Capital gains in AY 2026-27 are taxed at special rates that sit apart from the slab rates: 20% for short-term listed-equity gains, 12.5% above ₹1,25,000 a year for long-term ones. This guide explains the two rates, the exemption, the three interactions with the rest of the return — the basic exemption, the 87A rebate and the surcharge cap — and how losses, timing and the regime choice change the final bill.

What a capital gain is, in the AY 2026-27 return

A capital gain is the profit from selling a capital asset — shares, a house, gold, a mutual fund unit — for more than it cost. The gain is the sale price minus the cost of acquisition, minus the cost of transfer, and, where the law allows it, minus the cost of improvement. It is taxed in the year of the sale, not the year the asset was bought, and it is taxed separately from salary and business income in the sense that special rates apply to it: the gain is not simply added to salary and taxed at the slab rates, though it does interact with the slab system at the edges, as this guide explains. For AY 2026-27 — the assessment year for income earned in FY 2025-26 — the capital gains rules that matter most to ordinary investors are the listed-equity rules, because they are the ones the calculator on the hub page models, and they are the ones this guide explains in full. Other assets follow different rules, and they are described only in outline, so that no reader mistakes an equity rule for a property rule.

The first distinction is time. A gain on an asset held for a short period is a short-term capital gain; a gain on an asset held longer is a long-term capital gain; and the dividing line — the holding period that separates the two — differs by asset class. For listed equity shares and equity-oriented mutual funds, the line is twelve months: a sale within twelve months of purchase produces a short-term gain, and a sale after twelve months produces a long-term gain. For most other assets the line is longer, and for some it has changed in recent reforms, so the holding period for the asset actually sold must be checked, not assumed from the equity rule. The distinction matters because the two kinds of gain are taxed at different rates, and because the exemptions and reliefs that apply to one do not necessarily apply to the other.

Short-term gains: Section 111A at 20%

Short-term capital gains on listed equity shares and equity-oriented mutual funds — gains on assets held for twelve months or less, where securities transaction tax has been paid — are taxed under Section 111A at 20%. The rate is a flat special rate: it does not depend on the slab the taxpayer is in, and it does not rise with the size of the gain. A taxpayer in the highest slab and a taxpayer in the lowest slab both pay 20% on a Section 111A gain, which is the point of a special rate: it separates the gain from the ordinary income calculation and taxes it on its own terms. The gain is still part of total income for the purposes that need total income — the surcharge thresholds, for example, look at total income including capital gains — but the tax on the gain itself is the flat 20%, and the slab rates are not applied to it on top.

The flat rate has a consequence that is easy to miss. Because the gain is taxed at 20% regardless of the slab, a short-term equity gain is expensive for a low-income taxpayer and comparatively cheap for a high-income taxpayer, relative to their ordinary income. A taxpayer whose salary alone would be taxed at 5% pays 20% on a short-term equity gain — four times the rate on their salary — while a taxpayer whose salary is taxed at 30% pays 20% on the gain, less than on their salary. The holding decision follows: for a low-income taxpayer, holding an equity investment past the twelve-month line, into long-term treatment, is worth proportionally more than for a high-income taxpayer, and the twelve-month line should be watched as a tax event, not merely as an investment milestone.

Long-term gains: Section 112A at 12.5% above ₹1,25,000

Long-term capital gains on listed equity shares and equity-oriented mutual funds — gains on assets held for more than twelve months, where securities transaction tax has been paid — are taxed under Section 112A at 12.5% on the amount above ₹1,25,000 a year. The ₹1,25,000 is an annual exemption for this class of gain: the first ₹1,25,000 of long-term equity gains in the year is not taxed, and only the excess bears the 12.5% rate. The exemption is per year, not per transaction, so a taxpayer with three long-term sales in the year aggregates the gains and applies the exemption once, to the total. It is also specific to this class: it does not shelter short-term gains, and it does not shelter long-term gains on other assets, which have their own rules.

A worked example shows the mechanics. Suppose a taxpayer sells listed shares held for eighteen months and realises a long-term gain of ₹3,25,000, with no other long-term equity gains in the year. The exemption shelters ₹1,25,000, leaving ₹2,00,000 taxable at 12.5%, which is ₹25,000 of tax before surcharge and cess. Suppose instead the gain were ₹1,00,000: the whole gain falls within the exemption, and no tax is due on it under Section 112A. Suppose the taxpayer had already realised ₹1,00,000 of long-term equity gains earlier in the year: the remaining exemption is ₹25,000, the taxable portion of the new gain is ₹3,00,000, and the tax is ₹37,500. The exemption is a yearly allowance to be managed across the year’s sales, and a sale timed without regard to the gains already realised in the year can waste it.

Listed-equity capital gains in AY 2026-27, as modelled by the hub calculator. Other assets — property, gold, debt funds — follow different rates and holding periods and are not modelled here.

The basic exemption, the rebate, and the surcharge

Three interactions between capital gains and the rest of the return decide the final bill, and each is a trap for a calculation done in isolation. The first is the basic exemption: where total income including the gain is below the basic exemption limit, the unused portion of the exemption reduces the capital gain before the special rate is applied. In effect, a taxpayer with little other income does not pay the special rate on the whole gain, because the part of the gain that fits within the unused exemption is sheltered by it. The relief is limited to the unused exemption — it cannot create a refund, and it cannot shelter more gain than the exemption unused — but for a taxpayer with a small salary and a modest gain, it is the difference between a tax bill and none.

The second interaction is the Section 87A rebate, and it runs the other way: the rebate cannot be used against the tax on Section 111A and Section 112A gains under the new regime. A taxpayer whose total income is within the rebate cap — ₹12,00,000 under the new regime — still pays the special-rate tax on the gains, even though the rebate zeroes the tax on their ordinary income. The rebate shelters salary and other ordinary income; it does not shelter capital gains tax. A calculation that applies the rebate to the whole liability, gains included, understates the bill by exactly the gains tax, and it is one of the most common errors in AY 2026-27 estimates.

The third interaction is the surcharge, capped at 15% on listed-equity capital gains. The surcharge is an additional percentage on the tax, applied once total income passes ₹50,00,000, at rates that rise with income under each regime — 10% to 25% under the new regime, and up to 37% under the old regime at the highest levels. On the tax on listed-equity gains, however, the surcharge is capped at 15%, whatever the taxpayer’s total income. The 4% health and education cess is then charged on the tax plus surcharge, for both ordinary income and gains alike. The order matters: compute the tax on ordinary income at slab rates, compute the tax on gains at special rates, apply the surcharge with its cap on the gains portion, apply marginal relief where it prevents the tax plus surcharge from jumping by more than the income over a threshold, and add the cess last. The hub calculator follows that order, and any hand calculation should follow it too.

Other assets: property, gold, and debt funds, in outline

Long-term gains on assets other than listed equity follow different rules, and the differences are large enough that the equity rules must never be applied to them. Property, gold and unlisted shares have longer holding periods for long-term treatment, and their long-term rates and their treatment of the cost — including the indexation position, which has changed in recent reforms — differ from the equity position. Debt-oriented mutual funds, following the reforms that removed their long-term concessional treatment, are generally taxed at slab rates, without the special-rate shelter that equity funds retain. The practical consequence is that a portfolio holding equity funds, debt funds, property and gold contains four different capital gains regimes, and a single “capital gains rate” does not exist for it. Each asset must be classified, its holding period measured, and its rate applied separately, and the totals aggregated only at the end, for the surcharge and cess.

Property sales carry two further complications that equity sales do not. The first is the exemption for reinvestment: gains on a residential property may be exempted, in whole or in part, where the proceeds are reinvested in another residential property or in specified bonds, within the time limits the law prescribes, and the exemption is conditional on the reinvestment actually happening and being held for the required period. The second is the cost: the cost of acquisition for a property bought long ago, the cost of improvements, and the treatment of a property inherited or received as a gift, each require evidence — purchase deeds, improvement bills, valuation reports — that an equity sale, with its contract notes, rarely needs. A property gain estimated without the cost evidence is a guess, and the gain is the difference between two figures, both of which must be proved.

Losses: set-off, carry-forward, and the order of operations

Capital losses are not wasted, but they are not freely usable either. A short-term capital loss may be set off against both short-term and long-term gains; a long-term capital loss may be set off only against long-term gains. Losses that cannot be set off in the year may be carried forward, for a prescribed number of years, and set off in later years against gains of the permitted kind, provided the return for the loss year was filed on time. The order of operations in the return is therefore: compute each gain and each loss, set off the losses permitted in the year, carry forward the remainder, and apply the special rates only to the net gains that remain. A taxpayer who sells a losing investment and a winning investment in the same year, without considering the set-off, may pay tax on the full winning gain while holding a loss that could have sheltered it — and a taxpayer who realises losses in a year with no gains should still file on time, to preserve the carry-forward.

The set-off rules also interact with the ₹1,25,000 exemption in a way that rewards planning. Because the exemption shelters the first ₹1,25,000 of long-term equity gains, a long-term loss set off against a gain that would have been exempt wastes the loss: it shelters income that needed no sheltering, while the loss could have sheltered a taxable gain. The efficient order is to let the exemption shelter what it shelters, and to direct losses against gains that would otherwise be taxed. The return’s computation does much of this automatically, but the timing of sales — which gains and losses to realise in which year — is in the taxpayer’s hands, and it should be decided with the exemption and the set-off rules in view, not by selling whatever is convenient.

Planning the sale: timing, the exemption, and the regime

Three planning decisions, made before the sale, change the tax on a listed-equity gain more than any decision made after it. The first is the holding period: a sale a week before the twelve-month line is a short-term gain at 20%; a sale a week after it is a long-term gain at 12.5% above the exemption. Where the investment decision is neutral, the tax decision favours waiting for the line, and the cost of waiting is the market risk of the intervening days, which should be weighed honestly against the tax saving. The second is the year’s exemption: a sale early in the year, before other gains have used the ₹1,25,000, shelters more than the same sale late in the year, after the exemption is exhausted. The third is the regime: the capital gains tax is the same under both regimes — the special rates do not depend on the regime — but the ordinary income tax, the rebate, and the surcharge bands do, and the regime choice should be made on the whole return, with the gains included, not on the salary alone. The calculator’s comparison of both regimes, with gains entered separately, is the right tool for that choice, because it holds the gains constant while the regime changes.

Finally, keep the records that the calculation needs: contract notes showing purchase and sale dates and prices, the securities transaction tax paid, dividend records that distinguish income from gains, and the computation of each gain, year by year. Capital gains are the part of the return most often questioned, because the figures span years and the evidence is in documents that are easily lost. A taxpayer with a complete set of contract notes can prove every gain and every holding period; a taxpayer without them must reconstruct, and reconstruction under questioning is a poor substitute for a file kept from the start.

Frequently asked questions

How are capital gains taxed in AY 2026-27?

Listed-equity gains where securities transaction tax has been paid are taxed at special rates: short-term gains under Section 111A at 20%, and long-term gains under Section 112A at 12.5% on the amount above ₹1,25,000 a year. Other assets — property, gold, debt funds — follow different rates and holding periods. The 4% cess applies on tax plus surcharge, and the surcharge on listed-equity gains is capped at 15%.

What is the difference between STCG and LTCG for listed equity?

For listed equity shares and equity-oriented funds, the dividing line is twelve months: a sale within twelve months produces a short-term gain taxed at 20% under Section 111A, and a sale after twelve months produces a long-term gain taxed at 12.5% above the ₹1,25,000 annual exemption under Section 112A. The holding period is measured from purchase to sale, and the tax difference makes the twelve-month line a genuine planning date.

Can the Section 87A rebate reduce tax on capital gains?

No — under the new regime, the Section 87A rebate cannot be used against the tax on Section 111A and Section 112A gains. The rebate zeroes the tax on ordinary income up to its cap (₹12,00,000 of total income under the new regime), but the special-rate tax on capital gains remains payable. A calculation that applies the rebate to the whole liability, gains included, understates the bill by exactly the gains tax.

Does the ₹1,25,000 exemption apply to every sale?

No. It is an annual exemption for long-term gains on listed equity under Section 112A: the first ₹1,25,000 of such gains in the year is exempt, and only the excess is taxed at 12.5%. It applies once per year to the total of the year’s long-term equity gains, not once per sale, and it does not shelter short-term gains or gains on other assets.

Can capital losses be set off against capital gains?

Yes, under the set-off rules: a short-term loss may be set off against both short-term and long-term gains, while a long-term loss may be set off only against long-term gains. Losses that cannot be set off in the year may be carried forward for a prescribed number of years, provided the return for the loss year was filed on time. Losses should be directed against gains that would otherwise be taxed, not against gains the ₹1,25,000 exemption would already shelter.

Are capital gains taxed the same under the old and new regimes?

The special rates on listed-equity gains — 20% for short-term and 12.5% above the exemption for long-term — do not depend on the regime. What changes with the regime is the tax on ordinary income, the rebate, and the surcharge bands, so the regime choice should be made on the whole return with the gains included, not on salary alone. Enter the gains separately in the calculator and compare both regimes on the same figures.