Capital Gains Tax for AY 2026-27: STCG and LTCG on Shares and Mutual Funds, the Section 87A Rebate Trap, and How the Section 50AA Debt-MF Rule Bites

TL;DR: Capital gains tax in India was rewritten on 23 July 2024. For AY 2026-27 (FY 2025-26 transactions), the rates that matter are: STCG on listed equity / equity MF: 20 % under Section 111A (was 15 %); LTCG on listed equity / equity MF: 12.5 % above Rs. 1,25,000 under Section 112A (was 10 % above Rs. 1,00,000); LTCG on most other assets: 12.5 % uniform without indexation under Section 112 — with a transitional carve-out for resident individuals / HUFs on land or building acquired before 23 July 2024 (you can compute at 12.5 % without indexation or 20 % with indexation, whichever gives lower tax, subject to applicable transitional conditions). Specified debt-oriented mutual funds covered by Section 50AA, where acquired on or after 1 April 2023, are generally taxed at slab rates regardless of holding period (Finance Act, 2023). And the most expensive misconception: the new-regime Section 87A rebate of Rs. 60,000 (up to total income Rs. 12 lakh) is generally not available against tax computed at special rates such as Sections 111A and 112A — current utility / computation frameworks separately tax such income, so the LTCG and STCG portions effectively bear the special-rate tax even when your total income would otherwise fall within the rebate band.

This guide unpacks each piece, with the FY 2025-26 holding-period mechanics, worked numerical examples, the Section 54-series re-investment exemptions, and the Schedule CG reporting workflow.

1. The 23 July 2024 Watershed

Finance (No. 2) Act, 2024 made three changes that take full effect for AY 2026-27:

For FY 2025-26, both rate regimes can be relevant within the same financial year: a transfer on 5 May 2025 is at the new rates; a transfer would have been at the old rates if it had occurred before 23 July 2024 (relevant for AY 2025-26, not the year we are filing now). Make sure your sale date is captured precisely on the contract note — the system runs the gain through the section appropriate to the date of transfer.

2. Holding Period — the Long / Short Line

The character of the asset determines the holding-period threshold:

The Finance (No. 2) Act, 2024 also harmonised the long-term threshold for "other" capital assets to 24 months — a notable simplification that took effect from 23 July 2024.

3. Listed Equity / Equity Mutual Funds — STCG (Sec 111A) and LTCG (Sec 112A)

3.1 STCG — Section 111A

For listed equity shares, equity-oriented mutual fund units, and units of a business trust where Securities Transaction Tax (STT) has been paid, short-term capital gains are taxed under Section 111A. The rate for transfers on or after 23 July 2024 is 20 % (was 15 %). Surcharge and 4 % cess apply.

Key point: the 20 % is a flat special rate — it does not enter the slab calculation. Your gain is computed under Section 48 as full value of consideration minus cost of acquisition minus expenses incurred wholly and exclusively in connection with the transfer (brokerage, exchange transaction charges, transfer fees / DP charges). Securities Transaction Tax (STT) paid is expressly disallowed as a deduction while computing capital gains by virtue of the third proviso to Section 48 — the investor is compensated through the concessional 111A / 112A rates instead. (STT is, however, a permissible business-expense deduction under Section 36(1)(xv) for those who treat their securities transactions as business income, e.g. F&O traders — that is a different head, not capital gains.) Surcharge (slab-based; with the special-rate cap that applies to 111A / 112A income) and 4 % health and education cess apply on top.

3.2 LTCG — Section 112A

The same set of assets, held for more than 12 months, attract LTCG under Section 112A. The rate for transfers on or after 23 July 2024 is 12.5 % on gains exceeding Rs. 1,25,000 in the year (the threshold is per assessee per year, not per stock or per scheme, and applies after intra-head set-off of any current-year capital losses under Section 70). Below Rs. 1,25,000 of aggregate Section 112A gains net of set-off, the tax is nil. Surcharge (capped at the special-rate ceiling for 111A / 112A income) and 4 % cess apply.

Two grandfathering mechanisms continue:

• Pre-1 February 2018 acquisitions: Section 112A(5) read with Section 55(2)(ac) preserves the original grandfathering — cost of acquisition is the higher of (a) actual cost, or (b) the lower of fair market value as on 31 January 2018 and the actual sale price. So gains accrued up to 31 January 2018 on these holdings are protected.
• STT-paid requirement: If STT was not paid at acquisition (some FPO, ESOP, gift, off-market transfer scenarios) AND not paid at sale, Section 112A is unavailable; the gain is taxed under Section 112 at 12.5 % without the Rs. 1.25 lakh threshold.

4. The Section 87A Rebate Trap — Capital Gains Don’t Qualify

This is the single most expensive misconception of the new regime — though, as an evolving operational area, professionals continue to watch utility implementation and CBDT clarification patterns.

The Section 87A rebate under the new regime, as amended by Finance Act, 2025, allows up to Rs. 60,000 of tax-saving for a resident individual whose total income does not exceed Rs. 12,00,000. The rebate is generally not available against tax computed at special rates — current utility and computation frameworks tax such income separately at the section’s flat rate. In particular, the rebate is generally not applied against:

• LTCG under Section 112A above Rs. 1,25,000
• STCG under Section 111A
• LTCG under Section 112 (other assets at 12.5 %)
• Lottery / horse-racing / online-gaming winnings under Sections 115BB / 115BBJ etc.

Worked example. Anjali earns Rs. 9,00,000 salary and made Rs. 2,00,000 long-term capital gain on listed equity in FY 2025-26 (held over 12 months, STT paid). She has no other deductions. She is filing under the new regime.

Anjali’s slab income is fully sheltered by the Section 87A rebate, but she still pays Rs. 9,375 + cess on the LTCG. She might intuitively think "my total income is Rs. 10.25 lakh, which is below Rs. 12 lakh, so I pay zero tax". The capital-gains carve-out from the rebate is what she missed.

Bigger trap: if her total income had been Rs. 12,50,000 (still apparently within reach of the rebate band by the marginal-relief proviso), the rebate is unavailable on the slab portion entirely — both slab tax and LTCG tax apply in full, subject to marginal relief on the slab portion only.

5. Section 112 — LTCG on "Other" Assets (Land, Building, Gold, Foreign Assets)

For long-term capital gains on assets other than listed equity / equity MF / business trust units (i.e. Section 112A doesn’t apply), the operative provision is Section 112. Post-23 July 2024, the rate is a uniform 12.5 % without indexation, plus surcharge and 4 % health and education cess.

Transitional carve-out for resident individuals / HUFs on land or building. The Finance (No. 2) Act, 2024 added a proviso that a resident individual or HUF transferring land or building acquired before 23 July 2024 may compute LTCG either:

• at 12.5 % without indexation, or
• at 20 % with indexation (using the Cost Inflation Index methodology),

and pay tax under whichever produces the lower number, subject to applicable transitional conditions. This carve-out is restricted to resident individuals / HUFs and to grandfathered immovable property; it is not available for foreign assets, gold, or other movable property — those go directly to 12.5 % without indexation. The exact computation may also depend on the ITR utility’s transitional implementation each year.

For property acquired on or after 23 July 2024, only the 12.5 % no-indexation method is available.

Practical implication: If you sold an inherited Mumbai flat in FY 2025-26, get the cost-inflation-indexed cost calculation done both ways — the indexation route can still come out ahead for properties held 15+ years, even at the higher 20 % rate, because of the inflation-adjusted base.

6. Section 50AA — the Debt-MF Trap

Until 31 March 2023, debt mutual funds got the "long-term > 36 months at 20 % with indexation" benefit. Finance Act, 2023 inserted Section 50AA with effect from 1 April 2023, deeming units of "specified mutual funds" (broadly, schemes investing more than 65 % of their net assets in debt and money-market instruments) acquired on or after 1 April 2023 as short-term capital assets regardless of holding period. Gains are taxed at the investor’s slab rate.

The Finance (No. 2) Act, 2024 refined the definition of "specified mutual fund" with effect from 1 April 2026 (next financial year) to keep debt-heavy funds within the rule while carving out fund-of-fund structures and ETFs more cleanly. For AY 2026-27, the operative test remains the original Section 50AA — if your debt MF was acquired on or after 1 April 2023, the gain is short-term and goes to slab rate.

Practical points:

• Acquisitions before 1 April 2023: still get the long-term / short-term distinction with 36-month threshold (now 24 months for transfers post-23 July 2024 under the harmonised long-term definition); LTCG at 12.5 % without indexation post-23 July 2024.
• SIP units in the same scheme straddling 1 April 2023: each tranche is tested separately. Pre-1 April 2023 tranches qualify for the long-term route; post-1 April 2023 tranches are always short-term under Section 50AA.
• Hybrid / arbitrage / FoF / international FoF schemes: tax treatment depends on the scheme’s actual debt allocation. AMFI scheme classification is a useful practical indicator, but the statutory tax classification depends on the scheme’s actual asset composition tested against the applicable Section 50AA / "specified mutual fund" definition for the period in question.

7. Set-Off and Carry-Forward of Capital Losses (Sections 70, 71, 74)

The intra-head and inter-head rules:

• Section 70(1): Within capital gains, STCL can be set off against either STCG or LTCG in the same year. LTCL can be set off only against LTCG — not against STCG.
• Section 71(3): Capital losses (STCL or LTCL) cannot be set off against any other head of income (no offset against salary, house property, business, other sources). This is asymmetric — capital gains can be offset by capital losses, but other-head losses cannot reduce capital gains in most situations.
• Section 74(1): Unabsorbed capital losses can be carried forward for 8 assessment years. STCL can be set off against either STCG or LTCG in the carry-forward year. LTCL can be set off only against LTCG in the carry-forward year. This requires the original return to have been filed on or before the Section 139(1) due date (otherwise carry-forward is forfeited under Section 80).

Ordering with current-year set-off: take intra-head first (Section 70), then attempt inter-head (Section 71), then carry forward the unabsorbed remainder (Section 74).

Practical point: if you have an LTCL from a poorly performing equity portfolio and an LTCG from a property sale in the same year, the LTCL will set off against the property LTCG — but only after computing each gain under its own section (112A vs 112). The set-off is on the gain amount, not on the tax. After set-off, the remaining LTCG attracts tax at the section’s rate.

8. Section 54 Series — Re-Investment Exemptions

The Income-tax Act allows several exemptions where capital gains are reinvested into specified assets:

Each section has detailed timing rules — typically 1 year before / 2 years after for purchase, 3 years for construction, with mandatory deposit in the Capital Gains Account Scheme by the Section 139(1) due date if reinvestment is not yet completed.

9. Reporting in Schedule CG

All capital gains and losses are reported in Schedule CG of ITR-2 (or ITR-3 if you also have business income). Key sub-schedules:

• Schedule 112A: Detailed scrip-wise LTCG on listed equity / equity MF, including grandfathering FMV as on 31 January 2018. The portal may reflect broker / depository information through the AIS / TIS integration, but pre-fill is not always complete (off-market transfers, ESOP exercises, gifts, foreign-broker holdings can be missed). Taxpayers must independently reconcile contract notes, broker P&L statements and demat transaction histories before signing off on the schedule.
• Schedule 115AD(1)(b)(iii) proviso: Same-class details for non-residents.
• Schedule CFL: Carry-forward of losses (capital, business, etc.) by year of origination.
• Schedule SI: Special-rate income summary; this is where Section 87A’s rebate exclusion gets operationalised — the portal calculates rebate against tax on slab-rate income only and applies the special-rate tax separately.

The Department’s pre-fill from AIS / TIS is reasonably accurate for listed-equity transactions but can miss off-market ESOP exercises, gift transactions, and inherited-asset transfers — declare these proactively.

10. Common Mistakes Investors Make

1. Selling on 22 July 2024 vs 23 July 2024. Same investor, same stock, completely different rate band. Always check the trade-execution date on the contract note when the year straddles a watershed; use the rate applicable to the date of transfer, not the date of credit.
2. Treating equity-oriented hybrid funds as debt funds. AMFI’s scheme classification is the test — equity-oriented funds (broadly > 65 % in equity) get Section 111A / 112A treatment; debt-heavy funds get Section 50AA. Aggressive hybrid funds with 65-70 % equity allocation are usually equity-oriented.
3. Forgetting to take the Rs. 1.25 lakh Section 112A threshold per assessee, not per scrip. If you have Rs. 80,000 LTCG from one stock and Rs. 90,000 from another, total is Rs. 1.7 lakh; only Rs. 45,000 is taxable (above threshold).
4. Claiming Section 87A rebate against capital-gains tax. The portal blocks this automatically, but a manually filed JSON utility return can embed the wrong number; CPC adjusts it under Section 143(1)(a) and a refund expected gets reduced.
5. Filing belated and losing carry-forward. A belated return under Section 139(4) cannot carry forward STCL / LTCL (Section 80 read with 74). Filing on time even when there is no tax payable preserves the loss.
6. Not booking set-offs in the right order. Section 70 (intra-head) before Section 71 (inter-head); LTCL only against LTCG; the order affects how much gets carried forward.
7. Ignoring grandfathering for pre-1 February 2018 equity holdings. Section 112A(5) materially reduces the taxable base for old holdings; the broker P&L statement may not always factor it in. Re-compute manually.
8. Selling indexed property without comparing both methods. For long-held land / building (resident individual / HUF, acquired pre-23 July 2024), the 20 %-with-indexation route can still come out lower than 12.5 %-without.
9. Forgetting to deposit unspent capital gain in CGAS by the 139(1) due date. Section 54 / 54F reinvestment claims fail if the unspent portion is not parked in the Capital Gains Account Scheme by 31 July 2026.
10. Treating FX gains on foreign equity as Section 112A. Foreign listed equity is not "STT-paid recognised stock exchange" — gains go to Section 112 (LTCG 12.5 %, no indexation), and for STCG to slab rate.

11. Quick FAQ

Q. Is the Rs. 1.25 lakh Section 112A threshold per stock or aggregate?
Aggregate, per assessee, per year. All Section 112A gains across all your equity / equity-MF holdings are summed; the threshold is then applied once on the total.

Q. Can I carry forward LTCL from listed equity if I had a small gain elsewhere?
Yes — but the LTCL must first be set off intra-head against any LTCG in the same year (Section 70). Only the unabsorbed portion is carried forward, for 8 AYs, settable only against future LTCG. The original return must have been filed on time (Section 80).

Q. I sold listed equity at a loss. Where do I show it?
Schedule CG (sub-schedule 112A for LTCL on equity / equity MF; sub-schedule 111A for STCL). Even a loss must be reported to be eligible for set-off / carry-forward.

Q. ESOPs from a foreign parent — what section?
On exercise, the perquisite is taxed at slab rate under Section 17(2). On subsequent sale of the underlying shares, capital gain is computed: foreign equity is not Section 112A territory; gain falls under Section 112 (LTCG 12.5 % if held > 24 months) or slab rate as STCG (held ≤ 24 months). The sale proceeds and cost are converted to INR using the applicable rates under Rule 115 of the Income-tax Rules (telegraphic transfer buying rate / TTBR on the relevant dates). Schedule FA disclosure on holding is mandatory regardless of whether the shares have been sold.

Q. Buyback and dividend — capital gain or income?
For buybacks covered by the post-Finance (No. 2) Act, 2024 regime (broadly, buybacks tendered on or after 1 October 2024), the shareholder is taxed on the buyback proceeds as deemed dividend under Section 2(22)(f) at slab rate — not as capital gain. The shareholder is allowed to claim a capital loss equal to the cost of the bought-back shares in Schedule CG. The earlier company-level buyback tax (Section 115QA) applied for buybacks before that effective date and is not relevant for FY 2025-26 transactions. Regular dividends are slab-rate income (DDT was abolished from FY 2020-21).

Q. SGB redemption — how is it taxed?
Sovereign Gold Bonds redeemed at the end of the 8-year tenure are fully exempt from capital gains tax for individual investors (Section 47(viic)). If sold on the secondary market before maturity, regular Section 112 LTCG / STCG rules apply.

12. Statutory and Notification References

• Section 2(42A) and 2(29A), Income-tax Act, 1961 — short-term and long-term capital asset definitions.
• Section 45, Income-tax Act, 1961 — charging section for capital gains.
• Section 48, Income-tax Act, 1961 — mode of computation; cost of acquisition, expenses on transfer, indexation (where still applicable).
• Section 50AA, Income-tax Act, 1961 — specified mutual fund rule; Finance Act, 2023 effective 1 April 2023; refined definition by Finance (No. 2) Act, 2024 effective 1 April 2026.
• Section 55(2)(ac), Income-tax Act, 1961 — FMV as on 31 January 2018 grandfathering basis for pre-1 Feb 2018 equity acquisitions.
• Section 70, 71, 71(3), 74, 80, Income-tax Act, 1961 — set-off, inter-head restriction, carry-forward, return-on-time requirement for carry-forward.
• Section 87A, Income-tax Act, 1961 (Finance Act, 2025) — new-regime rebate Rs. 60,000 up to total income Rs. 12 lakh; rebate not available on tax computed at special rates.
• Section 111A, Income-tax Act, 1961 — STCG on listed equity / equity MF / business trust units where STT paid; rate 20 % from 23 July 2024 (Finance (No. 2) Act, 2024).
• Section 112, Income-tax Act, 1961 — LTCG on other capital assets; 12.5 % without indexation from 23 July 2024; transitional 20 %-with-indexation choice for resident individuals / HUFs on land / building acquired before 23 July 2024.
• Section 112A, Income-tax Act, 1961 — LTCG on listed equity / equity MF / business trust units where STT paid; 12.5 % above Rs. 1,25,000 from 23 July 2024 (Finance (No. 2) Act, 2024).
• Section 54, 54B, 54EC, 54F, Income-tax Act, 1961 — re-investment exemptions; Section 54 / 54F capped at Rs. 10 crore in new house (Finance Act, 2023); Section 54EC capped at Rs. 50 lakh per FY.
• Section 47(viic), Income-tax Act, 1961 — SGB redemption exemption for individuals.
• Section 2(22)(f), Income-tax Act, 1961 — buyback proceeds treated as deemed dividend post-Finance (No. 2) Act, 2024.
• Securities Transaction Tax Act, 2004 — STT framework; rates revised by Finance (No. 2) Act, 2024 and Finance Act, 2026 (the latter effective 1 April 2026 — relevant to next year’s F&O traders, not to AY 2026-27 equity sellers).

This guide reflects the capital gains regime as on 6 May 2026 for AY 2026-27 (FY 2025-26). The post-2024 regime is still evolving operationally — final computation in any given case may also depend on the ITR utility’s implementation for that AY, scheme-level classifications by AMFI / depositories, and subsequent CBDT clarifications and circulars. For a meaningful capital-gains transaction — property sale, large equity portfolio rebalancing, ESOP exercise from a foreign parent, capital-gains exemption claim under Section 54 / 54EC / 54F — consult a practising chartered accountant or a SEBI Registered Investment Adviser before signing the contract note. Nothing on this page is investment advice or a substitute for professional advice.