Long-Term Capital Gains Tax Explained

For listed shares and equity-oriented mutual fund units, any holding period beyond 12 months qualifies the resulting profit as a Long-Term Capital Gain under Section 112A. This 12-month threshold is shorter than the holding period required for many other asset classes, like property, which is a deliberate policy choice to favour listed equity.

LTCG on listed equity is taxed at 12.5%, applicable only to the portion of gains exceeding ₹1.25 lakh in a financial year. This rate and exemption threshold were revised upward from the earlier 10% rate and ₹1 lakh exemption, effective from 23 July 2024, and have remained unchanged since.

A common misunderstanding is assuming the exemption applies separately to each stock or fund you sell. It doesn't. The ₹1.25 lakh exemption is a single, cumulative limit across all your equity LTCG — from direct stocks and equity mutual funds combined — in a given financial year.

Previously, some capital gains calculations allowed you to adjust your purchase cost for inflation before computing tax, reducing your taxable gain. For equity LTCG taxed under the current 12.5% regime, this indexation benefit is no longer available — you pay tax on the actual gain, unadjusted for inflation.

If you bought shares or equity fund units before 31 January 2018, your cost of acquisition for tax purposes may be adjusted to the higher of your actual purchase price or the fair market value as of that date. This grandfathering provision protects gains that had already accrued before LTCG on equity was reintroduced, and it's worth checking if it applies to any long-held positions.

Suppose you held shares for 20 months and your only equity LTCG for the year is ₹3,00,000. Subtract the ₹1.25 lakh exemption, leaving ₹1,75,000 taxable. At 12.5%, that's ₹21,875 in tax, before cess. Compare that to the same gain realised within 12 months, taxed entirely at 20% with no exemption — over ₹60,000 in tax. The holding period alone accounts for the entire difference.

None of this should mean holding a fundamentally weakening stock purely to cross the 12-month mark — but when a stock's thesis remains intact, understanding the tax gap between short and long-term treatment is a legitimate reason to be patient. Filtered via Mahir Screener, investors can track whether a company's fundamentals still support a long-term hold, so the decision to wait is grounded in the business, not just the tax calendar. That's the Mahir Approach to investing — patience with a purpose.