The long-term capital gains rate is the easy part. What decides your actual tax is which units qualified, what cost the law lets you claim, and how much of your annual exemption is left.
The short answer
On equity-oriented mutual funds, long-term capital gains are taxed under Section 112A at 12.5%, and only on the amount above Rs 1.25 lakh of such gains in a financial year. Units qualify as long-term after 12 months. Indexation is not available. For other funds — gold, international, multi-asset — long-term gains are also taxed at 12.5%, but the Rs 1.25 lakh exemption does not apply and the qualifying period may be 24 months. Debt-oriented schemes bought on or after 1 April 2023 have no long-term category at all.
This page works through the calculation. If you are not yet sure which of those categories your scheme falls in, start with how mutual funds are taxed, which sets out the classification and the full rate map.
When a gain becomes long-term
The clock runs from the date each set of units was allotted to the date of redemption, and it runs separately for every purchase. Equity-oriented units cross into long-term after 12 months. Listed units of other funds also take 12 months; unlisted units of those funds take 24. The test is completed holding, so units allotted on 5 April 2025 become long-term on 6 April 2026 — a redemption on 4 April is still short-term, and on an equity fund that is the difference between 20% and 12.5%.
The Rs 1.25 lakh exemption, precisely
The exemption is easy to overestimate. Four things about it are worth getting right:
- It is per investor, per financial year — not per scheme, not per folio, not per AMC.
- It applies to your aggregate Section 112A gains: equity mutual funds, listed equity shares and business trust units all draw on the same Rs 1.25 lakh.
- It does not extend to gold funds, international funds or any other non-equity scheme. Those pay 12.5% from the first rupee of long-term gain.
- The Section 87A rebate does not wipe out tax on these gains. From AY 2026-27 the law is explicit that the enhanced rebate applies only to tax on slab-rate income, so a small total income does not make an equity LTCG liability disappear.
Unused exemption does not carry forward. If your long-term gains this year come to Rs 40,000, the remaining Rs 85,000 is simply gone on 31 March.
Units bought before 1 February 2018: the grandfathered cost
Equity LTCG was reintroduced with effect from 1 February 2018, and gains that had already accrued by then were protected. For units acquired on or before 31 January 2018, Section 55(2)(ac) replaces your purchase price with a deemed cost, computed in two steps — and most people perform only the first.
Step 1: take the lower of the 31 January 2018 value of the units and your sale value.
Step 2: take the higher of that figure and what you actually paid. That result is your cost.
Worked, where the fund rose. You invested Rs 1,00,000 in 2015. The units were worth Rs 1,80,000 on 31 January 2018 and you redeem them today for Rs 4,00,000. Step 1 gives Rs 1,80,000 (lower of 1,80,000 and 4,00,000). Step 2 gives Rs 1,80,000 (higher of 1,80,000 and 1,00,000). Your taxable gain is Rs 2,20,000, not Rs 3,00,000. After the Rs 1.25 lakh exemption, Rs 95,000 is taxed at 12.5% — Rs 11,875, plus cess.
Worked, where the fund fell. Same purchase and same 31 January 2018 value, but you redeem for Rs 90,000. Step 1 gives Rs 90,000. Step 2 gives Rs 1,00,000, your actual cost. You have a capital loss of Rs 10,000. The second step exists precisely so the rule can reduce a gain to nil but never manufacture an artificial loss.
The calculation is per holding, because Schedule 112A in the return asks for the detail holding by holding rather than as one portfolio total.
Cost, and the end of indexation
Outside the grandfathered cases, your cost is what you paid, including any entry-side charges reflected in the units allotted. Indexation — the old adjustment that raised your cost in line with inflation — no longer applies to mutual fund units of any category. The trade was explicit: a lower headline rate of 12.5% in place of a higher rate with inflation relief. For a holding of a few years that is usually a better outcome; for a low-return holding kept for a very long time, it is not.
An SIP redemption, worked
SIP units are redeemed first-in, first-out. The oldest units go first, whichever units you would have preferred to sell.
Suppose you invested Rs 10,000 a month from April 2024 and redeem Rs 2,00,000 on 30 April 2026 from an equity fund.
- The thirteen instalments from April 2024 to April 2025 have all completed 12 months. Say they cost Rs 1,30,000 and are now worth Rs 1,66,000.
- FIFO uses those first: the whole Rs 1,66,000 comes out as a long-term redemption, with a long-term gain of Rs 36,000. Below Rs 1.25 lakh, so no tax on it if you have no other Section 112A gains this year.
- The remaining Rs 34,000 of your redemption has to come from the May and June 2025 instalments, which have not completed 12 months. If those units cost Rs 30,600, the Rs 3,400 gain on them is short-term and taxed at 20% — Rs 680.
The point is not the arithmetic. It is that a single redemption instruction produced two different tax treatments, and that redeeming a slightly smaller amount, or waiting a few weeks, would have changed the result.
Long-term losses
A long-term capital loss can be set off only against long-term capital gains — never against a short-term gain, salary or interest income. What you cannot use this year can be carried forward for eight assessment years, but only if you filed your return by the due date. That filing condition is where most carry-forward claims are lost.
This is also the honest limit of “tax harvesting”. Redeeming and immediately repurchasing to use up the Rs 1.25 lakh exemption resets your cost upward and can genuinely reduce tax over time. It also puts you out of the market for a settlement cycle, adds transaction friction, and restarts the holding-period clock on the repurchased units. It is a small, occasional optimisation at the edge of a portfolio — not a strategy.
Paying and reporting
Nothing is deducted at source when a resident investor redeems, so the full liability is yours to discharge. A material gain pulls you into the advance tax schedule in the quarter the redemption falls in, and interest applies if you leave it to the filing deadline. At filing, equity long-term gains go into Schedule 112A of the return; the registrar’s capital gains statement and your Annual Information Statement should agree with what you report.
What the rule should not change
A 12.5% charge on gains above Rs 1.25 lakh is a modest price for money that has compounded for years, and it is not a reason to redeem early, to stay out of equity, or to rearrange a portfolio around a financial year-end. The far larger cost sits on the other side: gains realised at 20% because a market fall triggered an exit that the goal never required.
Where the rule does deserve attention is in sequencing a withdrawal you have already decided to make — which units, in which order, in which financial year. That is a planning conversation with your investment manager and your tax adviser.
Common questions
Is LTCG deducted before the money reaches my bank?
Not for residents. The full redemption amount is credited and you pay the tax through advance tax or at filing. Non-residents have tax withheld by the fund house.
Does the Rs 1.25 lakh exemption apply to debt fund gains?
No. It belongs to Section 112A, which covers equity-oriented schemes, listed shares and business trust units. Debt-oriented schemes bought on or after 1 April 2023 have no long-term treatment at all.
If I split a redemption across two financial years, do I get the exemption twice?
Yes — the Rs 1.25 lakh is an annual threshold, so gains realised in two different financial years each draw on their own. Whether the delay is worth the market exposure in between is a separate question.
Do bonus and switched-in units have their own holding period?
Yes. Any units allotted on a new date start their own 12-month clock, which is why a switch shortly before a planned withdrawal often costs more tax than the switch was worth.
This page explains the general position under Indian tax law as it applies for the tax year 2026-27. It is not tax advice, and it does not account for your individual circumstances. Please confirm your position with a qualified tax adviser before acting.
