Investing in the stock market has become a preferred choice for many individuals looking to grow their wealth. But alongside potential profits comes the often overlooked but critical aspect of taxation. Understanding how capital gains are taxed is essential, especially now with the recent Budget 2025 announcements bringing a few key changes.
In the latest budget, the government increased the rebate under Section 87A to Rs. 60,000. This means that individuals opting for the new tax regime can now enjoy zero tax liability if their total income does not exceed Rs. 12 lakh. However, there’s a catch — this relief does not apply to capital gains. So, even if your total income is within the rebate threshold, if you have earned profits from selling stocks or mutual funds, tax may still be payable on those gains.
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Capital gains arise when you sell a capital asset like shares, real estate, or mutual funds for more than what you paid to acquire it. These gains are categorized based on how long you’ve held the asset before selling it. For example, if you sell listed shares after holding them for more than 12 months, it qualifies as a long-term capital gain. If sold within 12 months, it falls under short-term capital gains.
When listed equity shares are sold within 12 months of purchase and you make a profit, the earnings are considered short-term capital gains. If Securities Transaction Tax (STT) has been paid during the transaction, the gain is taxed at a flat rate of 20%. However, if STT hasn’t been paid — such as in the case of certain off-market transactions — then the gains are taxed according to the individual’s normal income slab.
This policy is meant to discourage frequent trading and promote long-term investment habits. For instance, let’s say an investor purchases shares for Rs. 38,750 and sells them five months later for Rs. 48,000. After accounting for brokerage costs, if the net profit is Rs. 9,010, then a 20% tax is levied on that amount.
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If you hold listed shares for more than one year before selling them, any profit earned falls under long-term capital gains. Until a few years ago, such gains were tax-free. But that changed with the introduction of a 10% tax on long-term capital gains exceeding Rs. 1 lakh. Budget 2025 revised this further. Now, any long-term capital gains that cross Rs. 1.25 lakh are taxed at 12.5%, and this is before adding cess.
Consider this example: if an investor earns Rs. 90,000 in long-term gains from selling mutual fund units and doesn’t exceed the Rs. 1.25 lakh threshold, there’s no tax liability. However, if the gain were Rs. 1.5 lakh, tax would be levied on Rs. 25,000 at 12.5%.
From July 23, 2024, a new tax structure has taken effect for capital gains. For listed equity shares and mutual funds, long-term gains above Rs. 1.25 lakh are now taxed at a flat 12.5%, provided STT has been paid. This new rate simplifies taxation for investors but also removes the earlier indexation benefit in most cases.
When it comes to property, such as land or buildings, individual and HUF taxpayers now have an option — they can either pay 12.5% tax without indexation or stick to the older method of paying 20% with indexation. For companies or firms, the 12.5% rate applies without any option.
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Tax treatment differs based on the type of mutual fund. For equity-oriented mutual funds, holding units for more than 12 months makes the gain long-term. If sold before one year, it’s treated as short-term and taxed at 20%. After one year, gains above Rs. 1.25 lakh attract a 12.5% tax.
On the other hand, for debt funds, major changes took place from April 2023. Now, regardless of the holding period, capital gains from debt funds are taxed as short-term income and charged according to your income tax slab. There’s no indexation benefit anymore.
To calculate capital gains, you need to subtract the purchase price, any improvement cost (if applicable), and sale-related expenses from the final selling price. For instance, if someone buys shares for Rs. 38,750 and sells them within the same year for Rs. 48,000, paying Rs. 240 as brokerage, the capital gain will be Rs. 9,010. On this amount, a 20% tax is levied under the STCG rules.
When computing long-term capital gains, things are slightly different. If the asset was acquired before January 31, 2018, a provision called ‘grandfathering’ applies. Here, the cost of acquisition is taken as the higher of the actual purchase price or the market value as on January 31, 2018. This ensures that gains accumulated before that date are not unfairly taxed.
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Losses on capital assets can be set off against gains to reduce your tax burden. Short-term capital losses can be adjusted against both short-term and long-term gains. If you can’t set off the entire loss in the same year, you’re allowed to carry it forward for up to eight financial years, as long as you file your income tax return on time.
However, long-term capital losses can only be set off against other long-term gains. The rules for carrying forward apply in the same manner, making timely tax filing essential for anyone looking to optimize their tax position.
STT is a small tax charged on every buy or sell transaction on listed securities through a recognized stock exchange. It’s not only a revenue source for the government but also a determining factor in capital gains tax rates. For equity share transactions to qualify for the 12.5% LTCG rate or the 20% STCG rate, STT must have been paid. If it hasn’t, then regular slab rates apply instead.
For most delivery-based equity trades, STT is charged at 0.1% both at the time of purchase and sale. Its presence in the transaction not only affects taxability but also confirms the trade’s legitimacy from a regulatory perspective.
Example: Harsha Mehra’s Capital Gains Tax Calculation (Fictional)
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Harsha Mehra bought 1,000 shares of XYZ Ltd. on January 10, 2023, at Rs. 50 per share. The total cost of purchasing the shares was Rs. 50,000 (1,000 shares x Rs. 50). He later sold all the shares on March 15, 2024, at Rs. 80 per share, resulting in a total sale value of Rs. 80,000 (1,000 shares x Rs. 80). Since Harsha held the shares for more than 12 months, the profit qualifies as Long-Term Capital Gains (LTCG).
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If Harsha had sold the shares for a higher price, say Rs. 1.5 lakh in profit, he would have to pay tax on the amount exceeding the Rs. 1.25 lakh exemption limit.
Even if no tax is due, Harsha must report her capital gains in her ITR for the financial year. In case he had sold the shares within 12 months, the profit would have been subject to Short-Term Capital Gains (STCG) tax at 20% on the entire profit.
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Taxes on capital gains have become more structured in recent years, particularly after Budget 2025. The rates are now more predictable, but they also demand clarity and awareness from investors. Whether you’re trading in shares or investing in mutual funds, it’s important to know how your earnings will be taxed, what reliefs are available, and how to manage losses.
Filing your return on time, maintaining proper records, and staying updated on policy changes can make a big difference. While the numbers might seem daunting at first, a clear understanding of capital gains taxation can help you plan better and avoid unexpected liabilities later on.
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