What is long term capital gains tax?
When you sell an asset for more than you paid, the profit is a capital gain. How it is taxed turns on one question: how long did you hold it? Hold it past the threshold for its asset class and the gain is long-term, taxed at a flat rate. Sell earlier and it is short-term, usually taxed harder.
Budget 2024 rewrote this on 23 July 2024. Indexation went, the rates changed, and the holding-period thresholds were simplified to two numbers instead of a scatter across asset classes.
LTCG tax rate
| Asset | Long-term after | LTCG rate | STCG rate |
|---|---|---|---|
| Listed equity shares, equity mutual funds | 12 months | 12.5% above ₹1.25 lakh | 20% |
| Gold, gold ETFs, non-equity mutual funds | 24 months | 12.5%, no indexation | Slab rate |
| Property (bought on/after 23 Jul 2024) | 24 months | 12.5%, no indexation | Slab rate |
| Unlisted equity | 24 months | 12.5%, no indexation | Slab rate |
| Debt mutual funds bought on/after 1 Apr 2023 | — | Always slab rate | Slab rate |
That last row is the one people miss. A debt fund bought after April 2023 has no long-term treatment at all, however long you hold it. The holding period is irrelevant; the gain is added to your income and taxed at your slab.
The ₹1.25 lakh equity exemption
The first ₹1.25 lakh of long-term equity gains each financial year is exempt. It applies per person per year, and it does not carry forward — an unused exemption is simply gone on 31 March.
On ₹3 lakh of long-term equity gains: the first ₹1.25 lakh is exempt, ₹1.75 lakh is taxed at 12.5%, so the tax is ₹21,875.
The exemption applies only to equity and equity mutual funds under Section 112A. Gold, property and debt get no equivalent.
What happened to indexation?
It is gone for almost everything. Before July 2024 you could inflate your purchase price by a cost inflation index and pay 20% on the smaller gain. Now you pay 12.5% on the whole nominal gain.
One legacy exception survives. Property bought before 23 July 2024 can be computed either way — 12.5% without indexation, or 20% with it — and you may use whichever produces the lower tax. That choice does not exist for property bought after that date, and never existed for anything else.
Whether removing indexation helps or hurts depends entirely on how long you held and how fast prices rose. On a long hold through high inflation, the old 20%-with-indexation route was often cheaper; on a short hold or a fast gain, 12.5% flat usually wins.
How capital gains on SIPs are calculated
Every SIP instalment is a separate purchase with its own clock. Redeeming after two years of monthly SIPs does not give you one long-term gain — it gives you a mix, because the most recent twelve months of units are still short-term.
Redemptions follow FIFO: the oldest units go first. That works in your favour, since the oldest units are the ones most likely to qualify as long-term. Your fund house or registrar provides the split in the capital gains statement, and that is the figure to use rather than a hand calculation.
Tax harvesting: using the exemption before it expires
Because the ₹1.25 lakh exemption resets each year and cannot be carried forward, gains left unrealised accumulate into a single larger taxable event later.
Selling roughly ₹1.25 lakh of long-term equity gains before the financial year ends, and buying back, realises those gains at zero tax and resets your cost base higher. This is explicitly permitted under Section 112A.
Two things to keep in mind. It only works on gains that are already long-term — selling short-term units triggers 20% instead. And repurchasing carries the ordinary market risk of being out of position, briefly, at whatever price the market gives you.
Set off and carry forward of capital losses
Losses are not wasted:
- Short-term capital loss can be set off against both short-term and long-term gains.
- Long-term capital loss can only be set off against long-term gains.
- Whatever is left carries forward for eight assessment years.
Carrying a loss forward requires filing your return by the due date. File late and the loss is lost — one of the more expensive consequences of a missed deadline.
Do I pay capital gains tax if I reinvest?
Yes. Reinvesting the proceeds into another fund or stock does not defer anything — the sale is the taxable event regardless of what you do with the money next.
Sections 54, 54F and 54EC provide genuine exemptions, but only for property, and only when the proceeds go into a specified house or into notified bonds within set time limits. There is no equivalent for equity or mutual funds. Switching between two mutual fund schemes, including within the same fund house, is a redemption and a fresh purchase, and it is taxed as one.