Chapter 7 of 8
Capital Gains Tax - Stocks and MFs
STCG, LTCG, and tax-loss harvesting strategies.
Ganesh got a WhatsApp message from his CA cousin Vikram in November: "Send me your capital gains statement from Zerodha."
Ganesh stared at the message. He typed back: "Capital gains statement? What is that?"
Vikram replied: "From the stocks you sold this year, bhai. Zerodha has it in the Console section."
Ganesh: "Oh. Those stocks I bought in 2020 during COVID because everyone was buying stocks?"
Vikram: "Yes. Those."
Ganesh: "I thought I just… made money? Do I have to pay tax on that too?"
Vikram: 🤦
Yes, Ganesh. You do. But the rules are actually interesting, and knowing them can legally reduce what you pay. Let's go through it.
What Is Capital Gains Tax?
A tax you pay on the profit (gain) you make from selling a capital asset, shares, mutual funds, property, gold. The tax rate depends on what you sold and how long you held it before selling.
The key word is "gain." If Ganesh bought a stock for ₹100 and sold it for ₹160, he made a ₹60 gain. That ₹60 is what gets taxed, not the full ₹160.
The other key word is "held." How long you kept the asset before selling changes the tax rate dramatically.
Short-Term vs Long-Term: The Holding Period Matters
| Asset Type | Short-Term (STCG) | Long-Term (LTCG) | LTCG Threshold |
|---|---|---|---|
| Listed Equity Shares | Held < 12 months | Held ≥ 12 months | 12 months |
| Equity Mutual Funds | Held < 12 months | Held ≥ 12 months | 12 months |
| Debt Mutual Funds | Held < 24 months | Held ≥ 24 months | 24 months |
| Real Estate / Gold | Held < 24 months | Held ≥ 24 months | 24 months |
| F&O (Futures & Options) | Always business income | Not applicable | N/A |
The Tax Rates: FY 2025-26
| Type of Gain | Tax Rate | Exemption |
|---|---|---|
| Equity STCG (< 12 months) | 20% | None |
| Equity LTCG (≥ 12 months) | 12.5% | First ₹1.25L exempt per year |
| Debt MF STCG (< 24 months) | Slab rate | None |
| Debt MF LTCG (≥ 24 months) | Slab rate | No indexation benefit |
| F&O trading profits | Slab rate (30% for most) | None |
Before April 2023, debt mutual funds enjoyed lower LTCG rates with indexation benefit. Since then, all debt MF gains, regardless of holding period, are taxed at your income slab rate. The advantage of debt MFs as a tax-efficient instrument effectively ended in FY 2023-24.
Ganesh's Stocks: A Real Calculation
Ganesh bought stocks in April 2020 during the COVID crash. He sold them in September 2025.
Holding period: April 2020 to September 2025 = 5 years and 5 months → Long-Term (≥12 months)
His gains:
- Infosys: Bought at ₹550, sold at ₹1,890 → Gain: ₹1,340 × 10 shares = ₹13,400
- Tata Motors: Bought at ₹65, sold at ₹830 → Gain: ₹765 × 20 shares = ₹15,300
- HDFC Bank: Bought at ₹780, sold at ₹1,650 → Gain: ₹870 × 5 shares = ₹4,350
Total LTCG: ₹33,050
Tax on equity LTCG:
- First ₹1,25,000 is exempt: but Ganesh's total LTCG (₹33,050) is below ₹1,25,000
- Tax: Nil! He owes zero capital gains tax.
Wait, zero?? Yes. The ₹1.25L annual exemption on LTCG means small investors like Ganesh often pay nothing on equity gains. He still needs to report it in his ITR, but no tax is due.
Every financial year, your first ₹1.25L of equity LTCG is tax-free. This resets annually. Smart investors do "tax harvesting", selling long-term stocks each March to book ₹1.25L of gains tax-free, then buying them back. This resets the cost basis higher, reducing future tax.
Tax Harvesting: The Legal Trick Ganesh Should Learn
Tax harvesting is not cheating. It's using the ₹1.25L annual exemption proactively.
How it works:
- In March, identify stocks/equity MFs held for 12+ months where unrealised gain is ≤ ₹1.25L
- Sell them (no tax, since within exemption)
- Buy them back the next day or week (cost basis resets to the higher price)
- You've "crystallised" the gain tax-free and reduced your future tax liability
Over 10 years of doing this annually, Ganesh could save lakhs in tax, legally, on investments that would otherwise generate a large taxable LTCG lump sum when he eventually sells.
In the US, selling and immediately buying back the same stock to harvest losses has restrictions (wash sale rules). India currently has no such rule for equities, you can sell and rebuy the same day. Check with a CA for the latest rules before doing this.
F&O Trading: A Completely Different Beast
If Ganesh ever dabbles in Futures & Options, he needs to know: F&O is not capital gains. It's treated as Business Income and taxed at his slab rate.
At Ganesh's income level (₹5,000–₹8,000/month plus some brand deals), that might be a low slab rate. But once F&O losses exceed ₹25,000, he also technically needs to get his books audited. F&O is a tax complexity he should avoid until he's making real money and has a CA.
How to Get the Capital Gains Statement
Ganesh was confused about what Vikram was asking for. Here's how to get it:
- Zerodha: Console → Reports → Tax P&L → Select FY → Download
- Groww: Profile → Tax Statements → Capital Gains
- Kuvera / Coin (for MFs): Reports → Capital Gains Statement
This statement shows every sale, cost of acquisition, holding period, and gain/loss. Your CA will use this to fill Schedule CG in your ITR.
Reporting in ITR: Don't Skip This
Even if your gains are below ₹1.25L and no tax is owed, you must report capital gains in your ITR. Use ITR-2 (not ITR-1) once you have capital gains to report.
Ganesh cannot use ITR-1 (Sahaj) anymore once he has stock transactions, even if he owes zero tax on them.
The government gets data from CDSL, NSDL, and all brokers about your stock transactions. If you file ITR-1 and skip capital gains, the AIS will show gains and your return will get flagged. Always report, even when the tax is zero.
Key Takeaways
- Equity STCG (< 12 months) is taxed at 20%; equity LTCG (≥ 12 months) is taxed at 12.5%
- First ₹1.25L of equity LTCG per year is tax-free: resets every April 1
- Debt mutual funds lost their tax advantage in April 2023: gains taxed at slab rate regardless of holding
- F&O trading profits are Business Income, not capital gains: taxed at slab rate (up to 30%)
- Download your Tax P&L statement from Zerodha Console or Groww before filing ITR
- Use ITR-2 (not ITR-1) once you have any capital gains: even if tax is zero
Ready to calculate your own capital gains tax? Use the SIP Calculator to estimate future gains and plan when to sell. Also read the Old vs New Regime guide since your total income including capital gains affects which regime suits you.
Ganesh sold equity shares held for 14 months, making a gain of ₹90,000. How much capital gains tax does he owe?