Capital gains tax applies when you sell investments at a profit. The tax rate depends on the type of asset and how long you held it. Understanding capital gains taxation is essential for investment planning, as it directly impacts your net returns and influences decisions about when and what to sell.
Short-Term vs Long-Term Capital Gains
For equity shares and equity mutual funds: short-term is holding for less than 12 months, long-term is 12 months or more. For debt mutual funds: all gains are taxed at slab rates regardless of holding period (post-2023 rules). For real estate and gold: short-term is less than 24 months, long-term is 24 months or more. For unlisted shares: short-term is less than 24 months, long-term is 24 months or more.
Tax Rates After Budget 2024 Changes
Equity LTCG above ₹1.25 lakh per year is taxed at 12.5% (increased from 10% above ₹1 lakh). Equity STCG is taxed at 20% (increased from 15%). Real estate and other asset LTCG is taxed at 12.5% without indexation benefit (the indexation benefit for purchases before July 23, 2024, was grandfathered). Debt fund gains are added to income and taxed at slab rate. These changes from Budget 2024 significantly altered tax planning strategies for investors.
Tax-Loss Harvesting Strategy
Tax-loss harvesting involves selling investments at a loss to offset capital gains in the same financial year. Short-term losses can offset both short-term and long-term gains. Long-term losses can only offset long-term gains. You can carry forward unabsorbed losses for 8 years. Practical example: if you have ₹2 lakh in LTCG and ₹80,000 in unrealized losses, selling the loss-making investments reduces your taxable LTCG to ₹1.2 lakh — below the ₹1.25 lakh exemption, making it entirely tax-free.
LTCG Tax Planning for Equity Investors
Harvest ₹1.25 lakh in LTCG every year by selling and immediately rebuying equity holdings — this resets your purchase price and utilizes the annual exemption. For a diversified portfolio, systematically sell small portions across the year rather than large blocks at once. Time your redemptions across financial years to stay within the exemption limit. Consider holding equity investments beyond 12 months whenever possible to qualify for the lower LTCG rate versus the 20% STCG rate.
How do I calculate capital gains on mutual funds?
For SIP investments, each installment has its own purchase date and cost. Use the FIFO (First In, First Out) method — the first units purchased are considered sold first. Most mutual fund platforms provide a capital gains statement that automatically calculates gains for each redemption.
Are dividends also taxed?
Yes, since 2020, dividends from stocks and mutual funds are added to your income and taxed at your slab rate. TDS of 10% is deducted on dividends above ₹5,000. For investors in the 30% bracket, this makes dividend-paying investments less tax-efficient compared to growth-oriented ones.