Long-Term Capital Gains (LTCG) Tax for FY 2025-26

Understanding taxation on equity investments is important for any investor in India. For the Financial Year 2025-26, the Assessment Year being 2026-27, the taxation scenario is dictated by the significant changes brought about in Budget 2024, which attempted to simplify the taxation system while rationalising the tax rates according to the prevailing economic scenario.

What is long-term capital gains

In the context of equity, the capital gains are termed 'long-term' when the assets, namely the equity shares or the equity-oriented mutual funds, are held for over 12 months before their sale. For the tax treatment to be applicable under Section 112A, the Securities Transaction Tax (STT) may have to be deducted both at the time of purchase and sale of the shares.

The new tax regime

The most significant change for the FY 2025-26 is the new tax rate & exemption limit. The new rules are as follows:

• Tax Rate: The new tax rate applicable to LTCG is flat at 12.5%. This was 10% earlier.
• Exemption Limit: The exemption limit for cumulative long-term capital gains has been raised to ₹1.25 lakh, from ₹1 lakh.
• No Indexation: In equities that are listed, the investor cannot enjoy indexation benefits, which means they have to pay tax on actual gains.
• Additional Costs: Depending upon their income tax slab, they have to pay 4% Health & Education Cess.

Exemptions and compliance

Despite the fact that the standard deductions under Section 80C are not available for LTCG, the investor is eligible for tax exemption under Section 54EC, whereby the investor is eligible for an exemption of up to ₹50 lakhs if the investments are made in specified bonds.

Below requirements are needed to file taxes  -

• ITR Forms: The gains need to be reported in the ITR-2 or ITR-3 under the schedule for Capital Gains.
• Advance Tax: If tax liability for the year is more than ₹10,000, advance tax payments need to be made in instalments or else certain interest as penalty would be charged.
• Documentation: As the Income Tax Department monitors all demat transactions, Annual Information Statement needs to match the records. 

Conclusion

To optimise your tax outgo, consider tax-loss harvesting, which is selling underperforming stocks to realise a loss that can offset your gains. You may also reset your cost base without incurring tax by ‘harvesting’ gains up to the ₹1.25 lakh limit each year.