Tax on investments in India, explained in plain language

The one idea underneath all of it

You are not taxed on what your investments are worth. You are taxed when you sell and realise a gain, or when income such as a dividend or interest reaches you.

A holding that has doubled and not been sold creates no tax. This is why holding is more tax efficient than trading, before any consideration of returns.

Two questions then decide the rate: what did you own, and how long did you own it.

Shares and equity funds

This covers listed Indian shares and any fund holding at least 65% in Indian company shares, which includes most equity mutual funds, index funds and equity ETFs.

Two details people get wrong.

The ₹1.25 lakh exemption is combined. It covers all your long term equity gains for the year together, from funds and directly held shares. It is not ₹1.25 lakh per fund.

There is no exemption on short term gains. The comparison is not 20% against 12.5%. It is 20% on everything against 12.5% on only the part above ₹1.25 lakh. Selling at eleven months instead of thirteen can cost considerably more than it looks.

Budget 2026 made no change to these rates. It did change how share buybacks are taxed: from 1 April 2026, buyback proceeds are treated as capital gains on the amount above your cost, rather than as dividend income at slab rates. For most retail shareholders this is an improvement.

Everything else

The debt fund row is the one that surprises people. Before April 2023, holding a debt fund three years gave a lower rate and an inflation adjustment. Both are gone for units bought since. Debt funds are now taxed much like a bank fixed deposit.

The gold rows changed recently too, and the distinction matters: a listed gold ETF now needs only 12 months, while a gold mutual fund still needs 24, purely because its units are not listed.

Dividends and interest

Since April 2020, dividends are added to your total income and taxed at your slab rate. TDS is deducted by the company once dividend income crosses the applicable threshold in a year. Interest from deposits and bonds is treated the same way.

For someone in the 30% bracket, this makes dividend income noticeably more expensive than a long term capital gain. See dividend investing.

The Income-tax Act, 2025

The 1961 Act was replaced on 1 April 2026. This is a reorganisation, not a rate change, and it renumbered almost everything.

How SIPs are taxed

A SIP is not one investment. Each instalment is a separate purchase with its own holding period.

When you redeem, units go on a first in, first out basis. The oldest units are sold first.

So a SIP run for four years and withdrawn entirely will produce mostly long term gains, plus short term gains at 20% on everything bought in the last twelve months.

Legal ways to pay less

• Use the ₹1.25 lakh exemption every year. It does not carry forward. Some investors sell and immediately repurchase enough to realise about ₹1.25 lakh of long term gain annually, resetting their cost base tax free. Factor in costs before doing this.
• Cross the twelve month line. Selling at thirteen months rather than eleven changes 20% into 12.5% with an exemption attached.
• Set off losses. Realised capital losses can be set off against capital gains. Short term losses can offset both short and long term gains, long term losses only long term gains. Unabsorbed losses can be carried forward for eight years if you file your return on time. This is tax loss harvesting.
• Prefer growth over IDCW in funds. IDCW payouts are taxed at your slab rate. With the growth option you choose when to realise, and it is then a capital gain.
• Rebalance with new money. Directing fresh investment toward whatever is below target avoids a sale, and therefore avoids the tax.

One thing worth stressing: never let tax drive an investment decision on its own. Holding a deteriorating business to avoid 12.5% tax is a poor trade. Tax is a cost to manage after the investment case is settled, not before.

Filing and reporting

• Capital gains generally cannot be reported in the simplest ITR forms. Most investors with gains need ITR-2 or ITR-3.
• Your broker and fund house provide a capital gains statement for the year. Reconcile it against your Annual Information Statement before filing.
• Filing on time is what preserves your ability to carry forward losses. Missing the deadline can forfeit that.
• Intraday trading is speculative business income, not capital gains, taxed at your slab rate with its own rules.
• Foreign holdings, including US shares, must be declared separately in the foreign assets schedule.

Tax rules change and individual situations differ enormously. This lesson is general information for FY 2026-27, not tax advice. Once the amounts are meaningful, a qualified professional costs far less than a mistake.