Long Term Capital Gain
Also written LTCG · Long Term Capital Gain (LTCG) · Long-term capital gain (LTCG)
The gain on mutual fund units sold after the long-term holding period — 12 months for equity-oriented funds, 24 months for most others — taxed at 12.5% on equity funds above a Rs 1.25 lakh yearly exemption.
In plain language
When an investor sells units for more than they cost, the difference is a capital gain; for less, a capital loss. The Income Tax Act then sorts gains into short-term and long-term according to how long the units were held, and taxes the two differently.
There are only two holding periods to remember:
- 12 months — for all listed securities and for units of equity-oriented funds.
- 24 months — for all other assets.
Hold beyond the relevant period and the gain is long-term.
The tax picture for equity funds changed in stages. Long-term gains on equity mutual funds were exempt until the Union Budget of 2018 made them taxable, with a grandfathering clause protecting gains made up to 31 January 2018. Then the Union Budget presented in July 2024 reset the rates: the workbook's table applies to units redeemed on or after 23 July 2024, while units redeemed before that date follow the old rates.
How it works
The workbook's table for unit holders:
| Investment asset | STCG | LTCG | Long-term after |
|---|---|---|---|
| Equity-oriented funds (incl. hybrids with more than 65% in equity) | 20% | 12.5%, with Rs 1.25 lakh exemption per financial year | 12 months |
| Debt-oriented funds (incl. hybrids with more than 65% in debt) | Marginal slab rate | Marginal slab rate | — |
| Hybrid funds with 35% to 65% in domestic equity | Marginal slab rate | 12.5% | 24 months |
| Other MFs (fund of funds, international funds / FoFs) | Marginal slab rate | 12.5% | 24 months |
| Equity ETFs | Marginal slab rate | 12.5% | 12 months |
| Gold ETFs | Marginal slab rate | 12.5% | 12 months |
| Debt ETFs | Marginal slab rate | Marginal slab rate | — |
The Rs 1.25 lakh exemption applies to long-term gains from equity shares and equity-oriented funds, per year. The workbook's illustration: total LTCG of Rs 90,000 is entirely exempt; LTCG of Rs 1,35,000 leaves Rs 10,000 taxable.
Three more rules sit around the rate:
- Set-off. A long-term capital loss can be set off only against long-term capital gain. No capital loss can be set off against another head of income such as salary. Unabsorbed capital loss can be carried forward for up to 8 years.
- Joint holding. Capital gains are treated as earned by the first holder.
- Purchase date. Changes in the Union Budget 2023 apply from 1 April 2023; investments made before that date enjoy the old tax structure.
At the scheme level there is no tax at all: Section 10(23)(D) exempts a mutual fund's income. That is why the growth option lets gains compound until the investor sells — the deferment of taxes.
A worked example
Nisha redeems three holdings in the same financial year, all after 23 July 2024. Purchase prices and dates are illustrative; the rates are the workbook's.
| Holding | Held for | Gain | Classification |
|---|---|---|---|
| Flexi-cap equity fund | 20 months | Rs 1,60,000 | Long-term (over 12 months) |
| Balanced hybrid fund, 50% equity | 20 months | Rs 40,000 | Short-term (needs over 24 months) — taxed at slab |
| Gold ETF | 14 months | Rs 30,000 | Long-term (over 12 months) |
The equity fund gain:
LTCG from equity-oriented fund = Rs 1,60,000
Less: annual exemption = Rs 1,25,000
Taxable at 12.5% = Rs 35,000
Tax = Rs 4,375
The gold ETF gain is long-term at 12.5%: Rs 30,000 × 12.5% = Rs 3,750. The workbook applies the Rs 1.25 lakh exemption to equity shares and equity-oriented funds, so she should not assume it covers the ETF gain.
The hybrid fund is the trap. Twenty months is long enough for equity and gold ETFs, but a hybrid with 35 to 65 per cent in domestic equity needs more than 24 months, so her Rs 40,000 is short-term and added to her income at her marginal slab rate.
If she also had a long-term capital loss of Rs 20,000 on another equity fund, it would reduce her long-term gains first — but it could never be set against her salary.
Why NISM asks about it
Chapter 8 (Taxation), section 8.2, sets out the two holding periods, grandfathering, the Rs 1.25 lakh exemption with its Rs 90,000 / Rs 1,35,000 illustration, and the rate table; section 8.5 covers set-off and the 8-year carry-forward. Expect straight recall of the rate and exemption, a classification question that hinges on the fund type and holding period, and a set-off question on whether a long-term loss can absorb a short-term gain.
Common exam traps
- Equity-oriented: long-term after 12 months, 12.5% above Rs 1.25 lakh a year.
- A 35–65% equity hybrid needs over 24 months to be long-term. Twenty months is still short-term for it.
- Debt-oriented funds and debt ETFs are taxed at the marginal slab rate either way in the workbook's table.
- A fund of funds investing in equity funds is not equity-oriented for tax, even though its money ends up in equity.
- Long-term capital loss sets off only against long-term capital gain; short-term loss can go against either. Carry forward: 8 years.
- The old rates apply to redemptions before 23 July 2024 — the redemption date decides which table applies.
- The definition of "equity-oriented" differs between chapters. Chapter 8 (tax) says more than 65 per cent of AUM in equity shares listed on recognised Indian stock exchanges. Chapter 7 (TER limits) says a scheme investing a minimum of 65 per cent of net assets in equity and equity related instruments. A tax question wants the Chapter 8 test.
Where this is taught
- Series V-A · Chapter 8: Taxationintroduced here
- Series XXI-A · Chapter 11: Taxationintroduced here
Related terms
- Bonus strippingBuying units shortly before a bonus issue and selling the originals at the halved NAV to manufacture a capital loss — a loss the Income Tax Act disallows inside a defined 3-month and 9-month window.
- GrandfatheringThe Budget 2018 provision that kept long-term gains on equity funds accrued up to 31 January 2018 tax-free, by treating the value on that date as the base for computing taxable gain.
- Deferment of taxesThe advantage of the growth option: scheme income is tax-exempt and capital gains are taxed only when units are sold, so returns compound for years before any tax is paid.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Marginal Slab RateThe investor's own applicable income-tax slab rate. It taxes IDCW, short-term gains on most non-equity schemes, and all gains on debt-oriented funds and debt ETFs.
- Short Term Capital GainThe gain on mutual fund units sold within the holding period — 12 months or less for equity-oriented funds, 24 months or less for most others — taxed at 20% for equity funds and at slab rate otherwise.
- Realised gainA gain a mutual fund scheme has actually banked by selling the security, as against a valuation gain, which sits in the NAV on paper and may never turn into money at all.
- Intra-head adjustmentSetting off a loss from one source against income from another source under the same head of income — the first step of loss relief, under section 108 of the Income Tax Act, 2025.
- Inter-head adjustmentSetting off a loss under one head of income against income under a different head — permitted by section 109 of the Income Tax Act, 2025, but only after intra-head set-off and subject to two bars.
- Bonus sharesAdditional shares issued free to existing shareholders in proportion to their holding — no tax at allotment, a nil cost of acquisition, and a fresh holding period from the allotment date.
- Employee Stock Option PlanA right, not an obligation, for an employee to buy employer shares at a pre-fixed price — taxed twice: as a salary perquisite on exercise, and as capital gains on eventual sale.
- Marginal reliefRelief that caps the tax on income just above the section 87A rebate threshold at the amount by which the income exceeds that threshold — so one extra rupee of income never costs more than a rupee of tax.
- Telegraphic Transfer buying rateThe State Bank of India's telegraphic transfer buying rate for a foreign currency — the rate the Income Tax rules use to convert foreign-currency capital gains and income from securities into rupees.
- Post-tax returnReturn after taxes on investment income and realised capital gains: pre-tax return × (1 − tax rate). It is what matters to the investor, but performance is communicated pre-tax.
- Income from other sourcesThe head of income under which interest and dividends earned in a PMS are taxed, at the investor's slab rate — with no indexation or capital gains benefit.
- Index ETFA mutual fund scheme that invests in securities in the same proportion as an index of securities and lists on an exchange; it is taxed exactly like a listed equity oriented fund.
- Indexed cost of acquisitionCost of acquisition scaled up by the Cost Inflation Index, so that only the real gain is taxed; withdrawn for transfers on or after 23 July 2024 except for land or building acquired before that date.
- Long-term capital assetA capital asset held for more than the prescribed period before transfer — generally more than 24 months, and more than 12 months for listed securities and equity oriented fund units.
- Treasury BillA short-term Government of India debt instrument issued at a discount in tenors of 91, 182 or 364 days; it pays no interest, and the gain on redemption is taxed as a short-term capital gain.
- Unlisted equity sharesShares not listed on any recognised stock exchange in India: the long-term holding period is 24 months rather than 12, long-term gains are taxed at 12.50%, and short-term gains at normal rates.
- PGBPThe Income Tax Act head under which futures and options income earned through a PMS is taxed as business income, not as capital gains, regardless of whether the investor is resident or NRI.