For investors, a ₹2 lakh gain does not necessarily mean a ₹2 lakh tax bill. The tax depends on what you sold, how long you held it and whether the gain is eligible for a special capital-gains rate.
With the new Income Tax Act, 2025 now applicable for tax years beginning April 1, 2026, the underlying capital-gains framework continues, although provisions have been renumbered. The Income Tax Department says listed shares and equity-oriented mutual funds generally qualify for long-term treatment after a 12-month holding period.
Here is what investors need to know.
1. I made ₹2 lakh from stocks. How much tax do I pay?
First, an important distinction: ₹2 lakh should mean your profit or capital gain, not the total amount for which you sold the shares.
“It depends on how long you held them. For listed equity shares on which Securities Transaction Tax (STT) is paid, the following rates apply: long-term gains (held over 12 months) are taxed at 12.5% after a ₹1.25 lakh annual exemption under Section 112A, and short-term gains at 20% under Section 111A. So on a ₹2 lakh long-term gain, only ₹75,000 is taxable (after the ₹1.25 lakh exemption), giving about ₹9,375 in tax; if it were short-term, the ₹2 lakh is taxed at 20%, or ₹40,000. Equity-oriented mutual funds are taxed exactly the same way. [The parallel provisions under the Income Tax Act, 2025 are the renumbered capital-gains sections; exact numbers to be confirmed against the bare Act,” said Archit Gupta, Founder & CEO, ClearTax.
For example, if you bought shares for ₹8 lakh and sold them for ₹10 lakh, your capital gain is ₹2 lakh.
For listed equity shares where the applicable STT conditions are met, a long-term capital gain is taxed at 12.5% after the ₹1.25 lakh annual exemption available for qualifying gains. Short-term gains are taxed at 20%. The Income Tax Department confirms the 20% rate for eligible short-term equity gains and the 12.5% rate for qualifying long-term gains.
Example: ₹2 lakh long-term gain
Suppose you bought shares for ₹8 lakh and sold them for ₹10 lakh after holding them for more than 12 months.
Capital gain: ₹2,00,000
Less: ₹1,25,000 exemption
Taxable LTCG: ₹75,000
Tax at 12.5%: ₹9,375
4% cess: ₹375
Total tax: about ₹9,750, assuming no surcharge
So, a ₹2 lakh long-term equity gain does not result in ₹25,000 of tax.
What if you sell within 12 months?
Suppose the same ₹2 lakh gain arises after holding the shares for only eight months.
Short-term capital gain: ₹2,00,000
Tax at 20%: ₹40,000
4% cess: ₹1,600
Total: about ₹41,600, assuming no surcharge.
That is a significant difference simply because of the holding period. The 12-month threshold applies to listed equity shares and equity-oriented mutual funds.
In other words, the same ₹2 lakh profit can attract roughly ₹9,750 or ₹41,600 of tax depending on whether it is long-term or short-term.
2. What about mutual funds?
If you are investing in an equity-oriented mutual fund, the tax treatment is broadly the same as eligible listed equity investments.
The Income Tax Department specifically includes units of equity-oriented mutual funds among assets for which the 12-month holding period is relevant for determining long-term status.
Example
Suppose you invest ₹5 lakh in an equity mutual fund and redeem it for ₹7 lakh.
Your gain is ₹2 lakh.
If you held the fund for more than 12 months:
Gain: ₹2 lakh
Less ₹1.25 lakh exemption
Taxable gain: ₹75,000
Tax: ₹9,375
Including 4% cess: about ₹9,750
If you redeem it before completing 12 months and the gain qualifies as short-term equity-fund gain:
Gain: ₹2 lakh
Tax at 20%: ₹40,000
Including cess: about ₹41,600
So the tax treatment is not determined simply by whether you invest through a mutual fund or directly in shares. The type of mutual fund matters.
3. What about ETFs?
“An ETF is a fund that trades on the exchange like a share. Its tax depends on what it holds, not the ETF label. An equity ETF is taxed just like an equity fund, long-term after 12 months, at 12.5%. Since ETFs are mostly listed on the stock exchange, the holding period of 12 months is considered to consider whether they are taxed as short term or long term,” said Gupta.
For an equity ETF that qualifies as an equity-oriented fund, the 12-month long-term threshold applies.
Example: equity ETF
You invest ₹4 lakh in an equity ETF and eventually sell it for ₹6 lakh.
Your gain is ₹2 lakh.
If held for more than 12 months, the calculation would broadly be:
₹2 lakh gain – ₹1.25 lakh exemption = ₹75,000 taxable × 12.5% = ₹9,375 tax, before cess.
But investors should not assume every ETF gets this treatment. A gold ETF, debt ETF or another non-equity ETF can have a different tax outcome depending on the applicable classification and rules.
4. What happens when you sell cryptocurrency?
“Crypto is taxed as a Virtual Digital Asset. Gains are taxed at a flat 30% regardless of how long you held it, and no deduction is allowed except the cost of acquisition. Crucially, crypto losses cannot be set off against any income, not even against other crypto gains, and cannot be carried forward,” said Gupta.
xample
Suppose you bought Bitcoin for ₹5 lakh and sold it for ₹7 lakh.
Your gain is:
₹7 lakh – ₹5 lakh = ₹2 lakh
Tax:
Gain: ₹2,00,000
Tax at 30%: ₹60,000
4% cess: ₹2,400
Total: ₹62,400, before surcharge, if applicable.
The holding period does not reduce the rate to 12.5% as it can for qualifying equity investments.
There is another important difference: VDA losses cannot be set off against other income or even other VDA gains, and cannot be carried forward.
For example, if you make a ₹2 lakh profit on one crypto asset but a ₹1 lakh loss on another, you cannot simply reduce the taxable crypto gain to ₹1 lakh. The loss does not get the normal capital-loss set-off treatment.
5. What is the tax difference between short-term and long-term gains?
Long-term gains generally get more beneficial rates. For listed equity shares, equity-oriented funds and units of a business trust (STT paid), long-term gains are taxed at 12.5% with a ₹1.25 lakh exemption, and short-term gains at 20%. For most other capital assets, long-term gains are taxed at 12.5% without indexation, while short-term gains are taxed at your applicable slab rates.
6. Can losses from one investment offset gains from another?
“Yes, within limits. A short-term capital loss can be set off against both short-term and long-term capital gains. A long-term capital loss can be set off only against long-term capital gains. Capital losses can’t be set off against income from other heads, but any unabsorbed capital loss can be carried forward for eight assessment years, provided the return is filed by the due date,” explained Gupta.
Example
Suppose during the year you have:
₹2 lakh short-term gain from Stock A
₹80,000 short-term loss from Stock B
You can potentially set off the ₹80,000 loss against the ₹2 lakh gain.
So your net taxable short-term gain becomes:
₹2,00,000 – ₹80,000 = ₹1,20,000
At 20%, the basic tax would be ₹24,000 rather than ₹40,000, subject to the applicable rules.
But suppose instead you have:
₹2 lakh short-term gain
₹80,000 long-term loss
The long-term loss cannot be used to reduce the short-term gain. It can be adjusted only against eligible long-term gains.
Unused eligible capital losses can generally be carried forward for eight assessment years, provided the return for the year in which the loss arose is filed within the prescribed due date.
7 What is tax-loss harvesting, and can young investors use it legally?
Tax-loss harvesting means booking a loss on one holding to offset gains on another, reducing your overall capital-gains tax. It’s perfectly legal, and any investor can use it, typically by selling underperformers before year-end and rebalancing the portfolio so the realised losses soak up realised gains.
For example, suppose you have:
₹3 lakh realised gain from Stock A
₹1 lakh unrealised loss in Stock B
If you sell Stock B and realise the ₹1 lakh loss, you could potentially use that loss against the eligible gain, subject to the short-term/long-term set-off rules.
Instead of paying tax on the entire ₹3 lakh gain, you could potentially end up with a net ₹2 lakh capital gain.
The key word is realised. An investment showing a ₹1 lakh loss on your portfolio screen does not ordinarily create a capital loss for set-off purposes merely because its market value has fallen. The transfer has to occur.
Tax-loss harvesting is not restricted to older or wealthy investors. A young investor with a small portfolio can use the same capital-loss rules.
However, investors should not turn it into a purely artificial transaction.
The Income Tax Department’s General Anti-Avoidance Rule (GAAR) provisions allow arrangements that are primarily designed to obtain a tax benefit and lack commercial substance or are not undertaken for bona fide purposes to be treated as impermissible avoidance arrangements. GAAR has been retained under the Income Tax Act, 2025
8. Can I sell a loss-making stock and buy it back later?
“There’s no legal bar on selling a stock to book the loss and buying it back afterwards. But if the sale-and-repurchase is purely to manufacture a loss with no real change in position, aggressive use of this can draw the department’s attention and invite scrutiny, so it should reflect a genuine investment decision,” said Gupta.
For example, an investor may sell a stock because its prospects have deteriorated, book the capital loss and later decide to re-enter the stock after reassessing the investment. The surrounding facts and commercial rationale matter.
If, however, transactions are arranged primarily to obtain a tax benefit and lack commercial substance, GAAR provisions can become relevant.
So investors should not assume that simply selling and immediately repurchasing a security makes every tax-loss strategy automatically risk-free