Capital Gains Tax on Equity Investments FY 2025-26: Complete Guide with Section 87A Rebate

With Indian stock markets witnessing unprecedented retail participation, understanding capital gains taxation has become essential for every investor. Whether you're trading stocks actively or holding mutual funds for the long term, knowing how your profits are taxed can save you thousands in tax outgo. This comprehensive guide covers everything you need to know about capital gains tax on equity investments for FY 2025-26, including recent changes and Section 87A rebate benefits.

Understanding Capital Gains: The Basics

Capital gains refer to the profit you earn when you sell a capital asset—such as equity shares, equity-oriented mutual funds, or business trust units—at a price higher than what you paid for it. The Income Tax Act categorizes these gains based on the holding period:

Short-Term Capital Gains (STCG)

When you sell equity shares or equity-oriented mutual funds within 12 months of purchase, the resulting profit is classified as Short-Term Capital Gains. For FY 2025-26, STCG on equity instruments is taxed at a flat rate of 20% under Section 111A, applicable from July 23, 2024.

Long-Term Capital Gains (LTCG)

If you hold equity shares or equity-oriented mutual funds for more than 12 months before selling, the profit qualifies as Long-Term Capital Gains. The LTCG tax structure for FY 2025-26 includes:

• Exemption limit: Gains up to ₹1.25 lakh in a financial year are completely tax-free
• Tax rate: Gains exceeding ₹1.25 lakh are taxed at 12.5% without indexation benefits

Calculating Capital Gains: Practical Examples

Example 1: Short-Term Capital Gains

Rajesh purchased 100 shares of Infosys at ₹1,500 per share on January 15, 2025. He sold all shares at ₹1,800 per share on November 20, 2025.

• Purchase value: 100 × ₹1,500 = ₹1,50,000
• Sale value: 100 × ₹1,800 = ₹1,80,000
• STCG = ₹1,80,000 − ₹1,50,000 = ₹30,000
• Tax @ 20% = ₹6,000
• Health & Education Cess @ 4% = ₹240
• Total tax liability = ₹6,240

Example 2: Long-Term Capital Gains Within Exemption

Priya invested ₹5,00,000 in an equity mutual fund in March 2020. She redeemed the investment in February 2026 for ₹6,00,000.

• Purchase value: ₹5,00,000
• Sale value: ₹6,00,000
• LTCG = ₹6,00,000 − ₹5,00,000 = ₹1,00,000
• Tax liability = ₹0 (within ₹1.25 lakh exemption limit)

Example 3: Long-Term Capital Gains Exceeding Exemption

Vikram bought shares worth ₹8,00,000 in April 2019 and sold them for ₹12,00,000 in January 2026.

• Purchase value: ₹8,00,000
• Sale value: ₹12,00,000
• LTCG = ₹12,00,000 − ₹8,00,000 = ₹4,00,000
• Exempt amount: ₹1,25,000
• Taxable LTCG = ₹4,00,000 − ₹1,25,000 = ₹2,75,000
• Tax @ 12.5% = ₹34,375
• Health & Education Cess @ 4% = ₹1,375
• Total tax liability = ₹35,750

Section 87A Rebate: Additional Tax Savings

One of the most significant benefits for retail investors is the Section 87A rebate, which was recently extended to capital gains income. Following the landmark ITAT Chennai ruling and subsequent budget clarification, taxpayers can now claim rebate under Section 87A on their capital gains from equity investments.

How Section 87A Rebate Works

For FY 2025-26, if your total taxable income (including capital gains) does not exceed ₹12 lakh under the new tax regime, you can claim a rebate that effectively makes your tax liability zero. Key points to remember:

• Maximum rebate amount: ₹60,000
• Applicable only under the new tax regime
• Available for both resident individuals and HUFs
• Covers normal income as well as capital gains

Practical Example with Section 87A

Consider Sameer, a salaried employee with the following income for FY 2025-26:

• Salary income after standard deduction: ₹9,00,000
• LTCG from equity shares: ₹2,00,000
• Total income: ₹11,00,000

Tax calculation under new regime:

• Tax on salary income: ₹60,000
• Tax on LTCG (₹2,00,000 − ₹1,25,000 exemption = ₹75,000 × 12.5%): ₹9,375
• Total tax before cess: ₹69,375
• Less: Section 87A rebate: ₹60,000
• Net tax liability: ₹9,375
• Add: Health & Education Cess @ 4%: ₹375
• Final tax payable: ₹9,750

Set-off and Carry Forward of Capital Losses

Not all investments result in profits. When you incur losses, the Income Tax Act provides mechanisms to offset these losses against gains, reducing your overall tax burden.

Short-Term Capital Loss (STCL)

• Can be set off against both STCG and LTCG
• Unutilized losses can be carried forward for 8 assessment years
• Must be declared in ITR to carry forward

Long-Term Capital Loss (LTCL)

• Can only be set off against LTCG
• Cannot be set off against STCG
• Unutilized losses can be carried forward for 8 assessment years

Example: Loss Set-off Strategy

Meera has the following transactions in FY 2025-26:

• STCG from trading: ₹1,00,000
• STCL from failed trades: ₹(40,000)
• LTCG from mutual funds: ₹2,00,000
• LTCL from old investments: ₹(30,000)

Set-off calculation:

• Net STCG after STCL set-off: ₹1,00,000 − ₹40,000 = ₹60,000
• Tax on STCG @ 20%: ₹12,000
• Net LTCG after LTCL set-off: ₹2,00,000 − ₹30,000 = ₹1,70,000
• Less: Exemption limit: ₹1,25,000
• Taxable LTCG: ₹45,000
• Tax @ 12.5%: ₹5,625

Filing Your ITR: Reporting Capital Gains

Accurate reporting of capital gains in your Income Tax Return is crucial. Here's what you need to know:

Choosing the Right ITR Form

• ITR-2: For individuals and HUFs with capital gains income but no business/profession income
• ITR-3: For individuals with business/profession income including trading as a business

Schedule CG Details

In your ITR, you'll need to provide:

• ISIN code of securities sold
• Name of shares/units
• Date of purchase and sale
• Number of units
• Sale and purchase consideration
• Cost of acquisition
• Expenses on transfer (brokerage, STT, etc.)

Documents to Maintain

• Contract notes from broker
• Demat account statements
• Bank statements showing credit of sale proceeds
• Form 26AS and AIS for verification

Special Scenarios and Considerations

Grandfathering Clause (Before February 1, 2018)

For equity investments acquired before February 1, 2018, the cost of acquisition is determined as the higher of:

• Actual purchase price
• Lower of fair market value as on January 31, 2018, and sale consideration

This grandfathering provision protects gains accrued before the LTCG tax was reintroduced.

Intraday Trading vs. Delivery

• Intraday trading: Treated as speculative business income, not capital gains
• Delivery-based trading: Treated as capital gains if done as investment
• Frequent trading: May be treated as business income by tax authorities

Systematic Investment Plans (SIPs)

For SIP investments in equity mutual funds, each installment is treated as a separate investment with its own purchase date. When redeeming:

• First-In-First-Out (FIFO) method applies
• Each installment's holding period is calculated separately
• Some units may qualify as LTCG while others as STCG

Common Mistakes to Avoid

• Not reporting exempt LTCG: Even gains below ₹1.25 lakh must be reported in ITR
• Missing the set-off deadline: Losses must be declared in ITR to carry forward
• Ignoring grandfathering benefit: Calculate cost basis correctly for pre-2018 holdings
• Wrong ITR form: Using ITR-1 when you have capital gains leads to defective return
• Not reconciling with AIS: Always verify capital gains shown in Annual Information Statement

Key Takeaways for FY 2025-26

Conclusion

Understanding capital gains taxation empowers you to make informed investment decisions and optimize your tax liability. With proper planning—such as timing your redemptions, utilizing exemption limits strategically, and claiming all eligible rebates—you can significantly reduce your tax outgo while staying fully compliant with income tax laws.

As we approach the end of FY 2025-26, review your equity portfolio and consider tax-loss harvesting opportunities or strategic redemptions to maximize your tax benefits. Remember, when in doubt about complex transactions, consulting a qualified tax professional can help you navigate the nuances of capital gains taxation effectively.