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NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Equity Products

Taxation of Equity Shares and Equity Mutual Funds

Updated 11 October 2026 · Fact-checked

Gains on listed equity shares and equity-oriented mutual funds are capital gains. Sold within 12 months, they are short-term (STCG). Sold after 12 months, they are long-term (LTCG). The special STCG and LTCG rates apply when STT has been paid; otherwise other rules apply. LTCG above the annual exemption limit is taxed at a flat rate, with no indexation.

Understand Taxation of Equity Shares and Equity Mutual Funds

A capital gain is the profit you make when you sell a capital asset for more than its cost. Listed equity shares and units of equity-oriented mutual funds are capital assets. The gain is taxed in the year of sale (transfer).

The first test is the holding period. For listed equity shares and units of equity-oriented mutual funds, the gain is long-term if you hold for more than 12 months. If you hold for 12 months or less, it is short-term. Count from the date of purchase to the date of sale.

An equity-oriented mutual fund is a fund whose investment in equity shares of domestic companies is at least 65% of its total proceeds. For a fund of funds, the test is different: at least 90% of its proceeds must be invested in units of another equity-oriented fund. A fund that fails the test is not equity-oriented, and it is taxed differently. Always check the fund type in the question.

The two types of gain are taxed at different flat rates. STCG on equity where STT is paid is taxed at a special rate under the Income Tax Act. LTCG is taxed at a lower special rate, but only on the part above an annual exemption limit. The special LTCG rate applies where STT has been paid on the sale. For listed shares, STT must also have been paid on acquisition, except for transactions the government has notified as exceptions. There is no indexation benefit on this LTCG. Surcharge and cess are added on top.

The rates and limit depend on the transfer date. For transfers on or after 23 July 2024, STCG is taxed at 20%, LTCG at 12.5%, and the exemption limit is ₹1,25,000. For transfers before that date, STCG was 15%, LTCG was 10%, and the limit was ₹1,00,000.

Grandfathering protects gains made up to 31 January 2018. It applies only to LTCG on shares or units bought before 1 February 2018 and sold later. The cost of acquisition is taken as the higher of (a) the actual cost and (b) the lower of fair market value on 31 January 2018 and the sale value. This stops you being taxed on gains that accrued before LTCG tax was introduced. The grandfathered cost is capped at the sale value, so it cannot create a loss or increase a loss. A loss arises only if your actual cost is higher than the sale value, and then the actual cost is used. It never applies to STCG.

Key formulas to remember

Holding period test
Held for 12 months or less → STCG; held for more than 12 months → LTCG
Applies to listed equity shares and units of equity-oriented mutual funds.
Capital gain
Capital gain = Full value of consideration − Cost of acquisition − Cost of improvement (if any) − Transfer expenses
Brokerage and similar sale expenses are deducted. STT is not deductible.
Grandfathered cost of acquisition
Cost = Higher of [Actual cost, Lower of (FMV on 31-1-2018, Sale value)]
Applies only to LTCG on assets acquired before 1 February 2018 (on or before 31 January 2018). The cost is capped at the sale value, so it cannot create a loss or increase one. A loss arises only if the actual cost is above the sale value.
Taxable LTCG
Taxable LTCG = Total LTCG in the year − Exemption limit
Tax is charged only if LTCG exceeds the annual limit. The limit is ₹1,25,000 for transfers on or after 23 July 2024 (₹1,00,000 before). The special LTCG rate applies where STT has been paid on sale (and on acquisition for listed shares, apart from notified exceptions). Use the limit and rate given in the question.
Equity-oriented fund test
Domestic equity shares ≥ 65% of total proceeds; for a fund of funds, ≥ 90% of proceeds invested in units of another equity-oriented fund
Meeting the test gives equity-share style capital gains treatment.

How to solve Taxation of Equity Shares and Equity Mutual Funds questions

Use the same order for every question on equity capital gains. It stops you mixing up the types of gain and the cost rules.

  1. 1Identify the asset: listed equity share, equity-oriented fund, or another fund such as debt.
  2. 2Find the holding period from purchase date to sale date and classify the gain as STCG (12 months or less) or LTCG (more than 12 months).
  3. 3Check whether the purchase date is on or before 31 January 2018. If it is, apply the grandfathering rule to find the cost.
  4. 4Compute the gain: sale value less cost (grandfathered if applicable) less sale expenses.
  5. 5If the gain is LTCG, add all LTCG for the year and deduct the exemption limit. Tax only the excess.
  6. 6Apply the rate for STCG or LTCG as given in the question, then add surcharge and cess if asked.
  7. 7Check the answer: no negative LTCG tax, and no indexation.

Quickest way: Three-check shortcut

When to use it: Use this when a question gives dates and prices and asks for the tax type or taxable gain.

  1. Check the months held first. More than 12 months means LTCG; otherwise STCG.
  2. For pre-February 2018 purchases, compare cost, 31 January 2018 value and sale price. Use the higher of cost and the lower of the other two.
  3. For LTCG, subtract the exemption limit from the total and apply the rate only to the balance. Then eliminate options that tax the whole gain or use indexation.

Common mistakes in Taxation of Equity Shares and Equity Mutual Funds

  • Using 36 months or 24 months as the long-term test for listed equity.

    Students mix up rules for property, unlisted shares and debt funds.

    Fix: For listed equity shares and equity-oriented funds the test is more than 12 months.

  • Applying indexation to equity LTCG.

    Indexation features in other asset questions in the same chapter.

    Fix: Equity LTCG on listed shares and equity funds has no indexation. Use the grandfathered cost only.

  • Taxing the whole LTCG instead of the amount above the exemption limit.

    Students forget the limit applies to total LTCG in the year.

    Fix: Add up all LTCG for the year, deduct the limit, then tax the balance.

  • Using FMV on 31 January 2018 as the cost every time.

    Students remember only the headline of grandfathering.

    Fix: Use the higher of actual cost and the lower of FMV and sale value. This is a two-step comparison.

  • Deducting STT as an expense when computing the gain.

    It looks like a transaction cost.

    Fix: STT paid is not deductible. Only brokerage and similar transfer expenses are.

  • Treating every mutual fund as equity for tax.

    Students judge by the fund name, not its equity exposure.

    Fix: Check that the fund meets the equity-oriented test of at least 65% domestic equity.

Worked examples

Example 1

Anita bought listed shares for ₹2,00,000 on 10 June 2016. On 31 January 2018 their FMV was ₹3,00,000. She sold them on 15 March 2025 for ₹4,50,000, with no sale expenses. She has no other capital gains that year. Compute the LTCG before exemption, and the taxable LTCG and tax at the rate for this date (before surcharge and cess).

Show the solution
  1. Holding period is far more than 12 months, so the gain is LTCG.
  2. Purchase was before 1 February 2018, so grandfathering applies.
  3. Lower of FMV (₹3,00,000) and sale value (₹4,50,000) is ₹3,00,000.
  4. Higher of actual cost (₹2,00,000) and ₹3,00,000 is ₹3,00,000. This is the cost of acquisition.
  5. LTCG = ₹4,50,000 − ₹3,00,000 = ₹1,50,000.
  6. The sale is after 23 July 2024, so the exemption limit is ₹1,25,000 and the LTCG rate is 12.5%.
  7. Taxable LTCG = ₹1,50,000 − ₹1,25,000 = ₹25,000.
  8. Tax = 12.5% of ₹25,000 = ₹3,125.

Answer: LTCG is ₹1,50,000. The gain that accrued up to 31 January 2018 (₹3,00,000 − ₹2,00,000 = ₹1,00,000) is excluded because the cost is stepped up to the FMV of ₹3,00,000. Taxable LTCG is ₹25,000 and the tax is ₹3,125, before surcharge and cess.

Example 2

Ravi bought units of an equity-oriented mutual fund on 5 April 2020 for ₹1,00,000 and redeemed them on 20 January 2021 for ₹1,30,000. STT was paid on the redemption. Separately, he bought shares in 2019 and sold them on 10 September 2024, with an LTCG of ₹60,000 in that year. Classify each gain, state the STCG rate that applied to the fund sale, and state whether any LTCG tax arises.

Show the solution
  1. Fund units: 5 April 2020 to 20 January 2021 is about 9.5 months, which is under 12 months, so the gain is STCG.
  2. STCG = ₹1,30,000 − ₹1,00,000 = ₹30,000.
  3. STT was paid on the redemption, so the special STCG rate under section 111A applies. The units were redeemed on 20 January 2021, which is before 23 July 2024, so the old rate of 15% applies, not 20%.
  4. The shares were bought in 2019 and sold on 10 September 2024. They were held for more than 12 months, so the gain is LTCG. The purchase was after 31 January 2018, so grandfathering is not relevant.
  5. The exemption limit applies only to LTCG, not to STCG.
  6. The share sale was on or after 23 July 2024, so the limit is ₹1,25,000.
  7. ₹60,000 is below ₹1,25,000, so the whole LTCG is exempt and no LTCG tax arises.

Answer: The fund gain of ₹30,000 is STCG. Because STT was paid, it is taxed at the special section 111A rate, which was 15% for a sale before 23 July 2024, and it gets no exemption. The ₹60,000 is LTCG, which is fully covered by the ₹1,25,000 exemption limit, so no LTCG tax arises.

Exam tips

  • Memorise 12 months as the test for both listed equity shares and equity-oriented funds. It is the most tested number here.
  • Read the purchase date first. If it is before 1 February 2018, expect a grandfathering calculation.
  • Remember grandfathering cannot turn a gain into a loss and never applies to STCG.
  • Eliminate any option using indexation for equity LTCG.
  • For transfers on or after 23 July 2024, the figures are STCG 20%, LTCG 12.5% and exemption ₹1,25,000. Rates and limits change in Budgets, so use the figures given in the question.

Practice questions from Taxation of Equity Products

Taxation of Equity Shares and Equity Mutual Funds in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Taxation of Equity Shares and Equity Mutual Funds: frequently asked questions

What is the holding period for LTCG on equity shares?

For listed equity shares and equity-oriented mutual fund units, the gain is long-term if you hold for more than 12 months. Otherwise it is short-term.

What is grandfathering in equity taxation?

It protects gains up to 31 January 2018. For assets bought before 1 February 2018, the cost is the higher of actual cost and the lower of FMV on 31 January 2018 and sale value.

Is there indexation on equity LTCG?

No. Equity LTCG on listed shares and equity-oriented funds does not get indexation. The only cost adjustment is the grandfathered cost for older holdings.

Is LTCG on equity fully taxable?

No. LTCG up to the annual exemption limit is not taxed. Only the excess over the limit is taxed at the special rate. Check the current limit and rate.