A capital gain is the difference between what you receive when you sell, redeem or transfer an asset and what it cost you, after allowable expenses. Redeem mutual fund units bought for ₹1,00,000 at ₹1,30,000 and your capital gain is ₹30,000. Sell for less and you have a capital loss.
Why it matters
Tax on gains reduces what you keep, and the rules differ by asset type and holding period. Knowing them helps you compare investments on a post-tax basis, plan redemptions sensibly and avoid surprises when you rebalance or withdraw.
How to read it
- Holding period decides whether a gain is short-term or long-term; the threshold differs by asset.
- Asset type decides the rate. Under current rules, listed shares and equity-oriented funds have their own rates; debt mutual funds bought on or after 1 April 2023 are taxed at slab rates; listed bonds, gold, property and other assets follow their own rules.
- Losses can generally be set off against gains, within rules about which losses offset which gains, and some can be carried forward.
- Every redemption counts. SWPs, STPs, switches and rebalancing are all redemptions.
Common misconceptions
- “No tax until I withdraw everything.” Each partial redemption can create a taxable gain.
- “All mutual fund gains are taxed alike.” Equity-oriented, debt and other schemes are treated differently.
In India: From 1 April 2026, income tax is governed by the Income-tax Act, 2025, which replaced the 1961 Act and uses a single “tax year” in place of “previous year” and “assessment year”. Rates and thresholds can change in any Budget. This page is educational; consult a tax professional about your situation.
Formula
Capital gain = Sale or redemption value − Cost of acquisition − Expenses on transfer
Worked example
For illustration, assume you invested ₹2,00,000 in an equity-oriented fund and redeem it after three years for ₹3,10,000. Your capital gain is ₹1,10,000, and it is long-term because you held the units for more than 12 months.
Figures are for illustration only — not a forecast or a recommendation.
Related terms
LTCG
Long-Term Capital Gains
Gains on assets held longer than a set period; for listed shares and equity-oriented funds, that currently means more than 12 months.
STCG
Short-Term Capital Gains
Gains on assets sold within a set holding period; for listed shares and equity-oriented funds, gains on holdings of 12 months or less.
TDS
Tax Deducted at Source
Tax withheld by the payer — an employer, bank or fund house — before paying you, and credited against your final tax for the year.
ELSS
Equity Linked Savings Scheme
An equity mutual fund with a three-year lock-in whose investments can qualify for a tax deduction under the old tax regime, within limits.
Debt
Lending money in return for interest — through bonds, deposits or debt mutual funds — with returns driven mainly by interest rates and credit quality.
Equity
Ownership in a company through its shares; equity investors share in the company’s growth and profits, and bear the risk of losses.