Tax on shares and equity funds
Part of Tax on investments. 7 min read. Free lesson with a short video, quiz and practice.
Listed shares and equity mutual funds (funds with at least 65% in Indian shares) share the same tax rules. Here's how those rules work for SIPs, redemptions and the ₹1.25 lakh yearly exemption.
The rates
- Short-term (held 12 months or less): 20% of the gain.
- Long-term (held more than 12 months): 12.5% on total long-term gains above ₹1,25,000 in a tax year.
The ₹1.25 lakh is one combined limit for all your listed shares and equity funds together, not per stock or per fund. These rates need STT to have been paid, which happens automatically on stock exchange trades and equity fund redemptions.
SIPs: every instalment is separate
Each SIP instalment buys units on its own date, so each has its own 12-month clock. When you redeem, the oldest units go first.
Example: Aman invested ₹10,000 on the 5th of every month from January to December 2025. He redeems everything on 1 August 2026.
- January to July 2025 instalments (7): held more than 12 months, so long-term. Say the gain is ₹14,000.
- August to December 2025 instalments (5): held less than 12 months, so short-term. Say the gain is ₹4,000.
Long-term gain of ₹14,000 is within the ₹1.25 lakh exemption: tax ₹0. Short-term tax: 20% × ₹4,000 = ₹800, plus cess.
ELSS lock-in
ELSS (tax-saving) funds lock each instalment for 3 years from its own date. An instalment made in January 2026 can be withdrawn only from January 2029, and the next one a month later.
Old investments: grandfathering
For shares and equity funds bought before 1 February 2018, gains up to the price on 31 January 2018 are protected. The cost is taken as the higher of what you paid and the 31 January 2018 value (but not more than the sale price). Your broker or fund statement does this calculation for you.
Other points
- Switching from one fund or plan to another (even regular to direct) counts as a sale.
- Dividends (the IDCW option) are taxed separately, at your slab rate.
- Some investors choose to book long-term gains each year up to ₹1.25 lakh. Whether that suits you depends on your situation; this is not a recommendation.
Your broker's capital gains statement and your fund's consolidated account statement show each sale, its holding period and the gain.
Key takeaways
- Equity funds (65%+ in Indian shares) follow the same tax rules as listed shares.
- Short-term: 20%; long-term: 12.5% on combined gains above ₹1.25 lakh a year.
- Each SIP instalment has its own 12-month clock; oldest units are sold first.
- ELSS locks each instalment for 3 years from its own date.
- Switching funds counts as a sale; dividends are taxed at your slab rate.
Quick quiz
Your long-term gains this year are ₹1,00,000 from shares and ₹50,000 from equity funds. How much is taxable?
Answer: ₹25,000. Combined ₹1,50,000 minus the ₹1,25,000 exemption leaves ₹25,000.
How is the holding period counted for a SIP?
Answer: Separately for each instalment. Each instalment buys units on its own date, so each has its own clock.
What is the short-term rate on equity fund gains?
Answer: 20%. Short-term gains on equity funds are taxed at 20%.
Switching from a regular plan to the direct plan of the same fund is…
Answer: Treated as a sale. A switch is a redemption plus a new purchase, so gains may be taxed.