If you sold shares or mutual fund units this year, you owe capital gains tax. For FY 2026-27 (AY 2027-28), the headline numbers are 20% on short-term gains, 12.5% on long-term gains, and Rs 1.25 lakh of long-term gain that is tax-free each year. Here is how it all works, in plain language.
Quick answer: In AY 2027-28, short-term capital gains on listed shares and equity mutual funds are taxed at a flat 20% under Section 111A (new Act Section 196), with no exemption. Long-term gains are taxed at 12.5% under Section 112A (new Act Section 198), and only the amount above Rs 1.25 lakh in the financial year is taxed.
What Is the Capital Gains Tax on Shares and Mutual Funds in AY 2027-28?
The financial year 2026-27 maps to assessment year 2027-28. So gains you make between 1 April 2026 and 31 March 2027 are reported and taxed in AY 2027-28.
| Asset | Holding period | Tax rate | Exemption |
|---|---|---|---|
| Listed equity shares (STT paid) | Up to 12 months | STCG 20%, Sec 111A (new Sec 196) | None |
| Listed equity shares (STT paid) | More than 12 months | LTCG 12.5%, Sec 112A (new Sec 198) | Gains up to Rs 1.25 lakh a year |
| Equity-oriented mutual funds (65% or more in Indian equity) | Up to 12 months | STCG 20% | None |
| Equity-oriented mutual funds | More than 12 months | LTCG 12.5% | Shares the same Rs 1.25 lakh limit |
| Debt or specified mutual funds (35% or less in equity), bought on or after 1 April 2023 | Any period | Slab rate, Sec 50AA | None |
| Debt mutual fund units bought before 1 April 2023, held over 24 months | More than 24 months | LTCG 12.5%, no indexation | None |
| Unlisted shares | More than 24 months | LTCG 12.5%, no indexation | None |
| Gold | More than 24 months | LTCG 12.5%, no indexation | None |
| Immovable property | More than 24 months | LTCG 12.5% without indexation | None |
Two points about the table. First, the 12-month holding period decides short-term versus long-term for shares and equity funds. Second, for property bought before 23 July 2024, a resident individual or HUF may choose 20% with indexation or 12.5% without indexation, whichever gives lower tax.
Add 4% cess to every rate above. So 20% becomes an effective 20.8%, and 12.5% becomes an effective 13%.
The rates themselves are not new. As per the Finance (No. 2) Act, 2024, STCG on listed equity went up from 15% to 20%, and LTCG went up from 10% to 12.5%. The same Act raised the LTCG exemption limit from Rs 1 lakh to Rs 1.25 lakh. All of this took effect from 23 July 2024.
What Is the Rs 1.25 Lakh LTCG Exemption and How Does It Work?
The exemption is simple. Every financial year, your first Rs 1.25 lakh of long-term gain on listed equity is free of tax. Tax applies only to the part above that.
The limit is aggregate. It covers all listed-equity LTCG in the year, meaning shares and equity-oriented mutual funds together. You do not get Rs 1.25 lakh for shares and another Rs 1.25 lakh for funds.
Here is a worked example. You bought shares and sold them after 14 months. Your long-term gain is Rs 2,00,000.
- Step 1: Long-term gain = Rs 2,00,000
- Step 2: Less exemption = Rs 1,25,000
- Step 3: Taxable LTCG = Rs 2,00,000 − Rs 1,25,000 = Rs 75,000
- Step 4: Tax at 12.5% = Rs 75,000 × 12.5% = Rs 9,375
- Step 5: Cess at 4% = Rs 9,375 × 4% = Rs 375
- Step 6: Total tax = Rs 9,375 + Rs 375 = Rs 9,750
If your total long-term gain for the year had been Rs 1,25,000 or less, the tax would be zero.
One older rule still matters. Under grandfathering, gains on listed equity up to 31 January 2018 are exempt. For shares held before that date, your cost is taken as the fair market value on 31 January 2018. This applies only to old holdings, so it is not relevant for most new investors.
Also remember: the Rs 1.25 lakh exemption does not apply to short-term gains, debt funds, property, gold or unlisted shares. It is only for listed equity and equity-oriented funds.
How Do You Calculate Capital Gains Tax on Mutual Funds?
The base formula is the same for every asset:
Capital gain = Sale value − Cost of acquisition − Transfer expenses
Transfer expenses include brokerage or charges paid on the sale. Then apply the rate that matches your holding period and fund type.
FIFO decides which units you sold
Mutual fund redemptions follow FIFO, or first-in, first-out. The oldest units in your folio are treated as sold first. This matters because each purchase has its own cost and its own holding clock.
Every SIP instalment has its own 12-month clock
If you invest through a SIP, each instalment is a separate purchase. The instalment from March 2026 becomes long-term only after March 2027. The instalment from August 2026 is still short-term if you redeem in January 2027. So one redemption can produce both short-term and long-term gains.
Worked STCG example
You bought equity fund units 8 months ago and redeemed them at a gain of Rs 60,000. Since the holding period is under 12 months, this is short-term.
- Short-term gain = Rs 60,000
- Tax at 20% = Rs 60,000 × 20% = Rs 12,000
- Cess at 4% = Rs 12,000 × 4% = Rs 480
- Total tax = Rs 12,000 + Rs 480 = Rs 12,480
There is no exemption here. Short-term gains are taxed from the first rupee.
Switching between mutual fund schemes counts as a redemption. If you move money from one scheme to another inside the same fund house, that switch triggers capital gains tax. It is not a tax-free transfer.
How Are Debt Mutual Funds Taxed in AY 2027-28?
Debt-oriented and specified mutual funds are funds with 35% or less invested in Indian equity. The rule depends on the purchase date.
Units bought on or after 1 April 2023: these are taxed at your income tax slab rate under Section 50AA. It does not matter whether you hold them for 3 months or 5 years. There is no indexation benefit and no special 12.5% rate. If your slab is 30%, your gain is taxed at 30% plus cess.
Units bought before 1 April 2023 and held for more than 24 months: these get long-term treatment at 12.5%, without indexation. Units bought before 1 April 2023 but held for 24 months or less are short-term and taxed at your slab rate.
Indexation used to be the main draw of debt funds. It is gone for most assets after the Finance (No. 2) Act, 2024. Do not plan around it.
What Changed in the New Income-tax Act, 2025?
The Income-tax Act, 2025 applies from 1 April 2026, so it governs Tax Year 2026-27 onward. That is the year reported in AY 2027-28. Most guides you read online still quote the old 1961 Act section numbers. Both sets are correct, and here is how they map.
| Old Act (1961) | New Act (2025) | What it covers |
|---|---|---|
| Section 111A | Section 196 | STCG on listed equity and equity funds |
| Section 112 | Section 197 | General LTCG provisions |
| Section 112A | Section 198 | LTCG on listed equity and equity funds |
| Section 54 | Section 82 | Reinvestment in a new house |
| Section 54F | Section 86 | Reinvestment using net consideration |
| Section 54EC | Section 85 | Investment in specified bonds |
What changed for these provisions is mostly the numbering. The rates stayed the same: 20% short-term, 12.5% long-term. The holding periods stayed the same: 12 months for listed equity and equity funds, 24 months for property, gold and unlisted shares. The Rs 1.25 lakh exemption stayed the same. Section 50AA for debt funds also continues.
So if a form or a notice quotes Section 112A, it is the same law as Section 198. Do not panic.
How Can You Reduce Capital Gains Tax Legally?
Do tax-loss harvesting before 31 March
Check your portfolio in March. If some holdings are at a loss, you can sell them and book the loss. A short-term capital loss can be set off against both short-term and long-term capital gains. A long-term capital loss can be set off only against long-term capital gains. Unused losses can be carried forward for 8 assessment years, but only if you file your return on time.
Use the Rs 1.25 lakh exemption every year
The exemption resets each financial year. If you have a large unrealised gain, spreading sales across two financial years can keep more of it inside the free limit.
Consider Sections 54, 54F and 54EC
We explain Sections 54, 54F and 54EC in detail, with worked examples, in our guide to tax on inherited property.
- Section 54 (new Section 82): sell a house, buy another residential house, and claim exemption on the long-term gain.
- Section 54F (new Section 86): applies when you sell an asset other than a house and invest the net consideration in a residential house.
- Section 54EC bonds (new Section 85): invest long-term gains in specified bonds issued by REC, PFC, IRFC or HUDCO. Up to Rs 50 lakh can be invested in a year, and there is a 5-year lock-in.
Section 54 helps mainly with house-property gains. Sections 54F and 54EC can also cover gains from listed shares, but the conditions are strict: under 54F the full net sale consideration must go into a residential house, and under 54EC up to Rs 50 lakh goes into bonds locked for 5 years.
Hold for the long term
Holding listed shares and equity funds beyond 12 months moves you from 20% to 12.5%. That is a real saving on large gains. For debt funds bought on or after 1 April 2023, holding longer makes no difference to the rate.
Which ITR Form Do You Need for Capital Gains?
Capital gains cannot be reported in ITR-1. If you sold shares, mutual funds, property, gold or any other capital asset in FY 2026-27, you must file ITR-2. See our ITR filing guide for AY 2027-28 for due dates and the new-Act changes. If you also have business income, you may need ITR-3.
Before you file, check your Annual Information Statement (AIS) and Tax Information Statement (TIS) on the income tax portal. Your broker and fund house report every transaction to the tax department. Match those entries against your own records. If something is missing or wrong, fix it before filing rather than after a notice.
Capital gains are taxed in the year of sale. If your total tax liability is high, pay advance tax in the instalment covering the quarter in which you sold. Late payment attracts interest on the shortfall. A large redemption in December, for example, means advance tax by the December quarter deadline.
Frequently Asked Questions
What is the LTCG tax rate on equity shares in FY 2026-27?
It is 12.5% under Section 112A, now Section 198 of the new Act. This applies to listed shares held for more than 12 months. Only gains above Rs 1.25 lakh in the financial year are taxed. Add 4% cess, which makes the effective rate 13%.
What is the STCG tax rate on shares and mutual funds?
It is a flat 20% under Section 111A, now Section 196. This applies to listed shares and equity-oriented mutual funds held for 12 months or less. There is no exemption limit. Add 4% cess, so the effective rate is 20.8%.
How much LTCG is tax-free in a year?
Rs 1.25 lakh of long-term gain on listed equity and equity-oriented mutual funds is tax-free each financial year. The limit is combined across both, not separate. It does not apply to short-term gains, debt funds, property, gold or unlisted shares.
Are debt mutual funds taxed at slab rate?
Yes, for units bought on or after 1 April 2023. Section 50AA taxes those gains at your income tax slab rate, however long you hold them, with no indexation. Units bought before 1 April 2023 and held over 24 months get 12.5% without indexation.
Do NRIs pay the same capital gains tax as residents?
Yes. NRIs pay the same rates on Indian shares and mutual funds, including 20% short-term and 12.5% long-term with the Rs 1.25 lakh limit. The practical difference is TDS. Fund houses deduct TDS at the time of redemption for NRIs, so you may need to claim a refund when filing.
Is indexation still available on capital gains?
Mostly no. Indexation was removed for most assets by the Finance (No. 2) Act, 2024, effective 23 July 2024. One exception remains: property bought before 23 July 2024 can still use 20% with indexation if that works out cheaper than 12.5% without it.
Official Sources
- Income Tax e-filing portal: https://www.incometax.gov.in/iec/foportal/
- Income Tax Department: https://www.incometax.gov.in/
- Central Board of Direct Taxes: https://www.cbdt.gov.in/
- India Code (full text of Acts): https://www.indiacode.nic.in/
One last note. Budget 2027 has not been presented yet. It is expected on 1 February 2027. These rates are correct as of today, but they can change in that Budget. Please check an updated source after 1 February 2027 before you file.
Reviewed by Asuthod Rathod, CA
Last updated: 15 November 2026
Disclaimer: This article is general information about tax rules and is not personal tax advice. Your situation may differ. Please speak to a chartered accountant before making investment or filing decisions.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.