Where this fits: You are investing and staying invested. This chapter covers what the tax department expects.
By the end of this chapter you will be able to
- Explain how capital gains are taxed differently by asset and holding period
- Identify the statutory charges on your transactions
- Keep records that make filing straightforward
An important note before you begin. The Income-tax Act, 2025 came into force on 1 April 2026 and replaced the Income-tax Act, 1961, which had governed Indian direct taxation for sixty-five years. It applies from Tax Year 2026-27 onwards. Income earned up to 31 March 2026 remains governed by the 1961 Act, so a return filed in 2026 for the financial year 2025-26 still uses the old law and the old section numbers. Every section and form reference in this chapter should be read against the 2025 Act, and the next section sets out the translations you will need. Rates and thresholds reflect the position at the time of writing.
Verify every figure against the Income Tax Department’s current guidance at incometax.gov.in before acting, and consult a qualified tax professional for your own situation. This chapter teaches you the structure; the structure is stable even when the numbers are not.
The Income-tax Act, 2025: what changed and what did not
The change that took effect on 1 April 2026 is a re-codification, not a new tax. It is worth being clear about which half is which, because the headlines caused a good deal of unnecessary alarm.
What did not change: Rates and slabs. The capital gains treatment set out in this chapter. Deduction limits. The choice between the old and new tax regimes. Nothing you already hold became taxable in a way it was not before, and assessments for earlier years continue under the old Act.
What did change: The structure and the vocabulary. Over eight hundred sections became 536 across 23 chapters, the language was rewritten in plainer terms, and — the part that will actually affect you — almost every section and form number is different. The terms Previous Year and Assessment Year have also gone, replaced by a single Tax Year.
The references a retail investor is most likely to meet translate as follows:
| Familiar reference under the 1961 Act | Equivalent under the 2025 Act |
|---|---|
| Section 80C deductions | Section 123, which also absorbs the old 80CCC and part of 80CCD |
| Section 87A rebate | Section 156 |
| Section 115BAC, the new tax regime | Section 202 |
| Form 16, the salary TDS certificate | Form 130 |
| Form 26AS, the tax credit statement | Form 168 |
| Form 60, declaration by a person without PAN | Form 97 |
| Forms 15G and 15H | Form 121 |
When the new numbers start to matter. Not immediately. A return for the financial year
2025-26, filed during 2026, is a return under the 1961 Act and carries the old numbers — your
Form 16 for that year will still say Form 16. The new numbering appears on returns for Tax Year 2026-27, filed from 2027. For the transition the Income Tax Department has published a mapping facility on incometax.gov.in that shows an old provision alongside its replacement; it is worth using rather than guessing.
Deductions belong to the old regime
One point deserves emphasis because it is the most expensive misunderstanding in personal tax, and renumbering has not changed it.
The new tax regime is the default. If you have never actively chosen otherwise, you are in it. And under it, the familiar deductions are simply not available:
- Section 123 — the old Section 80C — covering PPF, ELSS, life insurance premiums, NSC, the EPF contribution, Sukanya Samriddhi, tuition fees and home loan principal, up to ₹1.5 lakh
- Health insurance premiums, donations, education loan interest and most other deductions that used to sit in Chapter VI-A
These are available only if you opt for the old regime. A few benefits do survive in the new regime — the standard deduction for salaried taxpayers and the employer’s contribution to NPS among them — but they are the exception.
Watch Out — the tax-saving investment that saves no tax
Every January, people buy an ELSS fund or a five-year tax-saving deposit “for 80C” without first checking which regime they are in. If you are on the default new regime, that purchase earns you no deduction whatsoever. You may still have bought a perfectly good investment — but you bought it for a reason that does not apply to you.
Work out which regime leaves you paying less, using your own numbers, and only then decide whether a deduction is a reason to invest. An investment that is not worth holding on its own merits is not worth holding for a deduction either.
Capital gains: the basic idea
When you sell an investment for more than you paid, the profit is a capital gain and is taxable.
Two things determine how much:
- What kind of asset it is — equity, debt, gold, property
- How long you held it — short-term or long-term
The general principle across asset classes: holding longer results in more favourable treatment. This is a deliberate policy choice, and it happens to align with everything else in this book.
Equity and equity-oriented mutual funds
| Short-term (STCG) | Long-term (LTCG) | |
|---|---|---|
| Holding period | 12 months or less | More than 12 months |
| Rate | 20% plus applicable cess | 12.5% plus applicable cess |
| Exemption | None | Gains up to ₹1.25 lakh in a financial year are exempt |
An equity-oriented mutual fund is generally one holding at least 65% in equity.
Worked Example — the exemption is worth using
Anita holds equity mutual fund units bought three years ago. Her unrealised gain is ₹4,00,000.
If she sells everything in one financial year: Taxable gain = ₹4,00,000 − ₹1,25,000 = ₹2,75,000 Tax at 12.5% ≈ ₹34,375 (plus cess)
If she sells in instalments across four financial years, realising about ₹1,00,000 of gain each year, each year’s gain falls within the annual exemption and no LTCG arises on those redemptions.
Two cautions. The gain in later years will differ as the NAV changes, so this is not a fixed outcome. And tax planning should never override your actual need for the money — if you need the full amount now, take it and pay the tax.
(Illustrative, at rates current at the time of writing.)
Debt mutual funds
For units of specified debt mutual funds acquired on or after 1 April 2023, gains are generally added to your income and taxed at your applicable slab rate, irrespective of the holding period — there is no separate long-term concession.
Transitional treatment may apply to units acquired earlier. Given the number of changes in this area, verify the current position for your specific units and acquisition dates.
Hybrid funds
Treatment follows the equity content:
- Equity-oriented hybrid funds (generally 65% or more in equity) are taxed like equity funds
- Debt-oriented hybrid funds are taxed like debt funds
The scheme document and factsheet state the category. Check it before assuming.
Other assets
| Short-term | Long-term | |
|---|---|---|
| Holding period | Less than 24 months | More than 24 months |
| Rate | Added to income, taxed at your slab rate | 12.5% without indexation |
This covers physical gold, gold funds, real estate and similar assets.
Indexation — adjusting the purchase cost for inflation before computing the gain — was withdrawn in favour of a lower flat rate; specific transitional provisions may apply to certain immovable property. Verify for your situation.
Statutory charges on transactions
Separate from tax on gains, several charges apply to the transactions themselves.
Securities Transaction Tax
STT is levied by the Central Government on transactions executed on recognised stock exchanges.
- It appears as a separate line on your contract note
- On equity delivery, it applies on both purchase and sale, at prescribed rates
- On equity mutual fund units and equity ETFs, it applies on redemption or sale, not on purchase or subscription
- Off-market transfers do not attract STT
Stamp duty
A statutory levy on issue and transfer of securities, applied at uniform rates, itemised separately on your contract note or transaction statement.
Holding securities in demat form eliminated the physical stamp paper requirement that once applied to transfer deeds — one of the practical benefits of dematerialisation.
Exchange and regulatory charges
Exchange transaction charges, SEBI turnover fees, and GST on brokerage and certain charges. Individually small; collectively meaningful if you transact often. This is part of why this book is discouraging about frequent trading.
Tax Deducted at Source
TDS means tax withheld at the point of payment and deposited with the government on your behalf. It is not an additional tax — it is an advance against your final liability, and it appears in your Form 26AS and Annual Information Statement.
| Income | Treatment |
|---|---|
| Bank FD and RD interest | TDS applies where interest exceeds prescribed thresholds in a financial year. Interest is added to income and taxed at your slab rate |
| Mutual fund IDCW | Distributions are taxable in your hands at your slab rate. TDS applies where the payout from a fund house exceeds the prescribed threshold in a financial year, provided PAN is updated |
| Government Securities | No TDS on interest. You declare it in your return |
| NRI redemptions and gains | Tax is generally withheld by the AMC or RTA at the time of payout |
If your total income is below the taxable threshold, you may be able to submit a declaration to prevent TDS on certain interest income. From Tax Year 2026-27 this declaration is made in
Form 121, a single form under the Income Tax Act, 2025 that replaces Form 15G and Form 15H — previously two separate forms, one for those below 60 and one for senior citizens. The eligibility conditions are unchanged; only the form has been merged. The older forms continue to apply to earlier years. Check eligibility carefully — an incorrect declaration has consequences.
Deductions and the changing framework
Under the Income Tax Act, 1961, Section 80C (under old tax regime) allowed eligible individuals and HUFs to claim a deduction up to ₹1,50,000 per financial year for specified investments and payments, including:
- Equity Linked Savings Schemes (ELSS)
- Public Provident Fund
- Sukanya Samriddhi Yojana
- Tax-saving bank fixed deposits with a five-year lock-in
- National Savings Certificate
- Principal repayment on a housing loan
- Employee Provident Fund contributions
- Life insurance premiums
Two important qualifications.
First, the availability of deductions depends on which tax regime you have opted for. The regimes differ substantially in whether deductions are available at all.
Second, from Tax Year 2026-27, the Income Tax Act, 2025 applies, with corresponding provisions under new section and schedule references. Do not rely on the Section 80C framework without verifying the current position for your tax year and your old regime.
Watch Out — the tax benefit should follow the investment decision, not drive it
A large amount of poor financial decision-making in India happens in the last week of March.
Products bought purely to save tax, in a hurry, without regard to suitability, lock-in or cost, routinely turn out to be unsuitable — long-lock-in insurance-cum-investment products being the classic example.
The correct sequence: decide your asset allocation and goals first, then select tax-efficient instruments within that allocation. If ELSS fits your equity allocation and horizon, it is an excellent choice. If it does not, the deduction does not make it right.
And do this in April, not March. The same investment made at the start of the year has twelve extra months of compounding.
Records you must keep
Capital gains cannot be computed without purchase records. Keep, for every holding:
- Date of purchase
- Quantity and purchase price
- Brokerage and charges paid
- Date and price of sale
- Contract notes and transaction statements
Most brokers and AMCs provide a capital gains statement for the financial year — download it every year and file it. Reconstructing a fifteen-year holding history from memory is close to impossible.
Also review your Annual Information Statement (AIS) and Form 26AS before filing. They show what the department already knows about your income, and discrepancies are worth resolving before, not after, you file.
Recap in one minute
- Capital gains tax depends on the asset and the holding period; holding longer is generally treated more favourably.
- Equity and equity-oriented funds: 12 months is the dividing line, with an annual LTCG exemption worth using.
- Debt funds acquired on or after 1 April 2023 are generally taxed at slab rate regardless of holding period.
- STT, stamp duty, exchange charges and GST apply to transactions themselves and are itemised on your contract note.
- Never buy a product for the deduction alone. Decide allocation first, then choose tax efficient instruments within it.
Check your understanding
Ravi sells equity mutual fund units held for 10 months at a gain of ₹80,000. Short-term or long-term, and at what rate?
Show answer to question 1
Short-term, since the holding is 12 months or less. Taxed at 20% plus applicable cess.Why might realising long-term equity gains across two financial years produce a lower tax outcome than realising them in one?
Show answer to question 2
Because up to ₹1.25 lakh of long-term equity gains is exempt per financial year. Splitting realisation across two years can use the exemption twice.Why is buying an ELSS in April generally better than buying it in March?
Show answer to question 3
Because the money invested in April has an additional twelve months to compound — and because a March purchase is usually made in haste, without proper regard to suitability.
Your action step
Download your capital gains statement for the last completed financial year from your broker or AMC. Look at how much you paid in STT, brokerage and other charges. Most people are surprised. Then check your AIS on the income tax portal against your own records.
