Every investor eventually meets the taxman, and the moment you sell at a profit, one question decides how much you keep: how long did you hold it? In 2026, short-term gains on listed equity are taxed at 20% and long-term gains at 12.5% on anything above a Rs 1.25 lakh annual exemption, while debt funds are taxed at your slab rate regardless of holding period. Get the holding period right and the tax difference can be larger than a year's dividends.
The rules were reset in the July 2024 Budget and, crucially, Budget 2026 left them untouched, so the numbers below are what apply through FY 2026-27.
The rates that actually matter
For most retail investors, three buckets cover almost everything: listed equity, equity mutual funds, and debt funds. The single biggest lever is the 12-month line for equity, because crossing it drops your tax rate from 20% to 12.5% and unlocks the annual exemption.
| Asset | Short-term | Long-term |
|---|---|---|
| Listed equity & equity funds (STT paid) | 20% (≤12 months) | 12.5% above Rs 1.25 lakh (>12 months) |
| Debt mutual funds (bought after Apr 2023) | Slab rate | Slab rate (no LTCG benefit) |
| Gold & silver ETFs | Slab rate (≤12 months) | 12.5%, no Rs 1.25 lakh exemption (>12 months) |
Surcharge and a 4% health-and-education cess sit on top of these rates. The Rs 1.25 lakh exemption is the retail investor's best friend, since it is refreshed every financial year and applies across all your eligible equity long-term gains combined.
Why the holding period is everything
Consider a simple case. You make Rs 3 lakh of profit on an equity fund. Sell inside 12 months and you pay 20% on the whole Rs 3 lakh, roughly Rs 60,000. Hold past 12 months and only Rs 1.75 lakh is taxable at 12.5%, about Rs 21,875. Same profit, less than half the tax, purely because of the calendar.
This is not a loophole; it is the deliberate design of Section 112A, which rewards long-term equity holding. It is also why booking a small profit a few weeks before the one-year mark is often an expensive mistake, and why disciplined investors track their purchase dates as carefully as their prices.
The debt side works differently. Since April 2023, debt funds lost their long-term advantage, so a debt fund held for five years is taxed exactly like one held for five months, at your slab rate. For someone in the 30% bracket, that makes debt funds far less tax-friendly than they once were.
The details people miss
Two rules trip up even experienced investors. First, the STT condition: the low equity rates under Sections 111A and 112A apply only where Securities Transaction Tax is paid, which covers normal on-exchange trades but not, say, unlisted shares. Unlisted or foreign shares follow different, usually higher, treatment.
Second, gold and silver ETFs are not equity. Their long-term gains are taxed at 12.5% after 12 months but without the Rs 1.25 lakh exemption and without indexation, a point worth checking before you assume your gold fund gets the same break as your Nifty fund. Our guide on how to invest in gold in India covers those vehicles in detail.
There is also the buyback change worth flagging: proceeds from a share buyback are now taxed as dividend in the shareholder's hands, rather than as capital gains, which altered the math for anyone who used to treat buybacks as a tax-efficient exit. Knowing which rule applies before you sell is the difference between a clean return and an unpleasant surprise at filing time.