What Is the LTCG Exemption of ₹1.25 Lakh?

For millions of Indian retail investors who participate in equity markets and mutual funds, the Long-Term Capital Gains (LTCG) tax is one of the most impactful aspects of personal taxation. The good news for FY 2026-27 is that the exemption limit stands at ₹1.25 lakh — meaning your long-term capital gains up to this amount in a financial year are completely tax-free.

Whether you are a salaried employee investing in SIPs, a businessperson holding blue-chip stocks, or a retiree depending on equity dividends and redemptions — understanding this exemption can directly save you thousands of rupees every year. This comprehensive guide, updated for FY 2026-27 as per Indian tax laws amended through the Union Budget 2024, will walk you through every angle of the LTCG exemption.

What Changed in Budget 2024?

In the Union Budget presented on 23 July 2024, Finance Minister Nirmala Sitharaman revised the LTCG exemption threshold from ₹1 lakh to ₹1.25 lakh per financial year. Additionally, the LTCG tax rate on equity and equity mutual funds was raised from 10% to 12.5%, effective from 23 July 2024. These changes together shape the LTCG taxation landscape for FY 2025-26 and FY 2026-27.

What Is Long-Term Capital Gain (LTCG)?

A capital gain is the profit earned from the sale of a capital asset. When this asset is held beyond a specified holding period, the resulting profit is classified as a Long-Term Capital Gain (LTCG). The holding period and applicable tax rules differ depending on the type of asset.

Holding Period Criteria for LTCG in India (FY 2026-27)

Asset Type	Holding Period for LTCG	LTCG Tax Rate
Listed Equity Shares	More than 12 months	12.5% (no indexation)
Equity Mutual Funds (Equity > 65%)	More than 12 months	12.5% (no indexation)
Debt Mutual Funds (post Apr 2023)	Treated as STCG (slab rate)	As per income slab
Unlisted Shares	More than 24 months	12.5% (no indexation)
Immovable Property (Land/Building)	More than 24 months	12.5% (no indexation)
Gold / Physical Assets	More than 36 months	12.5% (no indexation)
Bonds / Debentures (listed)	More than 12 months	12.5% (no indexation)

Note: Indexation benefit on immovable property and gold was removed in Budget 2024. Only the flat 12.5% rate now applies for most assets without indexation.

LTCG Exemption Limit of ₹1.25 Lakh – FY 2026-27 Explained

Under Section 112A of the Income Tax Act, 1961, LTCG arising from the sale of listed equity shares, equity-oriented mutual funds, and units of a business trust are exempt up to ₹1.25 lakh in a financial year. Any gain above this threshold is taxed at 12.5% without the benefit of indexation.

Key Conditions for Claiming the ₹1.25 Lakh Exemption

• The asset must be listed on a recognized Indian stock exchange (BSE/NSE).
• Securities Transaction Tax (STT) must have been paid both at the time of purchase and sale (for equity shares).
• The holding period must be more than 12 months from the date of acquisition.
• The exemption applies per individual (or HUF, firm, company) per financial year — it cannot be carried forward.
• The exemption applies per taxpayer — meaning husband and wife can each claim ₹1.25 lakh separately.
• This exemption is available only under Section 112A — not for LTCG on property, gold, or unlisted shares.

Grandfathering Provision (Pre-2018 Holdings)

For equity shares or equity mutual fund units acquired before 31 January 2018, the cost of acquisition is deemed to be the higher of: (a) the actual cost of purchase, or (b) the lower of the fair market value (FMV) as on 31 January 2018 and the actual sale consideration. This ensures that gains accumulated before the reintroduction of LTCG tax on 1 April 2018 remain exempt.

How to Calculate LTCG and Apply the ₹1.25 Lakh Exemption

Step-by-Step Calculation Formula

1. Determine the Sale Consideration (actual sale price).
2. Identify the Cost of Acquisition (or FMV as on 31 Jan 2018, if applicable).
3. Compute LTCG = Sale Consideration – Cost of Acquisition.
4. Deduct ₹1,25,000 (the exemption under Section 112A).
5. Apply 12.5% tax on the remaining taxable LTCG.
6. Add applicable surcharge and 4% Health & Education Cess.

Illustration 1 – Equity Shares (Gains Within Exemption Limit)

Particulars	Amount (₹)
Purchase Price (FY 2023-24)	₹3,00,000
Sale Price (FY 2026-27)	₹4,20,000
LTCG (Gross)	₹1,20,000
Less: Exemption u/s 112A	₹1,20,000
Taxable LTCG	₹0
LTCG Tax Payable	NIL ✅

Illustration 2 – Equity Mutual Fund (Gains Exceeding Exemption)

Particulars	Amount (₹)
SIP Units Redeemed (held > 12 months)	—
Total Redemption Proceeds	₹7,00,000
Total Cost of Acquisition	₹4,50,000
LTCG (Gross)	₹2,50,000
Less: Exemption u/s 112A	₹1,25,000
Taxable LTCG	₹1,25,000
Tax @ 12.5%	₹15,625
Add: 4% Health & Education Cess	₹625
Total LTCG Tax Payable	₹16,250 💡

Illustration 3 – Married Couple Strategy

If both husband and wife have invested and earned LTCG independently, each can claim ₹1.25 lakh exemption separately. A couple together can therefore enjoy up to ₹2.50 lakh of LTCG tax-free per year — with zero tax liability, provided each has gains below the exemption threshold.

LTCG vs. STCG – Key Differences for FY 2026-27

Feature	LTCG (Listed Equity)	STCG (Listed Equity)	LTCG (Property)
Holding Period	> 12 months	≤ 12 months	> 24 months
Tax Rate	12.5%	20%	12.5%
Exemption Limit	₹1.25 lakh/year	No exemption	No exemption
Indexation Benefit	No	No	No (removed 2024)
Set-Off Allowed	LTCG only	STCG & LTCG	LTCG only
Section	112A	111A	112

Smart Tax Planning Strategies Using the ₹1.25 Lakh LTCG Exemption

Strategy 1 – Tax Harvesting (LTCG Harvesting)

Tax harvesting is the practice of systematically booking long-term capital gains up to ₹1.25 lakh every financial year and then reinvesting the proceeds in the same or similar securities. This resets your cost of acquisition to a higher base, reducing future taxable gains.

• Sell equity mutual fund units or shares with gains of up to ₹1.25 lakh before 31 March 2027.
• Reinvest immediately in the same fund or stock (no 30-day wash sale rule in India).
• Your new cost basis is now higher, reducing future LTCG.
• Over several years, compounding this strategy can lead to significant tax savings.

Strategy 2 – Systematic Withdrawal Planning (SWP)

For retirees or those near retirement, structuring withdrawals through a Systematic Withdrawal Plan (SWP) can ensure that gains redeemed each year remain within the ₹1.25 lakh exemption. Proper SWP planning can create a tax-efficient income stream.

Strategy 3 – Joint Investment Planning

By investing in separate demat accounts or folio accounts in the name of each family member (spouse, adult children), every individual can claim their own ₹1.25 lakh exemption independently. This effectively multiplies the family’s combined tax-free LTCG capacity.

Strategy 4 – Portfolio Rebalancing Using the Exemption Window

Instead of holding winning positions indefinitely (and accumulating large future tax liabilities), use the ₹1.25 lakh annual window to gradually rotate or rebalance your portfolio. This spreads the tax liability and avoids large one-time tax payments.

Strategy 5 – ELSS Investments for Additional Tax Benefits

While ELSS (Equity Linked Savings Scheme) funds are equity mutual funds and their long-term gains are taxed under LTCG rules, they also qualify for deduction under Section 80C (up to ₹1.5 lakh per year under the Old Tax Regime). ELSS has a 3-year lock-in, and upon redemption after this period, gains above ₹1.25 lakh are taxed at 12.5%.

Set-Off and Carry Forward of LTCG Losses

If you incur a long-term capital loss in any financial year (e.g., selling equity shares at a loss), these losses can be set off and carried forward as follows:

• LTCG losses can be set off ONLY against LTCG (from any asset class).
• LTCG losses CANNOT be set off against Short-Term Capital Gains (STCG) or income from any other head.
• Unabsorbed LTCG losses can be carried forward for up to 8 assessment years.
• To carry forward capital losses, you must file your Income Tax Return (ITR) on or before the due date.
• Losses from equity shares where STT was not paid are not eligible for set-off under Section 112A.

Important Note on Loss from Equity

From FY 2018-19 onwards, LTCG losses from equity (Section 112A) can be set off against other LTCG income. This is a notable relief for investors who hold diversified portfolios across different asset classes.

ITR Filing Requirements for LTCG in FY 2026-27

Which ITR Form to Use?

Taxpayer Type	ITR Form
Individuals with salary + capital gains	ITR-2
Individuals with business income + capital gains	ITR-3
HUF with capital gains	ITR-2 or ITR-3
Partnership Firms	ITR-5
Companies	ITR-6

Documents Required for LTCG Reporting

• Capital Gains Statement from your broker (e.g., Zerodha, Groww, Angel One, HDFC Securities).
• Consolidated Account Statement (CAS) from CDSL or NSDL for mutual fund transactions.
• Form 26AS and Annual Information Statement (AIS) from the IT portal.
• Purchase contract notes and demat account statements.
• PAN card, bank account details for refund (if any).

Due Date for ITR Filing – AY 2027-28 (FY 2026-27)

For individuals not subject to audit, the due date for filing ITR for AY 2027-28 is typically 31 July 2027 (subject to any CBDT extension). For those liable to tax audit, the due date is generally 31 October 2027. Timely filing is essential to carry forward any capital losses.

Surcharge and Cess on LTCG – FY 2026-27

For LTCG on equity assets under Section 112A, the surcharge applicable is capped at 15%, regardless of the total income of the taxpayer. This is a significant benefit for high-net-worth individuals (HNIs).

Total Income	Surcharge Rate on LTCG (Equity)
Up to ₹50 lakhs	NIL
₹50 lakh – ₹1 crore	10%
₹1 crore – ₹2 crore	15%
Above ₹2 crore	15% (capped — unlike other income)

Health & Education Cess: 4% is levied on (LTCG Tax + Surcharge) for all taxpayers.

LTCG Under New Tax Regime vs. Old Tax Regime – FY 2026-27

One of the most commonly misunderstood aspects of LTCG is how it interacts with the choice of tax regime.

• The ₹1.25 lakh LTCG exemption under Section 112A is available under BOTH the Old Tax Regime and the New Tax Regime.
• LTCG from equity is taxed at a flat 12.5% regardless of which tax regime you choose — it does NOT merge with your slab income.
• The basic exemption limit (₹3 lakh under new regime, ₹2.5 lakh under old) does NOT apply to reduce taxable LTCG.
• However, if your total income (excluding LTCG) is below the basic exemption limit, the shortfall CAN be used to reduce taxable LTCG before applying the 12.5% rate.

Example – Benefit for Low-Income Investors

If a senior citizen has total non-LTCG income of ₹2 lakh (below the ₹3 lakh basic exemption limit under new regime), and LTCG of ₹3 lakh, the taxable LTCG calculation is: Taxable LTCG = ₹3,00,000 – ₹1,25,000 (exemption) = ₹1,75,000. Since basic exemption shortfall = ₹1,00,000, further reduced taxable LTCG = ₹75,000. Tax = 12.5% of ₹75,000 = ₹9,375 + cess.

LTCG on Real Estate and Gold – Post-Budget 2024 Rules

While this blog primarily covers LTCG on equity, it is important to understand the changes for other asset classes post the Union Budget 2024.

LTCG on Immovable Property (Effective from 23 July 2024)

• Holding period for LTCG remains more than 24 months.
• Tax rate: 12.5% without indexation benefit (indexation removed).
• Alternatively, for property acquired before 23 July 2024, taxpayers have the option to choose between: (a) 20% with indexation, or (b) 12.5% without indexation — whichever is more beneficial.
• Section 54, 54EC, and 54F exemptions (reinvestment in property or bonds) remain applicable.

LTCG on Gold and Physical Assets

• Holding period: more than 36 months for LTCG treatment.
• Tax rate: 12.5% without indexation (indexation removed for gold too from Budget 2024).
• Sovereign Gold Bonds (SGBs) held till maturity are fully exempt from LTCG tax.

Common Mistakes Investors Make with LTCG – and How to Avoid Them

7. Not tracking the holding period accurately — use your broker’s P&L statement to verify.
8. Forgetting to file ITR even when LTCG is below ₹1.25 lakh — you must still file if total income exceeds the basic exemption limit.
9. Confusing LTCG exemption with STCG — STCG on equity (< 12 months) is taxed at 20% with NO exemption.
10. Missing the tax harvesting window — not booking gains before 31 March each year means losing the benefit.
11. Not reporting LTCG in ITR — all capital gains must be disclosed even if they are below the exemption limit.
12. Assuming debt mutual fund gains are LTCG — post April 2023, debt MF gains are treated as STCG regardless of holding period.
13. Not accounting for STT payment — if STT was not paid on purchase (e.g., off-market transactions), the Section 112A exemption may not apply.

Frequently Asked Questions (FAQs) on LTCG Exemption ₹1.25 Lakh

Q1. Is the ₹1.25 lakh LTCG exemption per transaction or per year?

Per financial year. The total LTCG from all listed equity shares and equity mutual funds combined is exempt up to ₹1.25 lakh in a single financial year — not per transaction.

Q2. Can I claim ₹1.25 lakh exemption on LTCG from property sale?

No. The ₹1.25 lakh exemption under Section 112A applies ONLY to LTCG from listed equity shares, equity mutual funds, and business trust units. Property, gold, and unlisted shares are governed by Section 112 and have no such blanket exemption.

Q3. What if my LTCG is ₹1.25 lakh exactly — do I pay any tax?

No. If your total LTCG from Section 112A assets is exactly ₹1,25,000 in the year, it is fully exempt and your LTCG tax liability is NIL.

Q4. Is LTCG applicable on SIP redemptions?

Yes, but the LTCG is calculated per SIP installment unit-wise, based on when each installment was made. Units held for more than 12 months qualify for LTCG treatment. Many fund houses provide a capital gains statement that makes this calculation straightforward.

Q5. What is the difference between LTCG under Section 112 and Section 112A?

Section 112A specifically covers LTCG on listed equity shares, equity mutual funds, and business trusts with STT payment, at 12.5% with a ₹1.25 lakh exemption. Section 112 covers LTCG on all other assets (property, debt funds, gold, unlisted shares) at 12.5% without any basic exemption.

Q6. Can NRIs claim the ₹1.25 lakh LTCG exemption?

Yes, NRIs investing in Indian listed equity markets through the SEBI-regulated route (SEBI PIS account) can claim the ₹1.25 lakh LTCG exemption under Section 112A. However, TDS at 12.5% may be deducted at source by the broker/AMC, and NRIs can claim a refund when filing their ITR if total LTCG is within the exemption.

Q7. Does the ₹1.25 lakh exemption apply to ETFs?

Yes. Exchange-Traded Funds (ETFs) that are equity-oriented (holding > 65% in equity) and listed on stock exchanges are treated as equity mutual funds and qualify for the ₹1.25 lakh LTCG exemption under Section 112A.

Quick Reference Summary – LTCG Exemption FY 2026-27

Parameter	Details
Exemption Limit	₹1,25,000 per financial year
Applicable Section	Section 112A, Income Tax Act
Qualifying Assets	Listed equity shares, equity MF, business trust units
Holding Period Required	More than 12 months
Tax Rate on Excess Gains	12.5% (flat, no indexation)
STT Condition	STT must be paid on purchase & sale
Surcharge Cap (Equity)	Maximum 15%
Cess	4% Health & Education Cess
Available Under New Regime?	Yes
Available Under Old Regime?	Yes
ITR Form for Individuals	ITR-2 or ITR-3
Loss Carry Forward Period	Up to 8 assessment years
Loss Set-Off	Only against LTCG

Conclusion

The LTCG exemption of ₹1.25 lakh for FY 2026-27 is one of the most investor-friendly provisions in the Indian income tax system for equity market participants. By understanding and proactively using this exemption through strategies like LTCG harvesting, joint portfolio planning, and SWP structuring, you can legally reduce your tax outgo and maximize your long-term wealth creation.

Always maintain proper records, file your ITR on time (even if no tax is due), and consult a SEBI-registered investment advisor or a Chartered Accountant (CA) for personalised tax planning that suits your financial goals.

⚠️ Disclaimer: This blog is for informational and educational purposes only. Tax laws are subject to change. Always consult a qualified tax professional or Chartered Accountant before making investment or tax-related decisions.