldn’t be an afterthought. It helps you make better informed decisions.

If you want to go deeper, I recommend NISM’s Skill Development Module (SDM) on Taxation in the Securities Market. It covers everything from capital gains and STT to derivatives and buybacks, all in about 2 hours of focused, expert-led content. For a modest fee of ₹500, you get a structured, comprehensive understanding of how taxation impacts your securities market decisions.

Remember, tax laws evolve. So, when in doubt, speak with a qualified tax advisor about your specific situation.

Author: Sandeep K Biswal, DGM