FM open to LTCG tax review: What capital gains tax you pay on stocks, mutual funds and ETFs today

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Finance Minister Nirmala Sitharaman has said the government would be keen to hear views on removing long-term capital gains (LTCG) tax during Budget consultations, amid a wider debate over equity taxation and securities transaction tax (STT).

SBI Research has also proposed scrapping LTCG tax on equities and extending the holding period to two to three years to encourage long-term investments and attract more stable capital flows into Indian markets. However, these are proposals, not changes to the existing tax rules.

For investors, the current tax treatment remains important when deciding when to sell shares, redeem equity mutual funds or exit exchange-traded funds (ETFs). Here is what you need to know about LTCG tax rates, exemptions and the costs that can affect your final returns.

What are the current LTCG tax rates on equity investments?

Under the current rules, listed equity shares, equity-oriented mutual funds and eligible domestic equity ETFs qualify for long-term capital gains treatment when held for more than 12 months.

Long-term capital gains exceeding Rs 1.25 lakh in a financial year are taxed at 12.5 percent, excluding applicable cess and surcharge. Short-term capital gains on these eligible investments, sold within 12 months, are taxed at 20 percent.

CA Dinesh K. Jain, Managing Partner, Dinesh Aarjav & Associates, Chartered Accountants, said the new Income-tax Act changed section numbers but did not alter these rates. He added that investors must calculate their taxable gains after deducting the acquisition cost and eligible expenses from the sale value, aggregate their long-term gains for the year and apply the Rs 1.25 lakh exemption. For instance, LTCG of Rs 3 lakh would attract tax of Rs 21,875 before cess and surcharge.

The Rs 12 lakh rebate available under the new tax regime does not cover these capital gains. International, gold and debt ETFs also do not automatically qualify for the equity LTCG exemption; their tax treatment depends on the category and applicable provisions.

How do holding periods and tax-loss harvesting affect tax?

Timing a sale by even a few days can change the tax treatment. Investors should check purchase dates carefully, particularly when investing through systematic investment plans (SIPs), as each instalment has its own holding period.

Jain said the annual Rs 1.25 lakh exemption lapses if unused. Investors can consider booking eligible gains within the exemption limit each year and reinvesting, although transaction costs and investment risks should be considered.

Capital losses can also reduce tax liability. Short-term capital losses can be set off against short-term as well as long-term capital gains, while long-term capital losses can be adjusted only against long-term capital gains. Unadjusted capital losses can be carried forward for up to eight years, provided the income tax return is filed within the prescribed deadline.

What should investors know about STT and LTCG tax?

STT is an additional transaction cost and is not deductible from capital gains while calculating taxable income. Jain said delivery-based equity trades attract STT of 0.1 percent on each side of the transaction, while mutual fund redemptions attract STT of 0.001 percent.

Investors should therefore consider the holding period, remaining exemption, available losses, exit loads and transaction costs before selling. Large capital gains may also trigger advance tax obligations.

The key point is that tax planning should help investors make informed decisions, rather than become the