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
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.
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.