Taxes on your investments (India)

Rates as at FY 2026-27. Indian tax rules change every Budget. Everything below is an educational framework with the current figures stated explicitly so you can see the logic — verify against the Finance Act and your own return before you act. Not tax advice.

Tax is not an admin chore at the end of the year. It is a friction cost, and like every friction cost it belongs in the arithmetic when you compare two investments.

A 2% round trip in costs is the difference between compounding at 10% and compounding at 7.6%. Over twenty years that gap is enormous. Yet most people compare “FD interest” against “expected stock return” and never touch the tax.

The five frictions

Friction	What it is	Typical magnitude
Capital gains tax	On the profit when you sell	12.5% LTCG / 20% STCG on equity
STT	Securities Transaction Tax, on both buy and sell	0.1% each side on delivery equity
Stamp duty	On the buy side	0.015%
TDS	Tax deducted at source on dividends	10% on dividend income
GST	On mutual fund units	Varies by category

Plus the one people forget: the 4% health and education cess on the tax itself.

Capital gains on equity — the headline numbers

Current treatment on listed shares and equity-oriented funds:

Holding period	Treatment	Rate
Over 12 months (long term)	LTCG, s.112A, no indexation	12.5% on gains above ₹1.25 lakh a year
12 months or less (short term)	STCG, s.111A	20%, no exemption

Three details that change real outcomes:

1. The ₹1.25 lakh is annual and aggregate. It is a single pool across all your equity sales for the whole financial year — not per scrip, not per demat account, not per transaction. A beginner selling ₹2 lakh in one go and ₹2 lakh in another has one ₹1.25 lakh exemption between them, not two.

2. Indexation is gone. Since 23 July 2024 there is no indexation benefit. Long-term gains are taxed at a flat 12.5% on nominal profit. The one remaining exception is the pre-February-2018 grandfathered fair market value choice.

3. STT must be paid on both acquisition and transfer for the s.112A concessional rate to apply. Most demat and delivery trades satisfy this automatically; some off-exchange and take-over routes do not.

Worked example: the ₹3 lakh gain

You bought shares for ₹10,00,000 and sold for ₹13,00,000 after 18 months. Gain = ₹3,00,000.

Gross gain                             ₹3,00,000
− s.112A annual exemption             −₹1,25,000
                                       ───────────
Taxable long-term gain                 ₹1,75,000
× 12.5%                                ₹ 21,875
+ 4% health & education cess            ₹   875
                                       ───────────
Tax on the gain                         ₹ 22,750

If instead you had sold after 8 months, it is short term:

₹3,00,000 × 20%                        ₹60,000
+ 4% cess                              ₹ 2,400
                                       ───────────
Tax on the gain                         ₹62,400

Same profit. ₹62,400 versus ₹22,750 — a ₹39,650 difference for holding ten months longer. This is the single most useful tax fact on this page: on equity, crossing the 12-month line is worth far more than any fund-selection decision.

Round-trip costs, because they compound against you

Buy ₹1,00,000 of delivery equity and sell it later:

Item	Rate	Cost
STT — buy	0.1%	₹100
Stamp duty — buy	0.015%	₹15
Brokerage	varies by broker	₹0–₹20
DP charges	per sell	~₹15–₹30
STT — sell	0.1%	₹100
Total friction		~₹230–₹265

That is roughly 0.23–0.27% per round trip on a small trade, before capital gains tax. On a large trade the percentage falls. This is why the "sell everything and buy back" behaviour is expensive, and why a one-time purchase is cheaper than two half-trades in the same fund.

Debt funds — the rule that surprises people

This is the one that costs the most money in practice.

Fund	Holding period	Tax treatment
Debt mutual funds bought on/after 1 April 2023	Any period	Slab rate. No LTCG benefit, ever.
Debt funds bought before 1 April 2023	≥ 24 months	12.5% LTCG (grandfathered)
Specified debt funds (arbitrage, ~65%+ debt)	Any period	Slab rate

The point: a debt fund is taxed at your marginal slab, which for many households is 30% plus cess — a 35%+ drag. A 7% debt fund can leave you with about 4.5% after that tax and after the fund's own tax. The same money in an FD pays interest taxed at slab as well, but has different formal treatment; and in a tax-free instrument like PPF, the return is genuinely untouched.

The practical consequence, which almost nobody is told:

Debt mutual funds are usually the wrong tax-efficient parking spot for a higher-income Indian household. If you are in the 30% bracket, low-tax debt instruments and tax-free small-savings products often beat them on an after-tax basis. See Where to park cash you are not investing.

Dividends and TDS

Item	Treatment
Dividend tax	Taxed as income at your slab — not capital gains. Dividends have been taxable in India since April 2020
TDS under s.194	10% deducted at source above an annual threshold per company
The rest of the dividend	Added to your total income and taxed at your slab
TDS credit	Claimable against your tax liability when you file — so it is a credit, not a final cost

The practical result: a 2% dividend yield on a ₹10 lakh holding is ₹20,000, and at a 30% slab plus cess you keep about ₹13,000. In a brokerage account, total-return (growth) usually beats dividend-payout, because the dividend is taxed but the growth is not (until you sell, at 12.5% above the exemption).

That is why "dividend yield" screens can mislead. A high yield often signals a falling price, a one-time payout, or a company that cannot reinvest internally — not a better investment.

GST on mutual fund units

GST applies to the units themselves at purchase, and the rate differs by category:

Category	Treatment
Equity and equity-oriented funds	GST on units, on the portion of NAV above ₹10,000, at the prevailing equity MF rate
Debt and money-market funds	A materially higher rate — debt fund units were raised significantly from 2025
ETFs	Treated per their underlying exposure

Because debt-fund GST is high and debt-fund gains are taxed at slab, debt funds have a double whammy: a high entry tax and a slab-rate exit tax. This is a structural reason retail investors in India are pushed toward equity funds and FDs despite the maths.

Check the current rate before buying. GST rates on specific fund categories are revised by the GST Council, and this line changes more often than income-tax rates.

Which acquisition date applies — the expensive mistake

The 12.5% / 20% rates apply to transfers executed on or after 23 July 2024. A sale executed in June 2024 is taxed at the old rates even if you report it in the same financial year's return. And where a person holds a mix of pre- and post-July-2024 lots in the same scrip, the first-in-first-out (FIFO) rule decides which lot is sold.

Mixing those two acquisition pools in one computation is a common and expensive error. If you do multiple purchases of the same stock over a long period, keep the purchase dates and prices in a spreadsheet. It takes twenty minutes once, and it is the difference between a correct and an incorrect return.

Friction in the comparison — put it in the table

Most people compare investments on headline return. The honest comparison is post-tax, post-friction, compounding.

Option	Headline	Real friction	What the household keeps
FD	7%	Slab tax on interest; no capital gains	~4.9% at 30% slab
Debt MF (post-Apr-2023)	7%	Slab tax + GST on entry	~4.4% at 30% slab
Equity MF / stocks	12%	12.5% LTCG above ₹1.25L, 0.24% round trip	~10% once you clear the exemption

The equity line assumes you hold past 12 months and your annual gain is modest. If your annual gains are large, the tax matters more and the case weakens. The comparison is the lesson — the winner changes with your tax bracket, your holding period, and your gain size, and almost nobody does this arithmetic.

Failure modes

Treating the ₹1.25 lakh exemption as per-sale. It is annual and aggregate. Selling in lots to “use it fresh each time” is a well-intentioned expensive error.

Selling just under 12 months to “time the market." You convert a 12.5% rate into 20% and give up the long-term classification. One extra bad quarter can cost more than ten years of a slightly better fund.

Holding a debt fund for 10 years expecting LTCG relief. There is none. Bought after April 2023, slab rate applies regardless of tenure.

Chasing high dividend yield. Dividends are taxed at slab; growth is not taxed until sale. A 3% yield at a 30% slab is roughly a 2% drag, and the price usually falls by the dividend on the ex-date.

Forgetting the 4% cess. 12.5% becomes 13%. 20% becomes 20.8%. 30% becomes 31.2%. It is small, but it is the difference between a number you verified and one you assumed.

Not keeping purchase records. Without date and price per lot, you cannot compute holding period, cannot prove a long-term gain, and cannot defend a claim.

Exercise

Pick a real holding you own. Write down:

1. Purchase date and price, per lot.
2. Sale date and price — or the intended sale date.
3. Is it over 12 months? → 12.5% above ₹1.25 lakh aggregate, or 20%?
4. How much of the ₹1.25 lakh annual exemption have you already used this year?
5. Round-trip friction: STT, stamp duty, brokerage, DP charges.
6. After-tax profit in rupees, and the after-tax percentage on your invested amount.
7. If you had sold six months earlier or later, what would the tax have been?
8. Did you take a dividend or growth? What would the other have been after tax?

Step 8 usually surprises people most, and it is usually worth more than the fund choice.

Checklist

1. Do I know my holding period on every lot, per scrip?
2. Am I aware the ₹1.25 lakh exemption is annual and aggregate?
3. Have I cleared 12 months on anything I was about to sell early?
4. Do I know that post-April-2023 debt funds have no LTCG relief?
5. Have I compared dividend vs growth on an after-tax basis?
6. Have I included STT, stamp duty and DP charges in my cost calculation?
7. Do I have the 4% cess included in every rate I quote?
8. Do I keep purchase date and price for every lot in one place?
9. Am I in the new regime, and does that change which deductions even apply? (See Tax-saving instruments, honestly)

Educational only. Not tax, investment, or legal advice. Not SEBI-registered research. Figures reflect FY 2026-27 and are illustrative — Indian tax law changes annually with the Finance Act and the GST Council. Verify every rate and threshold against current law and your own return, or consult a qualified tax professional, before acting on anything here.