Capital Gains Tax on Shares & Mutual Funds: Equity vs Debt Taxation

This guide is for resident Indian investors in shares and mutual funds. If you are investing from outside India as an NRI, the rates below are largely the same, but the TDS mechanics are very different; see our dedicated NRI Mutual Fund & Stock Taxation guide instead, since AMCs deduct TDS on every NRI redemption regardless of gain size, which does not happen for residents.

Equity Shares and Equity Mutual Funds

Listed equity shares and equity-oriented mutual funds (schemes holding at least 65% in equity) are taxed identically under Sections 112A and 111A:

The Rs 1.25 lakh exemption under Section 112A applies per financial year, across all your equity LTCG put together, not per stock or per fund. Gains below that threshold in a year are entirely tax-free; only the excess is taxed at 12.5%.

Debt Mutual Funds: A Different System Entirely

Debt funds do not follow the equity rules above. Since the Finance Act 2023 rewrote how debt-oriented mutual funds (funds with less than 35% equity exposure) are taxed, the holding period stopped mattering for anything bought from April 1, 2023 onward:

• Units bought on or after April 1, 2023: Every gain, regardless of how many years you hold the units, is treated as short-term capital gains and taxed at your applicable income tax slab rate. There is no LTCG category for these units at all.
• Units bought before April 1, 2023: The older rules still apply if the holding period exceeds 36 months, gains qualify as LTCG, taxed at a flat 12.5% (without indexation, per the Finance Act 2024 change). Held 36 months or less, gains are STCG at slab rate.

In practice, this means most debt fund investors today, holding units purchased in the last few years, are simply paying slab-rate tax on redemption, the same as interest income, with no long-term concession available.

Why This Matters for Portfolio Decisions

The tax gap between equity and debt funds is now structural rather than incidental. A high-income investor in the 30% slab holding a debt fund pays tax at 30% (plus surcharge and cess) on every rupee of gain, while the same investor holding an equity fund for over a year pays 12.5% above the Rs 1.25 lakh exemption. This does not mean debt funds are a poor choice; they still serve a different role (capital preservation, shorter horizons, lower volatility) but the after-tax return comparison between the two asset classes has shifted meaningfully since April 2023, and should be factored into any equity-versus-debt allocation decision, not just pre-tax return.

No TDS for Resident Investors

Unlike NRI investors, who face TDS deducted by the AMC or broker on every redemption, resident investors do not have TDS deducted on capital gains from mutual fund units or listed shares. The only TDS resident investors encounter in this space is under Section 194K, which applies to dividend or income distribution payouts from mutual funds above Rs 5,000 in a year; that is a distribution, not a capital gain, and it is a separate, much narrower obligation. This is one of the clearest practical differences between resident and NRI taxation in this area, so if you are advising a mixed-residency family (for example, a resident parent and an NRI child holding similar portfolios), do not assume the compliance steps are the same for both.

Unlisted Shares: A Third Set of Rules

If you hold shares in a private company (unlisted equity), neither Section 112A nor Section 111A applies. Instead: LTCG (holding over 24 months) is taxed at 12.5% without indexation, and STCG (24 months or less) is taxed at your slab rate rather than the flat 20% rate used for listed shares. This distinction matters for founders, early employees with vested shares, and angel investors exiting a private company; our startup advisory team handles this category regularly alongside ESOP and cap table questions.

Reporting These Gains in Your ITR

Capital gains from shares and mutual funds must be reported under the Capital Gains schedule of your income tax return, with equity and debt gains classified separately and matched against your broker/AMC-issued capital gains statement and the transaction detail already visible in your Annual Information Statement (AIS). Mismatches between what you report and what AIS shows are a common trigger for a scrutiny notice, so reconciling the two before filing is worth the extra 20 minutes.

Use our Capital Gains Calculator to work out the exact tax on a specific sale, and if you are planning a larger portfolio rebalancing or exit, talk to us before you sell; the Rs 1.25 lakh exemption resets every financial year, and timing a sale across two financial years instead of one can materially change the tax outcome.