For FY 2025-26 (AY 2026-27): Short-term capital gains (STCG) on listed equity shares or equity mutual funds held 12 months or less are taxed at 20% under Section 111A. Long-term capital gains (LTCG) on assets held more than 12 months are taxed at 12.5% under Section 112A on the amount exceeding the ₹1.25 lakh annual exemption (Finance Act 2024, effective 23 July 2024). In ITR-2, these are reported in Schedule CG — STCG in Part B(1), LTCG in Part B(3) — with mandatory scrip-wise details in Schedule 112A for LTCG transactions.
Overview: Capital Gains Tax on Equity in India (FY 2025-26)
For Indian Chartered Accountants preparing ITR-2 returns, capital gains from listed equity shares and equity-oriented mutual funds are the most common — and most misunderstood — income category. The rules changed significantly after the Finance Act 2018 introduced Section 112A, the Finance Act 2023 changed debt mutual fund taxation, and the Finance Act 2024 revised rates effective 23 July 2024.
This guide covers everything you need to accurately compute and report capital gains for your clients in FY 2025-26 (AY 2026-27).
Step 1 — Classify Each Trade as STCG or LTCG
The holding period threshold for listed equity shares and equity-oriented mutual funds is 12 months.
- Short-Term Capital Gain (STCG): Shares held for 12 months or less. Taxed at 20% under Section 111A (Finance Act 2024, effective 23 July 2024) plus 4% health & education cess.
- Long-Term Capital Gain (LTCG): Shares held for more than 12 months. Gains above ₹1.25 lakh are taxed at 12.5% under Section 112A (Finance Act 2024, no indexation benefit).
Important: The 12-month rule applies to each individual lot, not to the overall position. If a client bought HDFC Bank shares in three tranches and sold all of them, the holding period of each tranche determines its classification.
Step 2 — Apply the Grandfathering Rule for Pre-2018 Holdings
For shares acquired before 31 January 2018, the cost of acquisition for LTCG purposes is the higher of:
- The actual purchase price, or
- The Fair Market Value (FMV) as on 31 January 2018 — capped at the actual sale price
This is the "grandfathering" provision introduced in the Finance Act 2018. In practice, it means gains that accrued before 31 January 2018 are effectively exempt.
Formula: LTCG = Sale Price − max(Purchase Price, min(FMV on 31-Jan-2018, Sale Price))
Most broker P&L statements (Zerodha, Angel One, etc.) already apply grandfathering when they report the taxable profit column. Verify this before entering figures in Schedule CG.
Step 3 — Compute Net STCG and LTCG
STCG Calculation
Net STCG = Total sale consideration − (cost of acquisition + cost of improvement + transfer expenses)
For equity shares: transfer expenses typically include brokerage and STT. However, STT is not deductible as an expense from capital gains — it can only be claimed as a business expense if F&O is treated as business income.
LTCG Calculation
Net LTCG = Total sale consideration − (grandfathered cost of acquisition + cost of improvement + transfer expenses excluding STT)
The first ₹1,25,000 of LTCG in a financial year is exempt (Finance Act 2024). Only the amount exceeding ₹1.25 lakh is taxed at 12.5%.
Step 4 — Handle Intraday (Speculative) Trades Separately
Intraday equity trades are not capital gains — they are speculative business income under Section 43(5). They must be reported in ITR-3 (not ITR-2) and cannot be set off against capital gains losses.
If your client has both delivery-based equity trades and intraday trades, they need to file ITR-3, not ITR-2.
Step 5 — Set Off and Carry Forward of Capital Losses
The set-off rules for capital losses are strict:
- STCL (short-term capital loss) can be set off against both STCG and LTCG
- LTCL (long-term capital loss) can only be set off against LTCG, not against STCG
- Unabsorbed capital losses can be carried forward for 8 assessment years
- Losses cannot be carried forward if the ITR is filed after the due date
Step 6 — Fill Schedule CG in ITR-2
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In ITR-2, capital gains are reported in Schedule CG (Capital Gains). The schedule has separate sections for:
- STCG on equity shares/mutual funds (Section 111A) — Part B(1)
- LTCG on equity shares/mutual funds (Section 112A) — Part B(3)
- LTCG from other assets (Section 112) — Part B(2)
For Section 112A, you must also report the scrip-wise details (ISIN, acquisition date, sale date, cost, FMV, sale price) in the Schedule 112A table. This is where most CAs face challenges when clients trade across multiple brokers — the data needs to be consolidated from multiple P&L statements.
Common Mistakes CAs Make in Capital Gains Computation
- Using broker P&L directly without verifying FIFO: Some brokers use different cost accounting methods. The Income Tax Act mandates FIFO for equity shares.
- Including STT as a deductible expense: STT is not deductible from capital gains. Only brokerage, transaction charges, and stamp duty are deductible.
- Mixing intraday and delivery trades: Intraday gains are speculative income, not capital gains. Mixing them understates speculative income and overstates capital gains.
- Missing the grandfathering step: For any client who held shares before 31 January 2018 and sold after, the grandfathering rule must be applied lot by lot.
- Not reconciling with broker data: The AIS (Annual Information Statement) now includes capital gains data from depositories. A mismatch between the AIS and ITR Schedule CG often leads to scrutiny notices.
- Using old tax rates (pre-Finance Act 2024): For FY 2025-26, STCG is 20% (not 15%) and LTCG is 12.5% (not 10%) with the exemption raised to ₹1.25 lakh. These changes were effective 23 July 2024.
Frequently Asked Questions
What is the STCG tax rate on equity shares in FY 2025-26?
20% under Section 111A, plus 4% health and education cess. This rate applies to listed equity shares and equity-oriented mutual funds held for 12 months or less. This rate was revised from 15% to 20% by the Finance Act 2024, effective 23 July 2024.
What is the LTCG tax rate and exemption limit on equity in FY 2025-26?
12.5% under Section 112A on gains exceeding ₹1.25 lakh per financial year, plus 4% cess. The ₹1.25 lakh exemption was raised from ₹1 lakh by the Finance Act 2024. There is no indexation benefit for equity LTCG.
What is the holding period for long-term capital gains on equity?
More than 12 months for listed equity shares and equity-oriented mutual funds. The holding period is calculated for each individual purchase lot separately — not for the overall position.
Where is capital gains from equity reported in ITR-2?
In Schedule CG (Capital Gains): STCG under Section 111A goes in Part B(1); LTCG under Section 112A goes in Part B(3). For LTCG, mandatory scrip-wise details (ISIN, acquisition date, sale date, cost, FMV, sale price) must be entered in the Schedule 112A table.
Is STT (Securities Transaction Tax) deductible from capital gains?
No. STT is not deductible as an expense from capital gains under the Income Tax Act. Brokerage, exchange transaction charges, and stamp duty are deductible. STT can only be claimed as a business expense if F&O income is treated as business income.
How does the grandfathering rule work for shares bought before 31 January 2018?
For LTCG on shares acquired before 31 January 2018, the cost of acquisition is the higher of the actual purchase price or the FMV on 31 January 2018 — but capped at the sale price. This means gains accrued before 31 Jan 2018 are effectively exempt. Most broker P&L reports (Zerodha, Angel One) apply this automatically.
What is Schedule 112A in ITR-2 and when is it mandatory?
Schedule 112A requires scrip-level reporting of every equity LTCG transaction — ISIN, company name, acquisition date, sale date, cost of acquisition (after grandfathering), FMV on 31 Jan 2018 (if applicable), and sale consideration. It is mandatory for all taxpayers with LTCG under Section 112A, regardless of whether the gain exceeds the ₹1.25 lakh exemption.
Can equity intraday trades be reported in ITR-2?
No. Intraday equity trades are speculative business income under Section 43(5), not capital gains. If a client has intraday trades, they must file ITR-3, not ITR-2. Mixing intraday trades with delivery-based capital gains in Schedule CG is a common error that can trigger scrutiny.
How FirstReports Helps
FirstReports automatically consolidates P&L statements from all major Indian brokers — Zerodha, Groww, Angel One, ICICI Direct, Upstox, and more. It classifies every trade as STCG, LTCG, or Intraday, applies the correct tax treatment (including Finance Act 2024 rates), and generates a single tax-ready statement per client. The Schedule 112A scrip-wise data is available for direct entry into the ITR.
Related Reading
- Capital Loss Set-Off and Carry Forward Rules — what to do when STCG/LTCG turns negative
- Section 87A Rebate and Capital Gains — why the rebate does not apply to STCG/LTCG tax
- How to Prepare an Equity P&L Consolidated Statement — pre-step before computing Schedule CG
- F&O Tax Treatment in India — when intraday trades must come out of the capital gains calculation
- Equity vs Debt Mutual Fund Taxation — same STCG/LTCG rules apply to equity MFs
- Advance Tax Calculation for FY 2025-26 — STCG and LTCG trigger advance tax obligations
- ITR Filing Due Dates for FY 2025-26 — when Schedule CG must be filed