The Rs 1.25 lakh exemption most investors waste every year

The rule

For FY 2026-27, long term capital gains on listed shares and equity mutual funds are taxed at 12.5% on the amount above Rs 1.25 lakh in a financial year.

Two features of that exemption matter here. It is a single combined limit across all your equity gains for the year, not one per holding. And it does not carry forward. Unused, it simply expires on 31 March.

The idea

If you hold equity for many years and sell nothing, you accumulate a large unrealised gain that will eventually be taxed in one year, with only one Rs 1.25 lakh exemption available against it.

The alternative is to realise roughly Rs 1.25 lakh of long term gain each year deliberately, then buy back. You pay no tax on that slice, and your cost base resets higher, which reduces the taxable gain later.

A simplified illustration. Suppose you hold units bought for Rs 5 lakh, now worth Rs 6.25 lakh, held over twelve months.

Repeated across many years, this can move a meaningful amount of gain out of the taxable column entirely, without changing what you own.

The honest caveats

This is presented enthusiastically in a lot of places. It deserves four qualifications.

• Costs are real. You pay STT on both legs, plus brokerage, exchange charges, GST, stamp duty and a DP charge on the sale. On small amounts those can eat much of the benefit.
• You are out of the market briefly. Between selling and rebuying, the price can move against you. On a fund, the NAV you sell at and buy at may be different days.
• Only units held over twelve months qualify. Selling anything newer creates a short term gain at 20%, with no exemption. Check the holding period before you act.
• It only helps if you actually have gains. If your holdings are flat or down, there is nothing to harvest.

The other things people forget

• Booking losses. Realised capital losses set off against gains. Short term losses offset both short and long term gains, long term losses only long term. Unabsorbed losses carry forward for eight years, but only if you file your return on time.
• Stopping a SIP twelve months before you need the money, so every unit you sell qualifies as long term.
• Rebalancing with new money rather than selling, which avoids the tax entirely.
• Choosing growth over IDCW in funds, since IDCW payouts are taxed at your slab rate.

Tax rules change and individual situations differ. This is general information rather than tax advice. Full detail in tax on investments.