Equity Fund STCG vs LTCG — Holding Periods, Rates & the ₹1.25 Lakh Exemption

Two investors can sell the exact same equity fund on the exact same day, at the exact same profit, and pay meaningfully different tax — purely because one held for 13 months and the other for 11. Understanding exactly where that line sits, and how the annual exemption actually works, is the single most consequential piece of equity fund tax planning available to an ordinary investor.

What Qualifies as an "Equity-Oriented Fund" in the First Place

Before the holding-period question even arises, a fund needs to qualify as equity-oriented for tax purposes — defined as a scheme investing at least 65% of its total assets in equity shares of domestic companies. This test looks at the fund's actual portfolio, not its marketed category name, and is applied using the annual average of daily closing equity exposure. Large-cap, mid-cap, small-cap, flexi-cap, focused, and ELSS funds typically clear this threshold comfortably; balanced or conservative hybrid funds sitting closer to the 65% line need closer scrutiny of the scheme's actual asset allocation before assuming equity tax treatment applies.

The 12-Month Line — Short-Term vs Long-Term

For an equity-oriented fund, the holding period threshold is 12 months — a genuinely shorter bar than the 24-month (or historically 36-month) threshold that applies to most non-equity assets. Sell within 12 months, and the gain is short-term. Hold beyond 12 months, and it becomes long-term. This single distinction is what separates a 20% flat tax bill from a potentially tax-free (or 12.5%-taxed) one.

Short-Term Capital Gains — Section 111A

Gains on equity fund units held 12 months or less are taxed at a flat 20% under Section 111A, effective for transfers on or after 23 July 2024 (raised from 15% under the pre-Budget 2024 rate). There is no exemption threshold for short-term gains — every rupee of STCG is taxed at this flat rate, regardless of the investor's income slab, and this rate applies identically whether the investor is otherwise in the 5% bracket or the 30% bracket.

Long-Term Capital Gains — Section 112A and the ₹1.25 Lakh Exemption

Gains on units held more than 12 months are taxed under Section 112A at 12.5%, but only on the portion exceeding ₹1.25 lakh in a financial year (raised from a ₹1 lakh exemption and 10% rate, effective the same 23 July 2024 cutoff). The first ₹1.25 lakh of eligible long-term gains in any financial year is entirely tax-free.

Why the Exemption Trips Up More Investors Than It Should

The single most common misunderstanding about this exemption: it is not a per-fund allowance. It is one aggregate limit covering the investor's total long-term capital gains from all Section 112A assets combined in a financial year — listed equity shares and equity-oriented mutual fund units together, across every fund and every broker account the investor holds. An investor with ₹80,000 in LTCG from one fund and ₹90,000 from another doesn't get ₹1.25 lakh of exemption against each — they have ₹1.70 lakh in combined LTCG, of which only ₹1.25 lakh is exempt and ₹45,000 is taxed at 12.5%.

Grandfathering for Units Held Before 31 January 2018

For units acquired on or before 31 January 2018, a grandfathering provision under Section 55(2)(ac) protects gains that had already accrued before Section 112A was introduced. The cost of acquisition for these units, for LTCG computation purposes, is taken as the higher of the actual purchase cost or the fair market value as on 31 January 2018 (capped at the actual sale consideration) — meaning gains that arose before this date are effectively kept out of the tax net, and only appreciation after 31 January 2018 is taxed. This remains relevant today for any investor still holding units from that vintage.

Why the Straddling Date of 23 July 2024 Still Matters for Reporting

Because rates changed mid-year in FY 2024-25 (10%/15% before 23 July 2024, 12.5%/20% from that date), gains realised in that transitional year needed to be reported separately by period within Schedule 112A of the ITR. For FY 2026-27 this split no longer applies to new transactions — but investors reconciling carried-forward losses or amended returns touching FY 2024-25 should be careful not to apply the current flat rates retroactively to pre-23-July-2024 transactions.

SIP Instalments Each Carry Their Own Holding Period

A common and costly assumption is that an entire SIP investment shares one holding period based on when the SIP started. It doesn't. Each monthly instalment is treated as a separate purchase with its own acquisition date, and on redemption, gains are computed instalment-by-instalment against the applicable holding period — commonly using the FIFO (first-in-first-out) method the fund's own capital gains statement will apply automatically. A three-year SIP redeemed in full on one date can produce a mix of both STCG (on the most recent instalments) and LTCG (on the earliest ones) within a single redemption transaction.

A Switch Is a Redemption, Not a Free Transfer

Switching between two schemes — even within the same fund house, and even from a Growth plan to an IDCW plan of the same fund — is treated as a redemption of the original units followed by a fresh purchase, triggering capital gains computation at the time of the switch. This is easy to overlook precisely because no cash actually leaves the investor's bank account during a switch, but the tax event occurs regardless.

Planning Around the 12-Month Line and the Annual Exemption

The two most actionable levers available to an equity fund investor are timing redemptions to cross the 12-month LTCG threshold where a sale is discretionary, and spreading gains across financial years to use the ₹1.25 lakh exemption more than once rather than realising a large gain in a single year that exceeds it substantially. Neither strategy works retroactively — both require planning before the redemption, not after.

Reconciling Your Actual Position Before Filing

Getting equity fund taxation right requires reconciling each redemption or switch against its correct holding period and aggregating LTCG across every equity holding you have — not just the fund you happen to be looking at. We help investors build this reconciliation properly, cross-checked against AIS and the fund house's capital gains statement, before an ITR is filed.

This article reflects the law as understood at the time of writing for FY 2026-27 (AY 2027-28) and is for general informational purposes only. It does not constitute tax advice specific to any individual's circumstances — please consult a qualified Chartered Accountant before making a filing decision.