FY 2025-26 Investment Tax Guide: Shares, Mutual Funds, Securities Transaction Tax Explained

A tax chart cannot determine an investor’s final liability for FY 2025-26. The result depends on the acquisition date, holding period, listing status, whether Securities Transaction Tax was paid, the composition of a fund and the investor’s Indian residential status.

Income earned from April 1, 2025 to March 31, 2026 is reported for Assessment Year 2026-27 under the Income-tax Act, 1961. The Income Tax Act, 2025 began on April 1, 2026 and does not retrospectively change the rules for FY 2025-26.

That makes the 1961 Act, rather than the new tax-year framework, the relevant law for AY 2026-27 returns. The notified return forms continue to refer to the older statute.

The headline 12.5% long-term capital-gains rate applies across several asset classes, but not under identical conditions. Shares, Mutual Funds and fixed-income products can fall under different provisions.

A second distinction is between tax deducted at source and the final tax bill. No TDS does not make income exempt, while excess TDS may be claimed as a refund.

Investors must also separate capital losses from trading losses. The treatment of each can affect the return form, set-off rights and carry-forward period.

Listed equity gets a combined ₹1.25 lakh threshold

Qualifying listed Indian equity held for more than 12 months generally receives long-term treatment. Under section 112A, aggregate long-term gains above ₹1.25 lakh are generally taxed at 12.5%.

The threshold is combined.

It does not apply separately to each share, broker, demat account or mutual-fund folio. A taxpayer with ₹80,000 of long-term gain from listed shares, ₹60,000 from an equity fund and ₹40,000 of long-term loss from another qualifying investment would have net covered gains of ₹1,00,000. Section 112A would not produce tax on that amount, although the transactions still must be reported correctly.

Qualifying equity sold after a holding period of 12 months or less generally produces short-term capital gains taxed at 20% under section 111A. The 12.5% and 20% rates apply to transfers made after July 22, 2024.

Listing alone is not enough. The applicable STT conditions must also be satisfied. Off-market transfers, employee share transactions, inherited assets, gifts and notified acquisition exceptions may require separate review.

Fund labels do not establish equity tax treatment

An Indian scheme does not become an equity-oriented fund merely because its name includes “growth,” “balanced,” “hybrid” or “market.” Its portfolio must satisfy the statutory definition, including the relevant domestic-equity and underlying-fund tests.

A qualifying domestic equity ETF can generally receive the same section 111A and section 112A treatment as listed equity when the fund and STT conditions are met. International, gold, debt and commodity ETFs should not automatically receive that treatment.

ELSS units generally carry a three-year lock-in. That period is separate from the holding-period test for capital gains, and section 80C relief depends on the investor’s tax regime and the conditions applying when the investment was made.

Unlisted and foreign equity use a 24-month test

Unlisted company shares generally become long-term capital assets after more than 24 months. A qualifying long-term gain on a FY 2025-26 transfer is generally taxed at 12.5% without indexation, while a gain on shares held for 24 months or less is ordinarily taxed at the applicable rate.

Section 194N does not impose 20% TDS on a resident’s sale of unlisted shares. That provision concerns specified cash withdrawals from banks, cooperative banks and post offices.

A non-resident seller may instead face withholding under section 195. The deduction can depend on the estimated gain, treaty provisions, residential documentation and whether a lower-withholding certificate is available.

Private transfers also require valuation attention. Sections 50CA and 56(2)(x) can affect a seller, buyer or both when unlisted shares change hands below prescribed fair value.

Foreign company shares generally do not receive the Indian listed-equity 12-month rule simply because they trade on the NASDAQ, New York Stock Exchange, London Stock Exchange or another overseas exchange. They ordinarily become long-term after more than 24 months, with qualifying long-term gains generally taxed at 12.5% without indexation.

ADRs, GDRs and employee GDR arrangements issued by Indian companies may fall under specialised provisions such as sections 115AC or 115ACA. They should not automatically be grouped with ordinary foreign shares.

Debt funds depend on the acquisition date and portfolio

Section 50AA changes the analysis for specified mutual-fund units acquired on or after April 1, 2023. The provision deems the gain to arise from a short-term capital asset, regardless of the actual holding period.

For AY 2026-27, the definition broadly covers a fund investing more than 65% of total proceeds in debt and money-market instruments, or a fund investing at least 65% in units of such a fund. The percentages use the prescribed annual average.

A fund with “35% or less equity” is not automatically covered. Gold, international securities and other non-equity holdings are not automatically debt and money-market instruments.

Units acquired before April 1, 2023 and outside section 50AA continue under normal rules. Ordinary unlisted or open-ended units transferred during FY 2025-26 will generally be long-term after more than 24 months, with qualifying gains generally taxed at 12.5% without indexation. Listed debt units require a separate 12-month analysis.

The commonly repeated 36-month test should not be applied mechanically to every sale.

F&O is generally business income

Eligible derivatives traded through a recognised stock exchange are excluded from speculative transactions under section 43(5). Their profits and losses are generally reported as non-speculative business income. Eligible commodity derivatives can receive similar treatment when statutory conditions are met.

That classification can require ITR-3 rather than ITR-2. Traders may also need books and transaction records, accepted turnover calculations, and a review of deductible business expenses.

Tax audit rules are conditional. The normal section 44AB business threshold is ₹1 crore, increasing to ₹10 crore when cash receipts and cash payments each do not exceed 5% of the relevant totals. Transaction values below ₹10 crore do not automatically remove every trader from audit consideration.

A non-speculative business loss may generally be carried forward for up to eight assessment years, subject to timely filing and applicable set-off conditions.

Deposits, bonds and gold produce different results

Interest from fixed deposits, recurring deposits and taxable post-office deposits is ordinarily taxed under “Income from Other Sources” at the applicable rate. For FY 2025-26, the section 194A TDS threshold for bank, cooperative-bank and post-office interest is ₹1,00,000 for senior citizens and ₹50,000 for other taxpayers. In specified other cases, the threshold rose from ₹5,000 to ₹10,000.

Those thresholds govern deduction, not exemption. A non-senior citizen receiving ₹45,000 of bank interest may still need to report it even when no TDS is deducted.

Listed corporate bonds and NCDs generally become long-term after more than 12 months. Qualifying long-term gains on a FY 2025-26 transfer are generally taxed at 12.5% without indexation, while short-term gains are ordinarily taxed at the applicable rate. Interest on securities can attract section 193 TDS, with the FY 2025-26 threshold generally increased to ₹10,000.

Unlisted bonds and debentures transferred, redeemed or maturing on or after July 23, 2024 fall within section 50AA. Their gains are deemed short-term regardless of the holding period.

Physical gold generally becomes long-term after more than 24 months. Gold ETFs listed on a recognised Indian exchange can generally use the 12-month listed-security test, but their short-term gains do not receive the 20% equity rate under section 111A merely because they trade on an exchange.

Sovereign Gold Bond sales differ from RBI redemptions

An SGB sold on a stock exchange is an ordinary capital-gains transaction. A listed bond held for more than 12 months will generally produce a long-term gain taxable at 12.5% without indexation, while a shorter holding ordinarily produces a short-term gain.

The exemption is narrower.

Section 47(viic) provides that an individual’s redemption of an RBI-issued Sovereign Gold Bond under the Sovereign Gold Bond Scheme is not regarded as a transfer. Capital appreciation on that qualifying redemption is exempt from capital-gains tax, but the periodic interest remains taxable. The exemption does not extend to an exchange sale.

NRIs and returning Indians need additional records

Indian residential status can change the reporting obligations for foreign investments. A resident and ordinarily resident taxpayer may need to disclose foreign shares, brokerage accounts, dividends and sale proceeds in Schedule FA, Schedule FSI and the relevant capital-gains schedule.

Schedule FA ordinarily does not apply to an individual who is non-resident or resident but not ordinarily resident. Citizenship, OCI status, immigration status or possession of a foreign green card does not by itself decide the issue.

An ROR investor may need records for each reportable foreign equity interest, overseas custodial account, dividend, interest receipt, gross sale proceeds and foreign tax withheld. Foreign tax credit generally requires coordination of Schedule FSI, Schedule TR and Form 67.

NRIs and returning Indians should also examine section 195 withholding, treaty residence, DTAA tie-breaker provisions, whether income accrues in India and whether the same receipt must be reported elsewhere.

Filing checks should cover every investment type

Before filing an AY 2026-27 return, investors should reconcile:

• Purchase and actual allotment dates.
• Sale, redemption or maturity dates.
• Listed or unlisted status.
• STT paid on purchase or transfer.
• Original cost and transaction expenses.
• Grandfathered cost for qualifying pre-February 1, 2018 equity assets.
• Fund portfolio classification and acquisition date.
• Interest and dividends in AIS or Form 26AS.
• TDS certificates and broker statements.
• Capital losses available for set-off or carry-forward.
• Foreign brokerage, dividend and withholding records.
• Schedule FA applicability.
• Advance-tax and self-assessment-tax requirements.
• The correct return form, ITR-2 or ITR-3.

The section 87A rebate also requires care. For AY 2026-27, a resident individual under the new tax regime may qualify for a rebate of up to ₹60,000 when total income does not exceed ₹12 lakh. Income taxed at special rates, including gains under sections 111A, 112 and 112A, is excluded when calculating the rebate attributable to normal slab-rate income.

A person with ₹8,00,000 of salary after standard deduction and ₹1,00,000 of qualifying short-term equity gain could have the salary tax covered by the rebate while the equity gain remains taxable at 20%, plus cess.

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.