The Basics Of Equity Taxation

After covering the importance of understanding basic taxation in our introductory post, we now look at the basics of taxation on equity investments, which will act as a base for future articles to help investors in making tax-efficient decisions.

If you are already familiar with the taxation rules, you can directly jump to Part II of our series where we convert tax understanding into smarter investment decisions.

Taxation on sale/redemption

When you redeem your mutual fund units or sell your equity shares, the profits are charged under ‘Capital Gains’. Calculating how much tax you owe depends on several factors - such as the type of mutual fund, how long you’ve held it, and your applicable tax slab. Let’s break this down step by step:

Step 1: Identify the type of investment - Mutual funds can be equity-oriented (where >65% of their investments are in Indian equity), debt-oriented (where >65% of their investments are in debt and money market instruments), hybrid (a mix of debt and equity allocation) and other categories (gold fund, funds investing offshore and so on).

Step 2: Calculate the Holding Period – The holding period is simply the time between the date of purchase and the date of sale/redemption. Based on this period, your capital gains will be classified as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG).

Step 3: Determine the tax rate - The type of investment and holding period will determine the tax rate for your gains.

Step 4: Check if any exemptions are applicable – Some capital gains may be partially or fully exempt from tax (more on this below under ‘Turning Tax Understanding into Smarter Choices’). Always review if your gains qualify for any exemption before computing your final liability.

Still confused? We got you covered - check the table below for a quick summary of tax rates across different categories.

Categories	Holding Period to Classify as Long-Term	Tax Rate
Listed Equity Shares*, REITs, InvITs	>12 months	STCG: 20% LTCG: 12.5%
Equity, Aggressive Hybrid Mutual Funds*, Equity FoF**	> 12 months	STCG: 20% LTCG: 12.5%
Mutual Funds - Balanced Hybrid***	> 24 months	STCG: Slab LTCG: 12.5%
Equity ETFs	>12 months	STCG: 20% LTCG: 12.5%
Other ETFs	>12 months	STCG: Slab LTCG: 12.5%
Commodity (Gold, Silver), Overseas Mutual Funds	> 24 months	STCG: Slab LTCG: 12.5%
Unlisted Equity Shares	>24 months	STCG: Slab LTCG: 12.5%

* for equity shares and equity mutual funds purchased on or before 31 January 2018, ‘grandfathering’ provisions apply while calculating the cost of acquisition.

** an Equity Fund of Funds is defined as a fund of funds which invests 90% of its money in the underlying funds and the underlying funds invest 90% of their money in Indian domestic equities. If not, it will be classified similar to Commodity and Overseas Mutual Funds.

*** holding 35% to 65% holdings in Indian equities. The current suggestion is based on our interpretation of the various tax sections (including Section 50AA of the Income Act, 1961 and Section 76 of the Income Tax Act, 2025). Alternate interpretations of the law are also possible – please consult with your tax advisor.

Taxation on Distributions

Distributions/dividends from equity shares and mutual funds (under the IDCW – Income Distribution cum Capital Withdrawal payout option) are taxable under ‘Income from Other Sources’ at the investor’s slab rates in the year of distribution.

Importantly, even if dividends are re-invested under the IDCW option for mutual funds (instead of being paid out), they are still taxable in the year they are declared or re-invested. Under the ‘Growth’ payout option of mutual funds, no distributions are made during the holding period, so there is no tax incidence until redemption.

Now that we have gathered a basic understanding of taxation, we will see how to convert this understanding into smarter investment decisions in Part II of our series.

Disclaimer

Assumptions used in the analysis:

• The tax provisions mentioned above are based on the prevailing law as of February 2026 for resident Indian individuals

• Assumes the investments will be sold after 1 April 2025

• Our analysis assumes equity shares and mutual funds are not treated as stock-in-trade or trading business of the investors. Further, Intraday gains are charged separately as speculative income, F&O as business income and our analysis does not cover these

• Advance tax is payable in the quarters in which capital gains are realized based on applicable rules

• Tax provisions are open to interpretation so please consult your tax advisor before any decision making

Disclaimer:

The information provided in this discussion is strictly for educational and informational purposes and does not constitute professional financial, investment, legal, or tax advice. Mutual fund investments are subject to market risks, including the potential loss of principal, and past performance is not a reliable indicator of future results. All specific fund names, historical events, or financial metrics mentioned are for illustrative purposes only and should not be construed as recommendations to buy or sell any security. You are strongly advised to consult with a Mutual Fund Distributor or a SEBI-registered investment advisor or a qualified financial planner to assess your specific risk profile, tax bracket, and financial goals before making any investment decisions.