The July 2024 Budget rewrote equity taxation in India. If you hold equity mutual funds – and most SIP investors do – the rules around Long Term Capital Gains changed in ways that affect how much tax you pay and when.
This guide covers everything: the current rates, the exemption, real calculation examples, and the legal strategy of tax harvesting that can meaningfully reduce your tax bill.
What Changed After the July 2024 Budget
Before July 23, 2024, LTCG on equity mutual funds was taxed at 10% with no indexation benefit, and gains up to Rs 1 lakh per year were exempt.
After July 23, 2024:
- LTCG tax rate increased to 12.5%
- The annual exemption increased to Rs 1.25 lakh
- Holding period for LTCG status remains more than 12 months
- Indexation benefit: not available for equity funds (it never was)
The rate went up, but the exemption limit also went up. Whether this is better or worse for you depends on your gain size.
LTCG vs STCG: The Key Distinction
Short Term Capital Gains (STCG): If you sell equity mutual fund units held for 12 months or less, gains are taxed at 20% (up from 15% before July 2024). No exemption applies.
Long Term Capital Gains (LTCG): If you sell equity mutual fund units held for more than 12 months, gains above Rs 1.25 lakh are taxed at 12.5%. The first Rs 1.25 lakh of LTCG in a financial year is completely tax-free.
The holding period clock starts fresh for each SIP instalment. If you started a monthly SIP in April 2023, each instalment has its own 12-month clock. The April 2023 instalment became long-term in April 2024. The March 2024 instalment became long-term in March 2025.
Real Examples with Numbers
Example 1 – Small SIP investor:
You invested Rs 5,000/month via SIP. After 3 years, you redeem your entire holding. Total invested: Rs 1.8 lakh. Current value: Rs 2.7 lakh. Gain: Rs 90,000.
Tax: Rs 0. Your total LTCG (Rs 90,000) is below the Rs 1.25 lakh exemption. You pay nothing.
Example 2 – Larger portfolio:
You invested a lumpsum of Rs 10 lakh in an equity fund 3 years ago. It is now worth Rs 17 lakh. Gain: Rs 7 lakh.
Taxable gain: Rs 7 lakh minus Rs 1.25 lakh exemption = Rs 5.75 lakh.
Tax: 12.5% of Rs 5.75 lakh = Rs 71,875.
Example 3 – The STCG trap:
You invested Rs 5 lakh in December 2025. Markets ran up 25% and by September 2026 your holding is worth Rs 6.25 lakh. You redeem. Gain: Rs 1.25 lakh.
Tax: 20% STCG (held less than 12 months) = Rs 25,000. No exemption applies to STCG.
Had you waited until December 2026 (just 3 more months), this would have been LTCG, and the entire Rs 1.25 lakh gain would have been exempt. Patience of 3 months = Rs 25,000 saved.
Tax Harvesting: The Legal Way to Reduce LTCG
Tax harvesting is a strategy where you sell equity fund units each year to “book” gains up to Rs 1.25 lakh, pay zero tax (since it is within the exemption), and immediately reinvest in the same fund. You reset your cost basis to a higher level, effectively reducing future taxable gains.
How it works step by step:
1. Near the end of each financial year (March), calculate your unrealised LTCG across all equity mutual fund investments.
2. If your unrealised LTCG is above Rs 1.25 lakh, sell enough units to realise approximately Rs 1.25 lakh of gains.
3. Immediately buy back the same units (or switch to a similar fund if exit load applies).
4. Your new cost of acquisition is higher. Future gains from this higher base will be smaller.
Over 10-15 years of SIP investing, this annual harvest can save a significant amount in taxes.
What to watch out for:
- Exit load: Many equity funds charge 1% exit load if redeemed within 12 months. Always check – harvesting units still within the exit load window will cost you more than the tax saving.
- STT: Securities Transaction Tax applies on equity fund redemptions. It is a small cost (0.001%) but factor it in.
- Wash sale: India does not have a US-style wash sale rule, so immediately buying back the same fund is perfectly legal.
Common Mistakes Indian Investors Make
Mistake 1: Treating all gains as one number. Each SIP instalment is a separate purchase with its own holding period and cost basis. Redeeming a lumpsum from a SIP fund does not mean all gains are LTCG – some instalments may still be STCG.
Mistake 2: Ignoring the annual exemption. Many investors let Rs 1.25 lakh of LTCG exemption go unused each year. Over a decade, that is Rs 12.5 lakh of tax-free gains that could have been harvested.
Mistake 3: Panic selling during market crashes. Selling equity funds less than 12 months after buying – even at a loss – locks in STCG treatment for units that were close to becoming long-term. Loss harvesting (selling losing positions to offset gains) is a separate and also valid strategy, but is different from panic redemption.
Mistake 4: Forgetting dividend taxation. Dividend from equity mutual funds is taxable at your slab rate (not 12.5%). If you hold dividend-option mutual funds, switch to growth option – you control when you realise gains rather than having the fund distribute taxable income.
How to Track Your LTCG
Your broker or mutual fund platform (Groww, Zerodha Coin, MF Central) will provide a capital gains statement. Download it before March 31 each year. It will show:
- Each redemption with purchase date and sale date
- Whether each transaction was STCG or LTCG
- The gain amount for each transaction
Use this to calculate your net LTCG for the year, subtract the Rs 1.25 lakh exemption, and pay 12.5% on the balance. This goes in Schedule CG of your ITR.
Tax laws are subject to change. This post reflects rules applicable for FY 2025-26. Consult a chartered accountant for personalised tax advice.