STCG vs LTCG Tax on Stocks in India: Rates & Rules

Key Takeaways

• STCG on listed equity shares held under 12 months is taxed at a flat 20% under Section 111A
• LTCG on listed equity shares held beyond 12 months is taxed at 12.5% under Section 112A, but only on gains above Rs 1.25 lakh in a financial year
• Shares bought before January 31, 2018 benefit from grandfathering, cost of acquisition is stepped up to the fair market value on that date
• Short-term capital loss (STCL) can offset both STCG and LTCG, but long-term capital loss (LTCL) can only offset LTCG, never STCG
• A proposed one-time relaxation that would have allowed brought-forward LTCL to offset STCG was dropped in the final Income Tax Act, 2025, confirmed in February 2026, standard restrictive rules apply
• LTCG on equity must be paid in full even if total income falls below the basic exemption threshold, since Section 87A rebate does not apply to it
• Unadjusted capital losses can be carried forward for 8 assessment years, but only if the ITR is filed by the due date

What is STCG and LTCG on Stocks?

Capital gains tax applies to the profit made when selling shares, and which category that profit falls into depends entirely on how long the shares were held before sale. Short-Term Capital Gains (STCG) apply when listed equity shares are sold within 12 months of purchase. Long-Term Capital Gains (LTCG) apply when listed equity shares are held for more than 12 months before sale.

This 12-month threshold is specific to listed equity shares and equity mutual funds, other asset classes like debt funds, real estate, and gold follow different holding-period rules for the same short-term versus long-term classification.

Research Stocks Smarter with Dhanarthi AI Screener

Analyze 5,000+ NSE & BSE stocks with 150+ custom filters, real-time volume breakout scans, and transparent fundamental data.

Use Dhanarthi Screener

Current Tax Rates: STCG 20% vs LTCG 12.5%

Tax rates on equity capital gains were revised in the Union Budget 2024 and remain in effect for FY 2025-26 and FY 2026-27. STCG on listed equity shares is taxed at a flat 20% under Section 111A of the Income Tax Act. LTCG on listed equity shares is taxed at 12.5% under Section 112A, applied without the benefit of indexation.

This rate structure directly rewards holding equity positions past the 12-month mark, selling even a day before completing 12 months converts what could have been a 12.5% tax into a 20% tax on the full gain.

The Rs 1.25 Lakh LTCG Exemption Explained

Long-term capital gains on listed equity shares and equity mutual funds enjoy an annual exemption of Rs 1.25 lakh, meaning the first Rs 1.25 lakh of such gains in a financial year is entirely tax-free, with only the amount exceeding this threshold taxed at 12.5%.

Example: An investor books Rs 3 lakh in long-term equity gains during a financial year. The first Rs 1.25 lakh is exempt, leaving Rs 1.75 lakh taxable at 12.5%, resulting in a tax liability of Rs 21,875, plus applicable cess. This exemption applies once per financial year across all long-term equity gains combined, not per transaction or per stock.

Grandfathering Clause for Pre-2018 Shares

For shares purchased before January 31, 2018, a grandfathering provision protects gains accumulated up to that date from LTCG taxation. Under this rule, the cost of acquisition for tax purposes is treated as the higher of the actual purchase price or the fair market value (FMV) of the share as on January 31, 2018.

This means any appreciation in a share's value that occurred before January 31, 2018 is effectively shielded from LTCG tax entirely, only gains accruing after that date are taxed when the shares are eventually sold. Investors holding shares purchased well before 2018 should factor in this stepped-up cost basis when calculating their actual taxable gain, rather than using the original purchase price alone.

Capital Loss Set-Off Rules: The Asymmetry Most Investors Miss

This is one of the more frequently misunderstood areas of equity taxation, and getting it wrong can mean paying more tax than necessary. Short-term capital loss (STCL) can be set off against both STCG and LTCG in the same financial year. Long-term capital loss (LTCL), however, can only be set off against LTCG, it cannot be used to reduce STCG at all.

Example: An investor has Rs 5 lakh in LTCL and Rs 3 lakh in STCG in the same year, with no LTCG to offset against. Despite having a larger loss on paper, that LTCL cannot touch the STCG at all, the investor still pays full 20% tax on the entire Rs 3 lakh STCG. This asymmetry surprises many investors who assume any capital loss can reduce any capital gain, when in fact the direction of the offset matters significantly.

Why the LTCL-vs-STCG Relaxation Did Not Survive the Final Tax Act

This is a detail that changed very recently and is worth flagging clearly, since earlier drafts of tax reform suggested a different outcome. The original Income Tax Bill, 2025, contained a savings clause that many tax professionals interpreted as allowing brought-forward long-term capital losses, incurred before April 1, 2026, to be set off against any capital gains going forward, including short-term capital gains, as a one-time transitional relaxation.

However, the finalized Income Tax Act, 2025 revised this savings clause to explicitly require that brought-forward capital losses be carried forward and set off strictly in accordance with the mechanism under the repealed Income-tax Act, 1961, confirmed in coverage as recently as February 2026. In practical terms, this means the standard restriction remains firmly in place: long-term capital losses can only be set off against long-term capital gains, never against short-term capital gains, even for losses carried forward from before the new Act took effect. Investors and tax planners who assumed the more generous transitional rule would apply should recalculate their tax planning around the standard, more restrictive rule instead.

Carry Forward Rules and the ITR Deadline Trap

Capital losses that cannot be fully absorbed in the year they occur can be carried forward for up to 8 assessment years, but this benefit comes with a strict condition: the loss can only be carried forward if the Income Tax Return is filed on or before the original due date for that financial year.

Missing the ITR filing deadline in the year a loss occurs permanently forfeits the right to carry that loss forward, regardless of how the loss might otherwise have been used to offset future gains. This makes timely ITR filing a meaningful part of tax planning for any investor who has booked a capital loss in a given year, not simply an administrative afterthought.

Section 87A Rebate Does Not Apply to LTCG

A detail that catches many smaller investors off guard: the Section 87A tax rebate, which can reduce or eliminate tax liability for individuals with total income below a specified threshold, does not apply to long-term capital gains on equity shares under Section 112A. This means LTCG tax above the Rs 1.25 lakh exemption must be paid in full, even if an investor's total taxable income would otherwise fall below the level where Section 87A rebate would normally zero out their tax liability.

This exclusion is a specific carve-out for equity LTCG and is worth understanding clearly, since many investors mistakenly assume that a low overall income automatically shields all forms of income, including capital gains, from tax. Anyone opening a demat account for the first time should factor these tax mechanics into their planning from the very first trade, rather than treating tax as an afterthought once gains start appearing.

How F&O and Intraday Trading Are Taxed Differently

STCG and LTCG rules apply specifically to delivery-based equity transactions, F&O and intraday trading are taxed under an entirely different framework. Intraday equity trading is classified as speculative business income, while F&O trading is classified as non-speculative business income, both taxed at the trader's applicable income tax slab rate rather than under the capital gains sections covered here, and both are typically reported using ITR-3 rather than the capital gains schedule used for delivery-based equity. This distinction is a core part of why trading and investing are treated so differently by India's tax system, not just in approach but in the specific tax rules that apply to each.

Common Mistakes

• Selling just before completing 12 months: Converting a lower LTCG tax rate into a higher STCG rate by selling a day or two too early
• Assuming any capital loss offsets any capital gain: Overlooking that LTCL cannot be used against STCG, only against LTCG
• Wasting LTCL against the already-exempt Rs 1.25 lakh threshold: Applying long-term losses to the portion of LTCG that would have been tax-free anyway, rather than to gains above the exemption
• Missing the ITR filing deadline in a loss year: Forfeiting the ability to carry forward a capital loss simply by filing late, even by a single day
• Assuming Section 87A rebate covers LTCG: Expecting a low overall income to eliminate LTCG tax liability, when this rebate explicitly does not apply to equity LTCG

Confused about chart patterns & stock analysis?
Use Dhanarthi Stock Guru to chat, analyze price patterns, and ask questions directly.

Conclusion

STCG vs LTCG tax on stocks in India hinges on a single factor, the 12-month holding period, with a meaningful rate difference, 20% versus 12.5%, on either side of that line. The Rs 1.25 lakh LTCG exemption, the grandfathering clause for pre-2018 shares, and the strict asymmetry in loss set-off rules all shape how much tax an investor actually pays, and the recent confirmation that the proposed LTCL-against-STCG relaxation did not survive into the final tax law means the older, more restrictive set-off rule remains the one to plan around. Understanding these mechanics, and filing the ITR on time in any year a loss is booked, can meaningfully affect an investor's real, post-tax returns.

References

1. Tax code 2026: One time LTCL set off against STCG removed in final Income Tax Act. Business Today, February 2026.
2. Budget 2024: FM hikes taxes on equity trading; STCG, LTCG, STT raised. Business Standard, July 2024.

FAQs