NISM-Series-X-B: Investment Adviser (Level 2) · Capital Gains

Taxation of Listed Securities and Mutual Funds for NISM X-B

Updated 11 October 2026 · Fact-checked

Gains on listed securities are short-term or long-term based on holding period. For equity shares and equity-oriented funds with STT paid, STCG is taxed at 20% and LTCG at 12.5% above ₹1,25,000 a year. Specified debt funds are taxed at slab rates for transfers from 1 April 2025, whatever the purchase date. Grandfathering fixes cost for pre-February 2018 holdings.

Understand Taxation of Listed Securities and Mutual Funds

A capital gain is the profit on selling a capital asset. Tax depends on two things: how long you held the asset, and what kind of asset it is. The holding period decides if the gain is short-term (STCG) or long-term (LTCG).

For listed shares, equity-oriented mutual fund units, listed bonds and ETFs, the cut-off is 12 months. Held for more than 12 months is long-term. Held for 12 months or less is short-term. Non-equity-oriented mutual funds that are not specified funds use 24 months.

Equity is taxed at special rates when Securities Transaction Tax (STT) is paid. STT is a tax charged on trades on recognised exchanges and on redemption of equity fund units. The special rates for equity apply when STT has been paid on the sale. The rates below apply to transfers on or after 23 July 2024.

Grandfathering protects gains made before LTCG tax on equity began. For equity bought on or before 31 January 2018, gains up to that date are not taxed. You do this by replacing the actual cost with a higher deemed cost.

Debt funds are treated differently. Gains on a specified mutual fund (one investing more than 65% in debt and money market instruments) are deemed short-term whatever the holding period. They are taxed at your slab rate. From FY 2025-26 (transfers on or after 1 April 2025), the Finance (No. 2) Act 2024 definition applies and the purchase date does not matter. Under the earlier rule, for FY 2023-24 and FY 2024-25, only units bought on or after 1 April 2023 were covered. Hybrid funds follow their equity share: 65% or more in equity is taxed like equity. Other hybrids follow the non-equity rules. Add 4% cess on the tax, and surcharge where it applies.

Key formulas to remember

Holding period: equity and listed securities: Long-term if held > 12 months; short-term if held ≤ 12 months; Applies to listed shares, equity-oriented fund units, listed bonds, listed debentures and ETFs.
STCG on equity (Section 111A): 20% of short-term gain; Only if STT is paid on the sale. Covers listed equity shares and equity-oriented fund units.
LTCG on equity (Section 112A): 12.5% × (total LTCG − ₹1,25,000); The ₹1,25,000 exemption is per year, across all such gains. No indexation. STT must be paid on sale.
Grandfathered cost of acquisition: Cost = higher of [actual cost, lower of (FMV on 31 Jan 2018, sale value)]; For equity acquired on or before 31 January 2018. It can never create a loss from the grandfathering step.
Specified mutual fund (Section 50AA): Gain = deemed STCG, taxed at slab rate; Debt-oriented funds (over 65% in debt and money market). For transfers on or after 1 April 2025, the purchase date does not matter. No long-term benefit.
Other listed securities (bonds, gold ETFs, non-specified funds): LTCG at 12.5% without indexation; STCG at slab rate; Listed securities need more than 12 months. Non-equity MF units that are not specified need more than 24 months.
Tax payable: Tax × (1 + 4% cess) + surcharge if applicable; Cess is 4% of tax plus surcharge.

How to solve Taxation of Listed Securities and Mutual Funds questions

Use the same sequence for every question on listed securities and mutual funds. Classify first, then compute.

1Identify the asset: equity share, equity-oriented fund, debt fund, hybrid fund, bond or ETF.
2For funds, check the equity or debt percentage. Equity-oriented means 65% or more in equity. Specified debt funds mean over 65% in debt and money market.
3Check the transfer date and purchase date. For transfers on or after 1 April 2025, specified debt funds fall under Section 50AA whatever the purchase date. Equity bought on or before 31 January 2018 needs grandfathering.
4Count the holding period from purchase to sale and apply the right cut-off: 12 months, or 24 months for non-specified non-equity funds.
5Compute the gain as sale value minus cost, using the grandfathered cost where it applies.
6Apply the rate: 20% STCG or 12.5% LTCG for equity; slab rate for specified debt funds; 12.5% LTCG for other long-term listed assets.
7For equity LTCG, add up all LTCG for the year and subtract ₹1,25,000 once. Then apply 12.5%.
8Add 4% cess, and check what is asked: tax, post-tax gain or the cost used.

Quickest way: Four-question filter

When to use it: Use when a one-mark MCQ asks which rate or treatment applies.

Is it equity or equity-oriented with STT paid? If yes, short-term is 20% and long-term is 12.5% above ₹1,25,000.
Is it a debt fund (over 65% in debt and money market) transferred on or after 1 April 2025? If yes, slab rate, no long-term benefit, whatever the purchase date.
Is it a listed bond or gold ETF? Over 12 months is 12.5% LTCG, otherwise slab.
Is a pre-31 January 2018 date given? Then use the higher of actual cost and the lower of FMV and sale price.

Common mistakes in Taxation of Listed Securities and Mutual Funds

Applying the ₹1,25,000 exemption to every sale separately.
Students read it as a per-transaction or per-security benefit.
Fix: It is one limit per year on total LTCG from equity and equity-oriented funds with STT. Add all gains, then deduct once.
Using the 31 January 2018 value as cost even when it is lower than actual cost.
Students remember the date but not the 'higher of' condition.
Fix: First take the lower of FMV and sale value. Then take the higher of that and actual cost.
Treating all debt fund gains as long-term after 24 months or 36 months.
Older rules gave indexation benefits to debt funds.
Fix: For specified funds transferred on or after 1 April 2025, gains are deemed short-term and taxed at slab rate whatever the holding period or purchase date.
Using 12 months for every fund.
Students assume 12 months is the same for all mutual funds.
Fix: 12 months is for equity-oriented funds. Non-equity funds that are not specified need more than 24 months.
Applying 12.5% LTCG with indexation.
Students remember the old 20% with indexation regime.
Fix: For transfers on or after 23 July 2024, the rate is 12.5% and no indexation is allowed on these listed securities.
Ignoring STT status or forgetting cess.
Students focus only on the rate.
Fix: Check that STT was paid, because the special rates depend on it. Add 4% cess on the tax when the question asks for total tax.

Worked examples

Example 1

Anil bought listed equity shares for ₹1,00,000 in 2016. Their FMV on 31 January 2018 was ₹2,40,000. He sold them for ₹3,00,000 in August 2025 with STT paid. He has other LTCG of ₹1,50,000 from equity funds in the same year. Compute the tax including 4% cess. Ignore surcharge.

Show the solution

The shares were held over 12 months, so the gain is long-term.
Lower of FMV (₹2,40,000) and sale value (₹3,00,000) is ₹2,40,000.
Higher of actual cost (₹1,00,000) and ₹2,40,000 is ₹2,40,000. This is the deemed cost.
LTCG on shares = ₹3,00,000 − ₹2,40,000 = ₹60,000.
Total LTCG = ₹60,000 + ₹1,50,000 = ₹2,10,000.
Taxable LTCG = ₹2,10,000 − ₹1,25,000 = ₹85,000.
Tax at 12.5% = ₹10,625. Cess at 4% = ₹425.

Answer: Total tax is ₹11,050 (₹10,625 tax + ₹425 cess).

Example 2

Rekha bought units of a specified debt mutual fund for ₹5,00,000 on 1 June 2023 and redeemed them for ₹6,00,000 in August 2025. She is taxed at the 30% slab rate. Find the tax including 4% cess. Ignore surcharge.

Show the solution

The fund is a specified mutual fund (over 65% in debt and money market) and the transfer is after 1 April 2025, so the purchase date does not matter.
Under Section 50AA, the gain is deemed short-term whatever the holding period of over two years.
Gain = ₹6,00,000 − ₹5,00,000 = ₹1,00,000.
It is taxed at her slab rate of 30%: ₹30,000.
Cess at 4% of ₹30,000 = ₹1,200.
The ₹1,25,000 exemption and the 12.5% rate do not apply.

Answer: Total tax is ₹31,200 (₹30,000 tax + ₹1,200 cess).

Exam tips

Memorise the current rates together: 20% STCG, 12.5% LTCG, ₹1,25,000 exemption, 12 months. Questions often include old rates as wrong options.
In grandfathering questions, write the two-step 'lower then higher' calculation. Trap options use only actual cost or only FMV.
For fund questions, read the equity or debt percentage and the purchase date before anything else.
With negative marking of 25% of the marks assigned to a question, skip a taxation item only if you cannot narrow it to two options. Guessing between two is worth it.
Check whether the question says STT was paid. Without it, the special equity rates may not apply.

Practice questions from Capital Gains

Taxation of Listed Securities and Mutual Funds: frequently asked questions

What is the LTCG tax rate on equity shares and equity mutual funds?

It is 12.5% on long-term gains above ₹1,25,000 in a year, for transfers on or after 23 July 2024 with STT paid. Long-term means held for more than 12 months. Indexation is not allowed. Add 4% cess.

What is the difference between STCG and LTCG tax rates on equity?

STCG is for equity held 12 months or less and is taxed at 20%, with no exemption limit. LTCG is for equity held longer and is taxed at 12.5% above ₹1,25,000 a year. Both need STT paid on the sale.

What is the grandfathering rule for 31 January 2018?

For equity bought on or before 31 January 2018, the cost for LTCG is the higher of actual cost and the lower of FMV on that date and sale value. This keeps gains up to 31 January 2018 out of tax. It cannot turn a gain into a loss.

How are debt mutual funds taxed?

Specified debt funds (over 65% in debt and money market) are taxed at your slab rate on the gain, as deemed short-term gain, for transfers on or after 1 April 2025, whatever the purchase date. There is no long-term rate or indexation. Hybrid funds follow their equity share: 65% or more in equity is taxed like equity funds.