Long-term capital gain (LTCG) Tax: The ₹1.25 Lakh Exemption That Expires Every 31 March

Half the financial year is gone, and so is half the allowance#

On Tuesday the Sensex closed at 74,003.82, down 777.94 points, with the Nifty 50 at 23,118.60. Realty stocks lost 4% in a session and have shed more than 9% across seven sessions. Small caps were down 2.4%. Nobody with an equity portfolio is enjoying this fortnight.

Which makes it a reasonable moment to look at a number most investors never check.

Every resident individual in India can book ₹1,25,000 of long-term capital gains on listed shares and equity mutual funds in a financial year and pay nothing on it. Per person. Per year. The counter resets on 1 April, and whatever you have not used by 31 March simply lapses.

At 12.5% that allowance is worth ₹15,625 of tax a year, ₹16,250 with cess. Ignore it for a decade and the bill at the end is roughly ₹1.46 lakh. AMFI's August 2026 data counts 28.35 crore mutual fund folios, 10.02 crore contributing SIP accounts and ₹39.21 lakh crore in equity schemes. A great many of those units have crossed the twelve-month mark. Very few of their owners have ever used the allowance.

What the law actually says#

Two things decide how a share or a fund unit is taxed when you sell: how long you held it, and what it is.

Hold a listed equity share, a unit of an equity-oriented mutual fund or a unit of a business trust for more than twelve months and the gain is long-term. Twelve months or less and it is short-term, taxed at 20% with no exemption threshold of any kind. The ₹1.25 lakh exists only on the long-term side.

The governing provision used to be Section 112A of the Income-tax Act, 1961. Since 1 April 2026 it is Section 198 of the Income-tax Act, 2025, which carries the old rules across almost word for word: 12.5% on such gains "exceeding ₹1,25,000", provided securities transaction tax was paid on the sale, and on the purchase too in the case of shares. Equity-oriented means a scheme holding at least 65% in domestic equity. The Union Budget of 1 February 2026 left all of this untouched, raising only the STT on commodity futures from 0.02% to 0.05%. On top of the 12.5% sits 4% health and education cess, with surcharge on these gains capped at 15% however large your income.

One older rule still matters for shares bought before February 2018. There, the cost of acquisition is the higher of what you paid and the lower of the 31 January 2018 fair market value or your actual sale price, which keeps gains accrued up to that date out of the net.

The allowance does not roll over#

Take two people who buy the same equity fund on the same day, hold the same units, and end up with the same ₹12,50,000 of gain after ten years.

Investor A never sells until year ten. Investor B redeems just enough each year to realise ₹1,25,000 of long-term gain, then puts the money straight back into the same scheme.

Worked from the rates in Section 198 of the Income-tax Act, 2025 and the cess rate published by the Income Tax Department. Assumes a resident individual with other income above the basic exemption limit, no capital losses and no surcharge.

Same fund, same gain, same holding, and a difference of ₹1,46,250 produced entirely by which financial years the gain landed in.

The second column has a practical catch. You need ₹1,25,000 of real long-term gain available each year, and early in a portfolio's life it will not be there. If your units held beyond twelve months show a 25% gain over cost, you have to redeem about ₹6,25,000 worth to realise ₹1,25,000 of it. Smaller portfolios will use only part of the allowance. Part of it still beats none of it.

Three ways people lose it without noticing#

The first is never selling. Buy-and-hold is sound investing and expensive tax planning, and those are not the same activity.

The second is selling everything at once, for a house, a wedding, a job loss, or a panic in a week like this one. One large redemption spends a single year's allowance against a gain that took years to build.

The third catches salaried people under the new regime. The rebate that wipes out tax on income up to ₹12 lakh does not extend to income taxed at special rates, and Section 198 puts it in statutory language: the rebate applies to tax on your total income after removing these capital gains. Somebody with ₹11 lakh of salary and ₹2 lakh of long-term equity gain therefore pays nothing on the salary and still owes 12.5% on ₹75,000, or ₹9,375 plus cess.

A related provision works the other way, and hardly anybody uses it. If you are a resident individual or HUF and your other income falls short of the basic exemption limit, Section 198 lets you reduce your long-term gains by that shortfall before the ₹1.25 lakh is applied. With the basic exemption at ₹4 lakh under the new regime, a resident with no other income can realise about ₹5,25,000 of long-term equity gain in a year and pay nothing. Homemakers, retired parents, students and the self-employed in a lean year all qualify. Non-residents get no such adjustment.

When the market is down, the other half of the ledger matters#

In a week when small caps drop 2.4% in a session, the more useful move for many people is harvesting a loss rather than a gain.

The rules are asymmetric and worth memorising. A short-term capital loss can be set off against both short-term and long-term gains, while a long-term capital loss can only go against long-term gains. Anything unabsorbed carries forward for eight assessment years, but only if the return went in by the due date under Section 139(1). File late and the carry-forward dies. For AY 2026-27 that date was 31 July 2026 for ITR-1 and ITR-2, and 31 August for non-audit ITR-3 and ITR-4.

Then comes the part that trips people up. The ₹1.25 lakh applies to the long-term gain that survives after losses are set off. Book a ₹1.25 lakh gain and a ₹1.25 lakh long-term loss in the same year and the two cancel out, the taxable gain is nil, the allowance was never needed, and the loss bought you nothing you would not have had for free. Better to use the exemption in a year with no losses to burn. That is interpretation rather than statute, but it follows from how set-off is computed.

What this actually costs, and when not to bother#

Harvesting is not free, and the people selling the idea rarely mention the frictions.

Selling and rebuying resets the clock. New units start a fresh twelve months, so if you need the money nine months later you are looking at 20% short-term tax instead of 12.5%. STT of 0.1% applies on both the buy and the sell side of delivery equity, on top of brokerage and stamp duty. Fund redemptions settle in a day or two, so a badly timed switch leaves your money out of the market over a weekend. Check the scheme's exit load period first, and remember that ELSS units are locked for three years regardless.

None of it helps with debt funds. Units of a specified mutual fund bought after 1 April 2023 are deemed short-term whatever the holding period and taxed at slab rates, so there is no ₹1.25 lakh to claim. And if your long-term gains in a year will not reach ₹1.25 lakh anyway, there is nothing to plan. Sell when you need the money.

Whatever you do has to appear in the return. Long-term gains on listed shares go in scrip by scrip, in what the current forms still call Schedule 112A, increasingly pre-filled from your AIS, so a mismatch is visible to the department before it is visible to you.

Key takeaways#

1. The ₹1,25,000 exemption under Section 198 of the Income-tax Act, 2025 is an annual allowance. It resets on 1 April and does not carry forward.
2. On a ₹12.5 lakh gain built over ten years, using the allowance once instead of ten times costs ₹1,46,250 including cess.
3. It applies only to gains on holdings of more than twelve months. Sell inside twelve months and you pay 20% short-term tax with no threshold.
4. The rebate that makes income up to ₹12 lakh tax-free under the new regime does not cover these gains, but a resident with little other income can shield about ₹5.25 lakh by combining the basic exemption limit with the ₹1.25 lakh.
5. A long-term loss booked in the same year eats into the gain before the exemption is applied, so pairing the two in one year wastes the loss.

Frequently asked questions#

Is the ₹1.25 lakh limit per financial year or per transaction? Per financial year, aggregated across all your listed shares and equity-oriented funds, and per person.

Does it apply to every mutual fund? No. Only to equity-oriented schemes, meaning at least 65% in domestic equity. Debt and specified funds are taxed as short-term at slab rates whatever the holding period.

Is selling and immediately rebuying the same fund legal? India has no wash-sale rule of the American kind for ordinary equity transactions, and the units you buy back are a fresh purchase with a fresh cost and a fresh holding period. Anti-avoidance rules on bonus and dividend stripping still apply, so ask a chartered accountant about your own facts.

My total income is below ₹12 lakh. Am I safe? Not on this income. The rebate is computed after removing gains taxed at special rates, so 12.5% on gains above ₹1.25 lakh still applies.

What about losses carried forward from earlier years? Losses brought forward from before 1 April 2026 stay usable under the new Act in the manner the old Act allowed, within the same eight-year limit counted from the original assessment year, per the department's guidance.

Do a husband and wife each get ₹1.25 lakh? The exemption belongs to whoever the gain is assessed on. Two spouses with separate demat accounts and separate funding have two allowances, though clubbing provisions can undo that if one spouse's money bought the other's shares.

Glossary#

Long-term capital gain (LTCG). Profit on an asset held beyond the statutory period, which is twelve months for listed shares and equity-oriented fund units.

Section 198. The provision of the Income-tax Act, 2025 taxing these gains at 12.5% above ₹1,25,000. It replaced Section 112A of the 1961 Act on 1 April 2026.

Securities transaction tax (STT). A levy on stock market transactions, 0.1% on each side of a delivery equity trade. Paying it is a condition for the 12.5% rate.

Equity-oriented fund. A scheme investing at least 65% of assets in domestic equity shares, which is what puts it inside Section 198 rather than the debt fund rules.

Grandfathering. The rule allowing the 31 January 2018 fair market value to be used in the cost of acquisition, protecting gains accrued up to that date.

Set-off and carry forward. Adjusting a loss against a gain in the same year and carrying the unused balance forward for up to eight assessment years, only if the return was filed on time.

Basic exemption adjustment. The rule letting a resident individual or HUF reduce long-term gains by the amount their other income falls short of the basic exemption limit.

Specified mutual fund. A scheme outside the equity definition whose units, bought after 1 April 2023, yield short-term gains taxed at slab rates however long they are held.

References#

1. Income Tax Department, tax on long-term capital gains: rates, holding periods, grandfathering and the basic exemption adjustment
2. Income Tax Department, tax on sale of shares: holding periods and applicable rates
3. Income Tax Department, tax rates, surcharge and health and education cess for AY 2026-27
4. Income Tax Department, set off and carry forward of losses under the income-tax law
5. Income Tax Department e-filing portal, set off and carry forward of losses, transition to the Income-tax Act, 2025
6. Income-tax Act, 2025, full text, Income Tax Department
7. Section 198, Income-tax Act, 2025, tax on long-term capital gains in certain cases
8. Section 198(1), Income-tax Act, 2025, Indian Kanoon
9. Association of Mutual Funds in India, tax regime for mutual funds
10. Cafemutual, AMFI monthly data for August 2026: AUM, SIP inflows, folio counts, 9 September 2026
11. Business Standard, Sensex settles 778 points lower, Nifty ends below 23,150, 15 September 2026
12. Angel One, Union Budget 2026: LTCG tax unchanged at 12.5%, STT on commodity futures raised
13. ClearTax, income tax slabs and the Section 87A rebate for FY 2026-27
14. ClearTax, ITR filing due dates for FY 2025-26 (AY 2026-27)
15. Zerodha, how securities transaction tax is calculated
16. Google Ads search volumes for India, retrieved through DataForSEO, 16 September 2026

This article is journalism, not investment or tax advice. Tax rules change and individual circumstances differ. Verify the current provisions and consult a qualified chartered accountant before acting.