How are your investments taxed? Capital gains made simple

When you sell an investment for more than you paid, the profit is a capital gain, and it is taxed. How much tax depends on two things: what you invested in, and how long you held it. Hold it past a set period and the gain is long-term, usually taxed less. Sell earlier and it is short-term.

Since July 2024 the rules are simpler. Long-term gains on almost everything are taxed at 12.5%. Short-term gains on listed shares, equity funds and REITs are taxed at 20%, and most other short-term gains are added to your income and taxed at your slab rate.

The rules in one table

Debt mutual funds here means funds with more than 65% in debt and money market instruments. Health and education cess of 4% is added to all these rates, and surcharge where your income is high.

Equity funds: the first ₹1.25 lakh is tax-free

Every financial year, the first ₹1.25 lakh of long-term gains from equity funds, listed shares and REIT or InvIT units is tax-free. The limit is shared across all of them, not ₹1.25 lakh each.

Example: Priya invested ₹5 lakh in an equity fund three years ago. She sells for ₹8 lakh, a long-term gain of ₹3 lakh.

Had she sold within 12 months, the whole ₹3 lakh would be short-term and taxed at 20%: ₹60,000 plus cess, about ₹62,400. Waiting past the first year saved her nearly ₹40,000.

A simple habit: if your equity funds have grown, you can sell enough each year to book up to ₹1.25 lakh of long-term gains tax-free and invest the money again. Your purchase price resets higher, so you pay less tax when you finally sell. This is called tax harvesting.

Debt funds: the date you bought matters

Debt fund units bought on or after 1 April 2023 are taxed at your slab rate, however long you hold them, just like FD interest. Units bought before that date still become long-term after 24 months and are taxed at 12.5%.

Debt funds still have one advantage over FDs: you pay tax only when you sell, not every year as interest is earned, so your money grows untaxed until then.

Property bought before 23 July 2024

For land or a house bought before 23 July 2024, resident individuals and HUFs can pay the lower of two amounts on a long-term gain:

• 12.5% on the gain, without indexation, or
• 20% on the gain after indexation (the purchase price raised for inflation).

Property bought on or after 23 July 2024 is taxed at 12.5% without indexation. NRIs pay 12.5% without indexation either way.

Other things to know

• The ₹12 lakh rebate does not cover these gains. Under the new tax regime, income up to ₹12 lakh can be tax-free, but the rebate does not apply to short-term gains taxed at 20% or long-term gains taxed at 12.5%. You can owe tax on them even when your other income is below ₹12 lakh.
• SIPs are counted instalment by instalment. Each SIP instalment has its own purchase date, so when you sell, the units bought in the last 12 months (24 for some funds) are still short-term.
• Switching between funds is a sale. Moving from one scheme to another, even within the same fund house, is taxed like selling one and buying the other.
• Losses can save tax. A short-term loss can be set off against short-term or long-term gains; a long-term loss only against long-term gains. Losses you can't use this year can be carried forward for eight years if you file your return on time.
• Dividends are taxed separately. Dividends from shares and funds are added to your income and taxed at your slab rate.
• NRIs have tax deducted at source on mutual fund gains when they redeem. They can claim back any excess when they file their return.

Tax rules change with Budgets. These are the rules for FY 2026-27. Before a large sale, check how it fits with the rest of your income, or talk to us and your tax adviser.