Capital Gains on Shares: Tax Rates, Rules and Loss Set-Off
Capital gains on shares arise whenever an investor sells equity shares at a price higher than their acquisition cost. Calculating the tax due on these profits depends on how long the shares were held, whether the trade took place on a recognized stock exchange, and whether Securities Transaction Tax was paid. Under the Income-tax Act 2025, which replaced the Income-tax Act 1961 on 1 April 2026, short-term equity gains face a 20 percent tax rate under Section 196, while long-term gains exceeding ₹1,25,000 are taxed at 12.5 percent under Section 198. This guide serves as the central reference for equity taxation, explaining holding period boundaries, rate calculations, and the statutory rules governing loss set-off and carry-forward.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers. This page explains statutory tax rules. It recommends no specific security and sets no course of action. The choice is yours.
The short version:
Listed equity shares held for 12 months or less trigger Short-Term Capital Gains (STCG) taxed at 20% under Section 196
Listed equity shares held for more than 12 months trigger Long-Term Capital Gains (LTCG) taxed at 12.5% on profits above ₹1,25,000 per year under Section 198
Concessional rates require Securities Transaction Tax (STT) paid on transfer (and on acquisition for equity shares, subject to notified exceptions)
Short-term capital losses can offset both short-term and long-term capital gains in the same financial year
Long-term capital losses can only offset long-term capital gains; they cannot be adjusted against short-term gains, salary income, or business profits
Unabsorbed capital losses can be carried forward for up to 8 tax years under Section 111, provided the return is filed on or before the due date under Section 263(1)
Holding periods and the 12-month classification line
Holding duration determines whether equity profits qualify as short-term or long-term capital gains under Indian tax legislation. Listed equity shares traded on recognized stock exchanges cross into long-term classification after twelve months, whereas unlisted shares require more than twenty-four months to establish long-term status under direct tax rules.
The calendar period between the date of acquisition and the date of transfer determines the tax classification of your profit:
Listed Equity Shares: Held for 12 months or less, profits are short-term. Held for more than 12 months, profits are long-term.
Unlisted Equity Shares: Held for 24 months or less, profits are short-term. Held for more than 24 months, profits are long-term.
| Equity Asset Type | Short-Term Holding Period | Long-Term Holding Period | Governing Statute |
|---|---|---|---|
| Listed Equity Shares (STT Paid) | 12 months or less | More than 12 months | Section 196 (STCG) / Section 198 (LTCG) |
| Unlisted Equity Shares (Private Companies) | 24 months or less | More than 24 months | Slab rates (STCG) / Section 197 (LTCG at 12.5%) |
This 12-month threshold applies strictly to shares listed on recognized platforms like the BSE and the NSE. For unlisted shares of private companies, long-term capital gains are taxed under Section 197 at 12.5 percent without indexation, and do not receive the ₹1,25,000 exemption threshold.
For general income tax rates and slab distributions, review our guide on income tax rules.
Short-term capital gains on shares: Section 196 rules
Short-term capital gains apply to listed equity shares held for twelve months or less under Section 196 of the Income-tax Act 2025. This statutory provision taxes qualifying net gains at a flat rate of twenty percent provided securities transaction tax was paid on transfer across recognized stock exchange transactions.
When you sell listed equity shares within 12 months of purchase, the capital gain is computed under Section 72 of the Act:
Allowable transfer expenses include brokerage and exchange transaction charges wholly and exclusively incurred in connection with the transfer. Securities Transaction Tax (STT) cannot be deducted as an expense.
Under Section 196 of the Income-tax Act 2025 (which corresponds to erstwhile Section 111A of the 1961 Act):
Tax Rate: A flat 20 percent on the net short-term capital gain.
No Standalone Exemption: There is no dedicated annual tax-free threshold for STCG (unlike the ₹1,25,000 threshold for LTCG under Section 198).
Basic Exemption Adjustment: For an eligible resident individual or Hindu Undivided Family (HUF), if other regular taxable income is below the basic exemption threshold, the unexhausted basic exemption limit can be adjusted against short-term capital gains before applying the 20 percent rate.
Health and Education Cess: A mandatory 4 percent cess applies to the calculated tax amount, making the effective base rate 20.8 percent (surcharge applies additionally at higher personal taxable income levels).
For complete calculations and intraday distinctions, visit our dedicated guide on short-term capital gains tax on shares.
Long-term capital gains on shares: Section 198 rules
Long-term capital gains govern listed shares held for more than twelve months under Section 198 of the Income-tax Act 2025. This statutory framework taxes aggregate annual equity gains exceeding one lakh twenty-five thousand rupees at twelve point five percent, without allowing indexation adjustments on the original acquisition cost.
If you retain listed equity shares for more than 12 months, the profit upon sale is taxed under Section 198 of the Income-tax Act 2025 (which corresponds to erstwhile Section 112A of the 1961 Act):
Tax Rate: 12.5 percent on net gains exceeding the statutory threshold.
The ₹1,25,000 Annual Exemption Threshold: Tax applies only to long-term capital gains that exceed ₹1,25,000 in a financial year. This is an aggregate annual limit shared across all Section 198 transfers (including listed shares and equity-oriented mutual funds).
No Indexation Benefit: Inflation indexation does not apply to listed equity shares. The acquisition cost is not adjusted using the cost inflation index.
The 31 January 2018 Grandfathering Mechanism
Prior to 2018, long-term capital gains on listed shares were exempt from tax under erstwhile Section 10(38) of the 1961 Act. When Parliament re-introduced taxation on long-term equity, it incorporated a statutory grandfathering mechanism into Section 198 to protect gains accrued prior to 1 February 2018.
For shares acquired on or before 31 January 2018, the cost of acquisition is deemed to be the higher of:
The actual purchase cost.
The lower of:
The Fair Market Value (the highest quoted trading price on a recognized exchange on 31 January 2018).
The full value of consideration received on transfer.
This deemed-cost formula protects pre-1 February 2018 price appreciation to the extent provided by the statutory calculation.
To see worked grandfathering calculations, consult our guide on long-term capital gain tax on shares. If you are evaluating older property where indexation applies, read our overview of the cost inflation index.
Securities Transaction Tax and statutory eligibility
Securities Transaction Tax represents a statutory turnover levy collected by stock exchanges on equity market transactions. Paying this regulatory levy on both acquisition and transfer is mandatory for listed shares to qualify for concessional tax rates under Section 196 and Section 198 of the direct tax code.
The concessional tax rates of 20 percent (STCG) and 12.5 percent (LTCG) are statutory privileges tied to the payment of Securities Transaction Tax (STT):
For Listed Equity Shares under Section 198: STT must have been paid both at the time of acquisition and at the time of transfer. Specific exceptions notified by the Central Government apply where STT was not chargeable at acquisition (such as IPO allotments, bonus shares, rights issues, and court-approved mergers).
For Units of Equity Funds and Business Trusts: STT is required only at the time of transfer.
For STCG under Section 196: STT must be paid at the time of transfer.
If you transfer listed shares off-market without paying STT through a recognized exchange, the transaction does not qualify for Section 196 or Section 198. Instead, the transfer is governed by standard capital gains provisions under Section 197.
STT is collected directly by exchanges on behalf of the Income Tax Department. While STT cannot be deducted to reduce taxable capital gains, it remains the qualifying condition that unlocks concessional equity rates.
Loss set-off and carry-forward rules under Section 111
Capital loss adjustments permit investors to offset equity losses against qualifying capital gains within the same tax year. Specific statutory restrictions govern equity deficits, establishing distinct rules for short-term and long-term losses while permitting unabsorbed balances to be carried forward for eight tax years under Section 111.
When share investments result in losses, direct tax statutes govern how those losses can offset other taxable profits:
1. Current-Year Set-Off Rules
Short-Term Capital Loss (STCL): A short-term loss from shares can be set off against both short-term capital gains and long-term capital gains in the same tax year.
Long-Term Capital Loss (LTCL): A long-term loss from shares can only be set off against long-term capital gains. An LTCL cannot be set off against short-term capital gains.
No Inter-Head Set-Off: Capital losses (short-term or long-term) cannot be set off against any other head of income, such as salary, house property, or business profits.
| Capital Loss Incurred | Can Offset STCG? | Can Offset LTCG? | Can Offset Salary / Business Income? |
|---|---|---|---|
| Short-Term Capital Loss | Yes | Yes | No |
| Long-Term Capital Loss | No | Yes | No |
2. Carry-Forward Rules under Section 111
If your allowable capital losses exceed your taxable capital gains in a financial year, the unadjusted balance does not lapse:
8 Tax Years: Under Section 111 of the Income-tax Act 2025, unabsorbed short-term and long-term capital losses can be carried forward for up to 8 tax years immediately succeeding the year the loss was first computed.
Carried-Forward Set-Off: In subsequent years, carried-forward short-term losses can offset future STCG or LTCG, while carried-forward long-term losses can only offset future LTCG.
3. The Mandatory Return Filing Condition under Section 263(1)
Under Section 263(1) of the Income-tax Act 2025 (which corresponds to erstwhile Section 139(1) of the 1961 Act), you must file your return of income on or before the statutory due date to carry forward capital losses. If you file a belated return after the deadline, your right to carry forward capital losses incurred during that financial year is completely forfeited.
Navigating the capital gains cluster: where to look next
Taxation schedules vary significantly across different asset classes, transaction structures, and reinvestment options under Indian tax statutes. Navigating these specific categories requires reviewing dedicated guides covering individual asset types, inflationary adjustments, and statutory exemptions to ensure accurate reporting across personal and corporate income tax return filings.
To explore specific topics across the Dhanvantree knowledge base, use this directory:
Short-Term Share Taxation: For granular holding period examples, intraday distinctions, and slab adjustments, visit short-term capital gains tax on shares.
Long-Term Share Taxation: For worked examples of the ₹1,25,000 threshold and 31 January 2018 grandfathering formulas, read long-term capital gain tax on shares.
Reinvestment Tax Exemptions: To learn how profits from shares, land, or houses can be legally exempted by reinvesting under Section 82, 85, or 86 (old Sections 54, 54EC, and 54F), consult our guide on capital gains.
Real Estate Capital Gains: For land and building holding periods, transitional grandfathering, and registration charges, visit capital gains tax on property.
Historical Inflation Adjustments: To look up official multiplication figures for eligible older assets, review our table on the cost inflation index.
We are not tax advisers. Confirm your personal tax computations and loss set-off schedules with a chartered accountant.
Common Questions
For listed equity shares with STT paid, short-term capital gains (held 12 months or less) are taxed at 20 percent under Section 196. Long-term capital gains (held more than 12 months) are taxed at 12.5 percent on gains exceeding ₹1,25,000 under Section 198. A 4 percent cess applies to both.
Unlisted equity shares held for 24 months or less trigger short-term capital gains taxed at your applicable income tax slab rate. Held for more than 24 months, gains are classified as long-term and taxed at 12.5 percent without indexation under Section 197 of the Income-tax Act 2025.
No. Under direct tax statutes, a long-term capital loss can only be set off against long-term capital gains. A short-term capital loss, however, can be set off against both short-term and long-term capital gains.
No. The ₹1,25,000 threshold is an aggregate annual exemption limit. It applies across all qualifying long-term equity transactions combined (including listed shares and equity mutual funds) during the financial year.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.