Introduction
Investing in stocks and mutual funds can generate substantial wealth, but it also comes with capital gains tax implications. Understanding how capital gains tax (CGT) applies to equity and debt investments helps investors reduce tax liability and plan their transactions effectively.
This guide explains:
What is Capital Gains Tax?
Short-term vs. long-term capital gains tax rates.
How CGT applies to stocks and mutual funds.
Tax-saving strategies for capital gains.
How to report capital gains while filing ITR.
1. What is Capital Gains Tax?
Capital Gains Tax (CGT) is levied on profits from selling capital assets, including stocks, equity & debt mutual funds, and real estate.
Types of Capital Gains Tax:
Short-Term Capital Gains (STCG): Gains from selling assets within a short period (varies by asset type).
Long-Term Capital Gains (LTCG): Gains from selling assets after holding them for a longer period.
Holding period matters! The tax rate depends on whether the investment is classified as short-term or long-term.
2. Capital Gains Tax on Stocks
The tax treatment of listed (NSE/BSE) and unlisted (private company) shares differs.
A. Capital Gains Tax on Listed Stocks (NSE & BSE)
| Holding Period | Type of Gain | Tax Rate |
|---|---|---|
| Less than 12 months | Short-Term Capital Gain (STCG) | 15% |
| More than 12 months | Long-Term Capital Gain (LTCG) | 10% (if gains exceed ₹1 lakh) |
Example:
- Purchase: 100 shares at ₹1,000 each.
- Sale (after 6 months): ₹1,200 per share.
- STCG: (₹1,200 – ₹1,000) × 100 = ₹20,000.
- Tax (15% of ₹20,000) = ₹3,000.
Tip: LTCG is exempt up to ₹1 lakh per year. If your gains are below ₹1 lakh, you pay zero tax!
B. Capital Gains Tax on Unlisted Shares (Startups, Private Companies)
| Holding Period | Type of Gain | Tax Rate |
|---|---|---|
| Less than 24 months | STCG | As per income tax slab |
| More than 24 months | LTCG | 20% with indexation |
Example:
- Investment in Startup Shares: ₹5 lakh
- Sale Price (after 3 years): ₹10 lakh
- LTCG Tax (20% after indexation): ₹70,000 (approx.)
ESOPs & Pre-IPO Shares: Special tax rules apply. TDS is deducted at exercise, and LTCG applies when shares are sold.
3. Capital Gains Tax on Mutual Funds
Mutual fund taxation depends on whether they are equity-oriented or debt-oriented.
A. Equity Mutual Funds (Investing 65%+ in Stocks)
| Holding Period | Type of Gain | Tax Rate |
|---|---|---|
| Less than 12 months | STCG | 15% |
| More than 12 months | LTCG | 10% (if gains exceed ₹1 lakh) |
Example:
- You invested ₹2,00,000 in an equity mutual fund and sold it after 2 years for ₹2,80,000.
- LTCG = ₹80,000 (below ₹1 lakh exemption).
- No tax payable!
B. Debt Mutual Funds (Investing Less Than 65% in Stocks)
| Holding Period | Type of Gain | Tax Rate |
|---|---|---|
| Less than 36 months | STCG | As per income tax slab |
| More than 36 months | LTCG | 20% with indexation |
Tip: Debt fund investors should hold for at least 3 years to benefit from indexation and lower tax rates.
4. How to Calculate Capital Gains Tax?
Formula for Capital Gains Tax:Capital Gain=Sale Price−Purchase Price−Transaction Costs\text{Capital Gain} = \text{Sale Price} – \text{Purchase Price} – \text{Transaction Costs}Capital Gain=Sale Price−Purchase Price−Transaction Costs
For LTCG in stocks & equity MFs, deduct ₹1 lakh exemption before applying 10% tax.
For LTCG in debt MFs, apply indexation to reduce taxable gains.
Use an Online Calculator: Capital Gains Tax Calculator
5. How to Save Capital Gains Tax?
Use ₹1 Lakh LTCG Exemption – Plan sales to keep annual LTCG under ₹1 lakh.
Invest in Tax-Saving Bonds (Section 54EC) – Invest gains from real estate or unlisted shares in RBI or NHAI Bonds to save tax.
Set Off Capital Losses – Use short-term capital losses to offset short-term gains and reduce tax liability.
Gift Shares to Family Members – Transfer stocks to parents in lower tax slabs before selling.
Use Indexation for Debt Funds – This significantly reduces taxable gains.
Example:
- You sold a debt fund investment for ₹5 lakh after 4 years.
- Purchase price (indexed) = ₹3 lakh.
- LTCG after indexation = ₹2 lakh.
- Tax at 20% = ₹40,000 (instead of ₹1 lakh without indexation!).
6. How to Report Capital Gains While Filing ITR?
Steps to Report Capital Gains in ITR:
- Log in to the Income Tax e-Filing Portal – www.incometax.gov.in.
- Select the correct ITR form:
- ITR-2 for capital gains (stocks, mutual funds).
- ITR-3 for business & capital gains.
- Enter details under “Capital Gains” section.
- Upload Form 26AS & AIS statement to verify transactions.
- Submit and e-verify your ITR.
Tip: If you have foreign stock holdings (e.g., Apple, Tesla shares on Zerodha/INDmoney), declare them in “Schedule FA”.
7. Conclusion
Understanding capital gains tax rules helps investors optimize tax payments and maximize profits.
Stocks & Equity MFs – LTCG exempt up to ₹1 lakh, taxed at 10% thereafter.
Debt MFs & Unlisted Shares – LTCG taxed at 20% with indexation.
Plan your investments smartly to reduce tax liability.
Pro Tip: Use capital losses, gifting, and tax-saving bonds to legally minimize tax payments!
Useful Government & External References
FAQs on Capital Gains – Income Tax Department
Tax Regime for Mutual Fund Investors – AMFI
Master Circular for Mutual Funds – SEBI
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