Long-Term Capital Gains (LTCG) — Rules & Rates (Post Budget 2024)
A long-term capital gain arises when mutual fund units are held longer than the period set by tax law. This lesson explains the holding periods, the 12.5% rate, the ₹1.25 lakh yearly limit and the end of indexation, as of October 2026.
When a gain becomes long-term
Tax law sets a holding period for each group of funds except specified mutual funds, which are dealt with below. Units held longer than that period give a long-term gain; units held for that period or less give a short-term gain. Long-term means held more than 12 months or more than 24 months; exactly 12 or 24 months is not enough.
An equity-oriented fund holds at least 65% in listed domestic equity shares, and for it the period is 12 months. For other funds (hybrids that meet neither that test nor the specified mutual fund test, gold, silver and international funds) it is 24 months, or 12 months if the units are listed.
Equity-oriented funds
Long-term gains on equity-oriented units are taxed at 12.5% on the amount above ₹1.25 lakh in a year, under section 198 of the Income-tax Act, 2025 (Section 112A of the old 1961 Act). The rate was 10% before 23 July 2024.
The ₹1.25 lakh is one limit per taxpayer per year. It covers long-term gains from all equity-oriented fund units and listed equity shares together, not each scheme or redemption separately.
For equity-oriented units bought before 1 February 2018, gains that had accrued up to 31 January 2018 are grandfathered, meaning the gain built up to that date is kept outside this tax.
Other funds and specified mutual funds
In the other-funds group, units held more than 24 months (more than 12 months if listed) give long-term gains taxed at 12.5% without indexation, under section 197 (old Section 112).
A specified mutual fund holds more than 65% in debt and money-market instruments, or is a fund of funds with at least 65% in such funds. Its units bought on or after 1 April 2023 give no long-term gains: every gain is taxed at the investor's slab rate, however long the units are held. This definition has been in force from 1 April 2025; an earlier one applied before that, so for units bought between 1 April 2023 and 31 March 2025 the treatment may differ.
Indexation, surcharge and rebate
Indexation was an adjustment that raised the purchase cost for inflation before the gain was worked out. It was removed for mutual fund units from 23 July 2024, so the gain is the sale value less the actual cost.
Surcharge, where it applies, and cess are added to the base rates. The surcharge on capital gains taxed at special rates (the 12.5% rate here and the 20% rate on short-term gains from equity-oriented units) is capped at 15%; the cap does not cover gains taxed at the slab rate. Under the new tax regime, the rebate in section 156 (old Section 87A) is not available against capital gains taxed at special rates.
Rules at a glance
The same fund, two redemption dates (illustrative)
Farhan buys unlisted units of an international equity fund on 10 April 2025. The fund is in the other-funds group, so the holding period is 24 months.
If he redeems on 10 March 2027, after 23 months, the gain is short-term and taxed at his slab rate. If he redeems on 20 May 2027, after a little over 25 months, the gain is long-term and taxed at 12.5% without indexation. Both outcomes assume the rules as of October 2026 still apply on those dates.
One ₹1.25 lakh limit across schemes (illustrative)
- Assumed figures, for arithmetic only: in one tax year an investor redeems units of two equity-oriented funds, all held more than 12 months, at gains of ₹90,000 and ₹1,10,000.
- Total long-term gain under section 198 = ₹90,000 + ₹1,10,000 = ₹2,00,000.
- Less the single yearly limit: ₹2,00,000 − ₹1,25,000 = ₹75,000.
- Tax = ₹75,000 × 12.5% = ₹9,375, before surcharge and cess.
- The investor also redeems units of a listed gold exchange-traded fund, bought after 31 March 2025 and held 14 months, at a gain of ₹80,000. Listed units in the other-funds group are long-term when held more than 12 months, so this gain falls under section 197, outside the ₹1.25 lakh limit: ₹80,000 × 12.5% = ₹10,000, before surcharge and cess.
Result. Tax is ₹9,375 on the equity-oriented gains and ₹10,000 on the gold exchange-traded fund gain, ₹19,375 in all before surcharge and cess.
Key points
- Equity-oriented units held more than 12 months give long-term gains taxed at 12.5% above ₹1.25 lakh a year (as of October 2026).
- The ₹1.25 lakh is a single yearly limit per taxpayer across equity-oriented fund units and listed equity shares.
- Other funds give long-term gains when held more than 24 months (more than 12 months if listed), taxed at 12.5% without indexation.
- Specified mutual fund units bought on or after 1 April 2023 give no long-term gains.
Common misunderstandings
- The ₹1.25 lakh limit is not per fund: it is one yearly limit for the taxpayer across equity-oriented fund units and listed equity shares.
- Debt fund units do not get indexation after a long holding: indexation was removed for mutual fund units from 23 July 2024.
- A hybrid with 60% in debt is not a specified mutual fund: the test is more than 65%, so it can give long-term gains.
Questions people ask
Are units held for exactly 12 months long-term?
No. Equity-oriented units give long-term gains only when held more than 12 months.
What was the earlier rate on these gains?
10% before 23 July 2024; it is 12.5% as of October 2026.
How is a hybrid with 40% in equity and 60% in debt treated?
It is in the other-funds group: unlisted units held more than 24 months give long-term gains.
What this lesson relies on
- Income-tax Act, 2025 — section 198 (long-term gains on equity-oriented units), section 197 (other long-term gains), section 156 (rebate) and the provisions on specified mutual funds
- Fund-house tax reckoners for financial year 2026-27 (secondary source for rates, holding periods and surcharge)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.