LTCG and STCG Tax on Shares and Mutual Funds (FY 2026-27): Worked Examples, Plus What Tax Harvesting Really Saves Capital gains tax on shares and mutual funds trips up a lot of investors. The rules are simple once you…
LTCG and STCG Tax on Shares and Mutual Funds (FY 2026-27): Worked Examples, Plus What Tax Harvesting Really Saves
Capital gains tax on shares and mutual funds trips up a lot of investors. The rules are simple once you see them applied to real numbers, and knowing them can save you thousands of rupees a year through one legal move most people skip.
This guide explains LTCG and STCG on shares and mutual funds for FY 2026-27 with worked examples. Then it tests tax harvesting on 15 years of real Nifty data to show how much it actually saves.
Quick answer
- Listed shares and equity funds sold within 12 months: short-term capital gains (STCG), taxed at 20%.
- Sold after 12 months: long-term capital gains (LTCG). The first ₹1.25 lakh a year is tax-free; the rest is taxed at 12.5%.
- Add 4% cess. Debt and liquid funds bought since April 2023 are taxed at your slab rate instead.
- Booking ₹1.25 lakh of long-term gains every March and reinvesting cut the final tax on a ₹10,000-a-month Nifty SIP from ₹3.63 lakh to ₹2.07 lakh over 15 years.
- Selling loss-making investments before 31 March lets you offset gains. Losses can be carried forward for 8 years if you file your return on time.
In this article
LTCG and STCG tax rates for FY 2026-27
Budget 2024 set the current rates from 23 July 2024, and Budget 2026 left them unchanged. The new Income-tax Act, 2025, in force from 1 April 2026, kept the same rates and only renumbered the sections.
| Listed shares and equity mutual funds | Debt and liquid funds (bought after 1 Apr 2023) | |
|---|---|---|
| Short-term if sold within | 12 months | Always treated as short-term |
| Short-term tax rate (STCG) | 20% | Your slab rate |
| Long-term tax rate (LTCG) | 12.5% on gains above ₹1.25 lakh a year | Not applicable |
| Tax-free allowance | ₹1.25 lakh of long-term gains per financial year | None |
| Plus | 4% cess (and surcharge at very high incomes) | 4% cess |
The holding period counts from the purchase date to the sale date. For a SIP, each instalment has its own purchase date, and units are sold first in, first out (FIFO): the oldest units go first.
Tax including 4% cess on gains of different sizes, assuming no other long-term gains that year. STCG at 20%; LTCG at 12.5% above ₹1.25 lakh.
The chart shows why waiting matters. On a ₹2 lakh gain, selling a few weeks too early costs about ₹31,000 more in tax.
Worked examples
Here are four common situations, with the tax for each. Tax includes 4% cess.
| Example | What happened | Gain | Tax |
|---|---|---|---|
| 1. Sold within a year | Bought 100 shares at ₹1,000 in June 2025, sold at ₹1,300 in March 2026 | ₹30,000 STCG | ₹6,240 |
| 2. Same trade, held 13 months | Sold at ₹1,300 in July 2026 instead | ₹30,000 LTCG | ₹0 (under ₹1.25 lakh) |
| 3. Large long-term gain | Mutual fund units bought 2019 for ₹6 lakh, sold for ₹10 lakh | ₹4,00,000 LTCG | ₹35,750 |
| 4. Mixed SIP redemption | Sold ₹3 lakh of a SIP; the oldest units (FIFO) give ₹90,000 LTCG, the last 10 months' units ₹15,000 STCG | ₹90k LTCG + ₹15k STCG | ₹3,120 |
Example 2 is the same trade as example 1, held a month longer. Waiting turned a ₹6,240 tax bill into zero. Example 4 is how most SIP investors meet both types at once: the old units are long-term and the newest ones short-term.
Two more rules worth knowing:
- Shares bought before 1 February 2018: your cost is the higher of what you paid and the price on 31 January 2018 (but not more than your sale price). This "grandfathering" protects gains made before LTCG was introduced.
- Low income: if your total income without these gains is below the basic exemption limit, residents can use the unused limit against STCG and LTCG. The ₹12 lakh rebate in the new regime does not cover these special-rate gains.
Set-off rules and tax-loss harvesting
Gains and losses can be netted against each other before tax. The rules decide which losses can cancel which gains.
| Type of loss | Can be set off against | Carry forward |
|---|---|---|
| Short-term capital loss | Short-term and long-term gains | 8 years, if your return is filed on time |
| Long-term capital loss | Long-term gains only | 8 years, if your return is filed on time |
| Any capital loss | Not against salary, interest or other income |
Tax-loss harvesting means selling an investment that's below your purchase price before 31 March, to book the loss against gains you've already made that year.
Say you made a ₹80,000 short-term gain on one stock this year, and another holding shows a ₹50,000 loss. Sell the loser before 31 March and your taxable short-term gain drops to ₹30,000. That saves ₹10,400. If you still like the investment, you can buy it back.
India has no specific "wash sale" rule that blocks buying back immediately. Still, the sale and purchase should be real transactions at market prices, and the Income Tax Department can question deals that exist only to avoid tax. Keep it simple and genuine.
Tax-gain harvesting: 15 years of Nifty data
Tax-gain harvesting is the mirror image, and for long-term investors it's the bigger win. Each financial year, the first ₹1.25 lakh of long-term gains is tax-free. If you don't use it, it's gone. So in March you sell enough long-held units to book up to ₹1.25 lakh of gains, and buy them back the same day. Your holding barely changes, but your purchase price resets higher, so less gain is left to tax later.
To see what it's worth, I simulated a ₹10,000 monthly SIP in a Nifty 50 index fund from September 2011 to August 2026, using real monthly Nifty returns, and applied today's tax rules to the whole period.
Tax when the whole SIP is redeemed in August 2026. Nifty 50 monthly returns plus 1.2% a year for reinvested dividends. Today's rules applied throughout.
| Never sold | Harvested every March | |
|---|---|---|
| Total invested | ₹17.9 lakh | ₹17.9 lakh |
| Value in August 2026 | ₹47.1 lakh | ₹47.1 lakh |
| Gains booked tax-free along the way | ₹0 | ₹12.0 lakh |
| Taxable gain left at the end | ₹29.2 lakh | ₹17.2 lakh |
| Tax when you redeem everything | ₹3.63 lakh | ₹2.07 lakh |
Harvesting every March booked ₹12.0 lakh of gains tax-free over 15 years and cut the final tax bill by ₹1.56 lakh, from ₹3.63 lakh to ₹2.07 lakh. The portfolio's value didn't change.
Gains booked each March. In early years the SIP was too small to reach ₹1.25 lakh; in March 2020 the COVID crash left no gains to book.
The saving grows with the size of your portfolio. A larger SIP hits the ₹1.25 lakh cap sooner, but the cap itself limits the benefit to about ₹16,250 of tax deferred per year.
How to harvest gains step by step
- Pick funds with no exit load after a year, such as most index funds, so harvesting costs almost nothing. Each sale and buy has small stamp duty and STT.
- Sell only units held over 12 months, or you'll create a short-term gain taxed at 20%.
- Do it before 31 March and leave a few working days for settlement.
- Keep a record of each sale and repurchase; your broker's capital gains statement helps.
- Report it in your ITR (Schedule CG) even when no tax is due, and file on time to carry forward any losses.
- Remember the costs that matter more. A 1% commission costs more than this tax over time; see Direct vs regular mutual funds.
Frequently asked questions
What is the LTCG tax rate on shares and equity mutual funds in 2026?
12.5% on long-term gains above ₹1.25 lakh in a financial year, plus 4% cess. Gains are long-term if you held the shares or units for more than 12 months.
What is the STCG tax rate on shares?
20% plus 4% cess, for listed shares and equity mutual fund units sold within 12 months of purchase.
Is ₹1.25 lakh LTCG exemption per year?
Yes. The first ₹1.25 lakh of long-term gains on listed equity and equity funds each financial year is tax-free. Unused exemption can't be carried forward.
What is tax harvesting in mutual funds?
Selling enough long-held units each year to book up to ₹1.25 lakh of tax-free gains, then reinvesting. In our 15-year Nifty SIP test it cut the final tax from ₹3.63 lakh to ₹2.07 lakh.
Can I buy back shares immediately after selling for tax-loss harvesting?
India has no specific wash-sale rule, so buying back is common. The transactions should be genuine and at market prices.
How are SIP units taxed when I redeem?
First in, first out. Each instalment's holding period is counted separately, so one redemption can produce both long-term and short-term gains.
Related reading: FD vs debt fund vs liquid fund after tax · Buyback vs dividend · Dividend vs growth stocks in India
Sources and method: Tax rates: Finance (No. 2) Act 2024 (effective 23 July 2024), unchanged by Budget 2026; Income-tax Act, 2025 in force from 1 April 2026. Simulation: monthly Nifty 50 price returns (niftyindices via PrimeInvestor) from September 2011 to August 2026, plus 1.2% a year to approximate reinvested dividends; ₹10,000 invested at the start of each month; harvesting every March using FIFO lots held over 12 months; current rules applied to every year; final redemption assumes all remaining gains are long-term and taxed in one year. See the Income Tax Department e-filing help and Union Budget documents.
Disclaimer: WelthWest is an analytics and education platform, not a SEBI-registered investment adviser, research analyst or broker. Past performance does not indicate future returns. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Tax rules can change; check the latest rules or speak to a tax professional. Research and drafting were assisted by AI; the data, calculations and conclusions were checked by the author. This article is for educational purposes only and is not investment advice.