LTCG at 12.5%, STCG at 20%, the Rs 1.25 lakh exemption, FIFO calculation for SIPs, tax-loss harvesting, and how the grandfathering rule protects your older gains. Every rule, with examples.
Every time you sell a share, redeem a mutual fund unit, or book profits on an investment, you trigger capital gains tax. The rules changed significantly in the 2024 Union Budget — the LTCG rate went from 10% to 12.5%, and the exemption limit rose to Rs 1,25,000. For SIP investors with hundreds of individual purchase lots, the calculation is more complex than it looks. Here is every rule, with worked examples, including the legal ways to reduce the tax.
The two types of capital gains — and when each applies
### Short-Term Capital Gains (STCG)
- Listed shares and equity mutual funds: Held for 12 months or less → STCG at 20%. - Debt mutual funds (units purchased on or after 1 April 2023): Held for 24 months or less → taxed at your income slab rate. This is the major change from 2023 — debt fund gains no longer get indexation benefit or the 20% LTCG rate. - Property (immovable): Held for 24 months or less → STCG at slab rate.
### Long-Term Capital Gains (LTCG)
- Listed shares and equity mutual funds: Held for more than 12 months → LTCG at 12.5% on gains above Rs 1,25,000. - Debt mutual funds (units purchased after 1 April 2023): Held for more than 24 months → taxed at your income slab rate (no indexation, no special rate). - Property: Held for more than 24 months → LTCG at 12.5% (without indexation, post-2024 Budget).
The Rs 1,25,000 exemption — how it works
The first Rs 1,25,000 of LTCG from equity shares and equity mutual funds in a financial year is fully exempt from tax. This is a combined limit — it applies to the total of all your equity LTCG across all stocks, mutual funds, and ETFs.
Example: You sell shares with Rs 80,000 LTCG and redeem mutual funds with Rs 1,00,000 LTCG in the same year. Total LTCG: Rs 1,80,000. Exempt: Rs 1,25,000. Taxable: Rs 55,000. Tax at 12.5%: Rs 6,875 + 4% cess = Rs 7,150.
If your total LTCG is below Rs 1,25,000, you pay zero tax on the gains.
FIFO — the rule that complicates SIP tax
For SIP investors, every monthly instalment is a separate purchase lot with its own purchase date and purchase price. When you redeem units, the tax department applies FIFO (First In, First Out): the units you bought first are deemed sold first.
Example: You start a Rs 10,000 SIP in a Nifty 50 fund on 1 Jan 2022. On 1 Aug 2026, you redeem Rs 1,00,000 worth of units.
- Units bought on 1 Jan 2022: held for 4 years 7 months → LTCG. - Units bought on 1 Feb 2022: held for 4 years 6 months → LTCG. - ... and so on for every instalment up to the sold units. - Units bought within the last 12 months before 1 Aug 2026 → STCG (taxed at 20%).
If you only redeem partially, the oldest units are deemed sold first — this means most partial redemptions from a long-running SIP will trigger LTCG (not STCG), because the oldest units have crossed the 12-month threshold.
Tax-loss harvesting — the legal way to reduce LTCG
Tax-loss harvesting means: sell investments that are in a loss to realise a capital loss, then immediately repurchase similar (but not identical) investments. The realised loss can be set off against realised gains.
Rules: - Short-term capital loss can be set off against BOTH short-term and long-term capital gains. - Long-term capital loss can be set off ONLY against long-term capital gains. - Losses can be carried forward for 8 years if the return is filed on time.
Example: You have Rs 2,00,000 LTCG from selling mutual fund units. You also hold shares that are showing a Rs 70,000 short-term loss. Sell those shares, book the STCL. Net taxable LTCG: Rs 2,00,000 − Rs 70,000 = Rs 1,30,000. Exemption: Rs 1,25,000. Taxable: Rs 5,000. Tax saved: approximately Rs 22,000.
Important: If you repurchase the SAME shares or mutual fund units, this may be treated as a 'wash sale' and the loss may be disallowed. Repurchase a similar but not identical investment — e.g., sell a Nifty 50 index fund and buy a Nifty 100 fund, or sell shares of one company and buy shares of a different company.
The Rs 1.25 lakh exemption reset — harvest every year
Since the Rs 1,25,000 exemption resets every financial year, you can harvest tax-free gains each year. If your LTCG is approaching Rs 1,25,000 in a year, consider selling enough to use the exemption and repurchasing immediately (for mutual funds — for shares, you will incur STT and brokerage, so the math may not work).
Over 10 years, harvesting the exemption annually can save Rs 1,25,000 × 12.5% × 10 = approximately Rs 1,56,250 in tax — legally.
Grandfathering — protection for gains before 1 February 2018
When LTCG on equity was introduced in 2018, the government provided grandfathering: gains accrued up to 31 January 2018 are exempt. When you sell equity shares or mutual fund units purchased before 1 February 2018, the cost of acquisition is taken as the higher of the actual purchase price and the market value as of 31 January 2018.
For most practical purposes today (2026), this applies only to investors holding shares or funds purchased before February 2018. For SIP investors who started after this date, grandfathering is irrelevant — all gains are from post-2018 purchases.
Frequently Asked Questions
### Do I pay STCG or LTCG on mutual fund SIP redemptions? It depends on which units you redeem. Under FIFO, the oldest units are sold first. If you have been running a SIP for more than 12 months, most partial redemptions will trigger LTCG (on the older units). If you redeem ALL units, any units purchased within the last 12 months will trigger STCG.
### Is capital gains tax applicable if I reinvest the gains? Yes. Tax is on the transaction (sale of shares/units), not on what you do with the proceeds. Reinvesting the gains does not exempt you from capital gains tax.
### How is capital gains tax on international stocks calculated? For shares of foreign companies (Apple, Google, etc.) bought directly or through platforms that facilitate international investing, the holding period is 24 months for long-term classification. LTCG is taxed at 20% with indexation (if purchased before 23 July 2024) or 12.5% without indexation (if purchased after).
### Can I set off capital gains loss against salary income? No. Capital losses can only be set off against capital gains. You cannot use a capital loss to reduce your taxable salary.
### What records should I keep for capital gains tax? For every transaction: purchase date, purchase price, sale date, sale price, brokerage and STT paid, and the mutual fund statement or contract note. For SIPs, the Consolidated Account Statement (CAS) from your depository (NSDL/CDSL) provides the complete lot-by-lot transaction history.
Disclaimer
This article is for educational purposes only. Tax rates and provisions are subject to change. The examples use illustrative numbers for the current financial year. Verify current provisions before filing. Consult a qualified tax professional for your specific situation.