Capital Gains on Listed Shares and Equity Funds

A broker’s year-end statement shows one profit figure, but the tax return needs at least four. The law sorts each sale by how long the shares or units were held. It then asks whether securities transaction tax (STT) was paid, and whether the shares were bought before 1 February 2018. The rates changed on 23 July 2024, and from 1 April 2026 every provision has a new number in the Income-tax Act, 2025. This guide explains the computation for listed equity shares, units of equity-oriented mutual funds and units of business trusts. Debt funds are in the next guide. Property is in Capital Gains on Selling Property.

Which Act applies

The gain is charged in the year of the transfer (section 45; section 67).

• Sales up to 31 March 2026 (financial year 2025-26 and earlier) are taxed under the Income-tax Act, 1961. Sales in 2025-26 go in the return for assessment year 2026-27, the return being filed now.
• Sales from 1 April 2026 are taxed under the Income-tax Act, 2025, starting with tax year 2026-27. Section 536 of the 2025 Act repeals the 1961 Act and saves it for earlier years.

The substance of the rules below is the same under both Acts. Only the numbering differs, and both numbers are given.

Short-term or long-term

A capital asset is short-term if held for not more than 24 months. For a “security … listed in a recognised stock exchange in India”, a unit of the Unit Trust of India, a unit of an equity-oriented fund and a zero coupon bond, the period is 12 months (proviso to section 2(42A); section 2(101)(a) and (b)). The Finance (No. 2) Act, 2024 substituted “twenty-four” for “thirty-six” in the main clause and removed the words “(other than a unit)” from the proviso, both with effect from 23 July 2024. Listed units of any fund therefore now take the 12-month period.

So a listed share held for 12 months or less gives a short-term gain, and one held for longer gives a long-term gain. An unlisted share, or a unit of an unlisted fund that is not equity-oriented, needs more than 24 months.

Equity-oriented fund. This is a mutual fund scheme that invests at least 65 per cent of its total proceeds in equity shares of domestic listed companies. A fund of funds qualifies if 90 per cent goes into another exchange-traded fund that itself holds 90 per cent in such shares. The percentage is measured on the annual average of monthly averages of opening and closing figures (clause (a) of the Explanation to section 112A; section 198(8)).

Short-term gains: section 111A, now section 196

Section 111A applies where the short-term gain arises from an equity share, a unit of an equity-oriented fund or a unit of a business trust, and the sale “is chargeable to securities transaction tax”. The rate is:

Transfer	1961 Act (section 111A(1)(i))	2025 Act (section 196(1))
Before 23 July 2024	15 per cent	not applicable
On or after 23 July 2024	20 per cent	20 per cent

A short-term gain that is not covered, such as an off-market sale on which no STT is charged, is taxed at the person’s normal slab rates.

Long-term gains: section 112A, now section 198

Section 112A applies to a long-term gain on an equity share, a unit of an equity-oriented fund or a unit of a business trust. For an equity share, STT must have been paid on both acquisition and transfer. For a unit, STT must have been paid on transfer (section 112A(1)(iii); section 198(1)©). Under section 112A(4) (section 198(5)), the Central Government may notify kinds of acquisition to which the acquisition condition does not apply. The condition on payment of STT does not apply to a transfer on a recognised stock exchange in an International Financial Services Centre where the price is in foreign currency.

Tax is charged only on the gain “exceeding one lakh twenty-five thousand rupees”:

• Transfers before 23 July 2024: 10 per cent.
• Transfers on or after 23 July 2024: 12.5 per cent.
• The proviso to section 112A(2)(i) applies the Rs 1.25 lakh limit “on aggregate” of gains in the two periods. It is one limit a year, not one per share or fund.

Section 198(2)(a) of the 2025 Act charges 12.5 per cent on gains “exceeding ₹ 125000”.

A long-term gain on a listed share outside section 112A, for example one sold off-market, falls under section 112 (section 197 of the 2025 Act). It is taxed at 12.5 per cent for transfers from 23 July 2024, without indexation and without the Rs 1.25 lakh exclusion.

The cost: grandfathering to 31 January 2018

Long-term gains on listed equity were exempt until 31 March 2018. To protect the gains that had built up by then, section 55(2)(ac) fixes the cost of an equity share, equity-oriented unit or business trust unit “acquired before the 1st day of February, 2018” as the higher of:

• the actual cost; and
• the lower of (A) the fair market value and (B) the sale price.

For a share or unit listed on 31 January 2018, fair market value is “the highest price … quoted on such exchange on the said date”. If there was no trading that day, it is the highest price on the last earlier trading day. For an unlisted unit, it is the net asset value on 31 January 2018. Section 90(7) and (8) of the 2025 Act (section 90) carry the same rule.

Two results follow from the “lower of” step:

• grandfathering can reduce a gain to nil, but cannot create a loss where the price fell below the January 2018 value; and
• where the actual cost is higher than both, the actual cost is used and a genuine loss remains.

Computing the gain

The gain is the sale price less transfer expenses, the cost of acquisition and any cost of improvement (section 48; section 72(1)). Brokerage and similar charges are transfer expenses. STT is not deductible. The last proviso to section 48 and section 72(3)(b) of the 2025 Act exclude it. There is no indexation for gains under section 112A (third proviso to section 48).

Three further rules affect the tax:

• Basic exemption. A resident individual or HUF whose other income is below the exemption limit can set the shortfall against these gains before the special rate applies (proviso to section 111A(1); proviso to section 112A(2); sections 196(2) and 198(3)).
• No Chapter VI-A deductions against these gains (sections 111A(2) and 112A(5); sections 196(4) and 198(6)).
• Rebate. Under section 112A(6) (section 198(7)), the rebate is allowed only on tax other than tax on section 112A gains. For assessment year 2026-27, a proviso inserted into section 87A by the Finance Act, 2025 limits the new-regime rebate to tax “as per the rates provided in sub-section (1A) of section 115BAC”. Section 156(3) of the 2025 Act says the same by reference to section 202(1).

Losses

• A short-term capital loss can be set off against any capital gain, short or long. A long-term loss can be set off only against long-term gains (sections 70 and 74; sections 108(2) and 111).
• A capital loss cannot be set off against any other head (section 71(3); section 109(2)).
• Unabsorbed losses are carried forward for eight years. This is possible only if the loss year’s return was filed by the due date (section 80; section 121).
• Buying before a record date and selling soon after can make a loss disappear. Under section 94(7), a loss on securities bought within three months before the record date and sold within three months after it (nine months for units) is ignored to the extent of exempt dividend or income. Section 94(8) covers bonus units. The 2025 Act’s counterparts are section 175(8) to (10). The bonus rule is explained in Buybacks, Bonus Shares and Splits.

Investor or trader

Whether a sale gives a capital gain or business income turns on the facts. The Act sets no test. For listed shares, CBDT Circular No. 6/2016 of 29 February 2016 tells Assessing Officers to proceed as follows:

• Where the taxpayer treats listed shares as stock-in-trade, the income is business income, however long they were held.
• Where shares held for more than 12 months are treated as capital assets, the Assessing Officer is not to dispute capital gains treatment.
• In other cases the usual tests apply.
• The stand taken in one year is to be kept in later years.
• The circular does not apply where the genuineness of the transaction is in doubt.

Futures and options and intraday trading are business income in any case (see F&O and Intraday Trading).

What to have ready

• The broker’s capital gains statement (tax P&L) for the year, with buy and sell dates, quantities and prices. This comes from the broker.
• The demat holding statement and transaction history, to confirm acquisition dates. This comes from the depository participant.
• Mutual fund capital gains statements from the registrar or each fund house.
• Highest price on 31 January 2018 for each share bought before 1 February 2018, and the NAV for unlisted units. These come from the exchange or fund house records.
• The annual information statement (AIS), which shows sales reported by brokers and registrars (see Reconciling AIS, TIS and Form 26AS).
• Losses brought forward from earlier returns (Schedule CFL of last year’s return).

Return, due date and verification

For assessment year 2026-27, an individual with capital gains and no business income files ITR-2, and one with business income files ITR-3. The ITR-1 validation rules for that year accept long-term gains under section 112A up to Rs 1,25,000. Schedule CG and Schedule 112A are explained in Reporting Capital Gains in the Return. A worked filing is in How to file ITR-2 with salary plus listed-equity capital gains.

The return is due by the date in section 139(1), and a belated return may be filed under section 139(4) (see Belated and Revised Returns). The return is then e-verified (see E-Verifying a Return). From tax year 2026-27 the return is filed under section 263 in the form notified for that year.

Interest and corrections

• Advance tax. Tax on capital gains is payable as advance tax. Capital gains that arise after an instalment date are treated specially when interest under section 234C is computed. See Advance Tax and Self-Assessment Tax, and the quarterly table in Schedule CG.
• Late filing. A belated return attracts the late fee and loses the right to carry losses forward.
• Correcting a mistake. A missed sale or a wrong cost can be corrected by a revised return within time, and later by an updated return (see The Updated Return (ITR-U)).

A worked outline

A resident individual sells, in financial year 2025-26, listed shares bought in 2015 and units of an equity-oriented fund bought in 2023.

1. Both were held for more than 12 months, so both gains are long-term.
2. For the 2015 shares, the cost is the higher of actual cost and the lower of the 31 January 2018 highest price and the sale price.
3. Deduct brokerage, but not STT.
4. Add the two long-term gains and exclude Rs 1,25,000 from the total. Tax the balance at 12.5 per cent.

Summary

1. Date each sale and fix the Act: 1961 Act to 31 March 2026, 2025 Act from 1 April 2026.
2. Listed shares and equity-oriented units held for more than 12 months give long-term gains.
3. Short-term gains on STT-paid sales are taxed at 20 per cent from 23 July 2024 (section 111A; section 196).
4. Long-term gains under section 112A (section 198) are taxed at 12.5 per cent above Rs 1.25 lakh a year in aggregate.
5. Shares and units bought before 1 February 2018 take the higher of cost and the lower of the 31 January 2018 value and the sale price.
6. STT is not deductible, there is no indexation, and Chapter VI-A deductions and the rebate do not reduce tax on these gains.
7. File the return by the due date to keep the right to carry losses forward.

The next guide, Debt Mutual Funds and Market-Linked Debentures, covers the funds whose gains are always short-term.