How to Reduce Capital Gains Tax on Shares in India (Legally)

You cannot make capital gains tax on shares disappear, but you can legally cut it a lot. The biggest levers are holding for more than 12 months, using the ₹1.25 lakh yearly exemption on long-term gains, booking losses to offset gains, and spreading gains across years and family members.

This guide sets out the current rules for listed shares and equity mutual funds (as of October 2026), then walks through each method with worked rupee examples. It also covers the 31 January 2018 grandfathering rule, why the ₹60,000 tax rebate does not cover these gains, the new buyback rules and where STT fits in.

The current rules for listed shares

The rates below have applied since 23 July 2024. Budget 2025 left them alone, and so did Budget 2026 (presented 1 February 2026). From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. It renumbered the sections (equity STCG is now Section 196 of the 2025 Act, formerly Section 111A of the 1961 Act; equity LTCG is now Section 198, formerly Section 112A) and replaced “previous year” with “tax year”. The 20% and 12.5% rates and the ₹1.25 lakh exemption carried over unchanged.

Which Act applies depends on when you sold. Sales up to 31 March 2026 (FY 2025-26) are still taxed under the 1961 Act and reported in the ITR for assessment year 2026-27. Sales from 1 April 2026 fall in tax year 2026-27 under the 2025 Act. The examples below assume sales in tax year 2026-27. The section numbers in this article are given only where we could confirm them; elsewhere we describe the rule.

Item	Short-term (STCG)	Long-term (LTCG)
Holding period (listed shares, equity MFs, equity ETFs)	12 months or less	More than 12 months
Tax rate	20%	12.5%
Yearly exemption	None	First ₹1.25 lakh of LTCG each financial year
Indexation	Not applicable	Not available
Condition	STT paid as the law requires (on purchase and sale for shares; on sale for equity fund units)

A 4% health and education cess applies on top of the tax, and surcharge applies at higher incomes (capped at 15% on these gains). Intraday trades and F&O are not capital gains at all. They are taxed as speculative or business income at slab rates, which is one reason the difference between trading and investing matters for tax. Unlisted shares follow separate rules: they become long-term only after 24 months.

Worked example: the baseline bill

Suppose Riya, a resident whose other income already uses up her basic exemption, has these gains in FY 2026-27: LTCG of ₹3,00,000 on shares held for two years and STCG of ₹80,000 on shares held for five months.

• Taxable LTCG: ₹3,00,000 − ₹1,25,000 = ₹1,75,000. Tax at 12.5% = ₹21,875
• STCG tax: ₹80,000 × 20% = ₹16,000
• Total: ₹37,875 + 4% cess (₹1,515) = ₹39,390

The sections below use this example to show how much each method saves.

1. Cross the 12-month line before you sell

This is the simplest saving. If Riya’s ₹80,000 short-term gain had been held for more than 12 months, it would have been taxed at 12.5% instead of 20%: ₹10,000 instead of ₹16,000. Check your purchase date in the broker’s tax P&L before selling. A share bought on 10 March 2026 needs to be held past 10 March 2027 to be long-term.

For shares bought in several lots, the first-in, first-out (FIFO) method applies to demat holdings. Your oldest units are treated as sold first, so a partial sale may be long-term even if you bought more recently.

2. Tax-loss harvesting and the set-off rules

Tax-loss harvesting means selling holdings that are below your purchase price before 31 March, so that the loss reduces your taxable gains for the year. The rules on which loss can offset which gain are strict:

• Short-term capital loss (STCL) can be set off against both STCG and LTCG.
• Long-term capital loss (LTCL) can be set off only against LTCG.
• Capital losses cannot be set off against salary, interest or any other head of income.
• Unused losses can be carried forward for 8 years, but only if you file your ITR for the loss year by the due date. A belated return loses the carry-forward.

Worked example: booking losses

Riya also holds a stock bought four months ago that shows a ₹60,000 loss, and another held for three years showing a ₹50,000 loss. She sells both in March.

• STCL of ₹60,000 against STCG of ₹80,000: net STCG ₹20,000, tax ₹4,000
• LTCL of ₹50,000 against LTCG of ₹3,00,000: net LTCG ₹2,50,000, taxable after exemption ₹1,25,000, tax ₹15,625
• New total: ₹19,625 + 4% cess (₹785) = ₹20,410, against ₹39,390 before. Saving: ₹18,980

Using the short-term loss against the 20% gain first gives the bigger saving, because each rupee of loss there saves 20 paise instead of 12.5 paise.

Two traps

First, the ₹1.25 lakh exemption applies only after losses are set off. If your LTCG for the year is ₹1 lakh, it is already tax-free, so booking a ₹1 lakh long-term loss uses up the loss for no benefit. You would do better to leave the loss for a year with bigger gains.

Second, if you want to keep the stock, buy it back on a later trading day, not the same day. A sell and buy of the same share on the same day in one account is normally netted by the broker as an intraday trade, so no delivery loss is booked. India has no specific wash-sale rule like the US, but a transaction done only to create a loss can still be questioned, so keep it to genuine portfolio decisions.

3. LTCG harvesting: use the ₹1.25 lakh every year

The ₹1.25 lakh exemption cannot be carried forward. If you do not use it in a year, it is gone. LTCG harvesting means selling long-term holdings with gains of up to about ₹1.25 lakh before 31 March and buying them back, which resets your purchase cost higher at no tax.

Suppose Arjun put ₹6 lakh into a Nifty index fund. After 14 months the units are worth ₹7.2 lakh, a long-term gain of ₹1.2 lakh, and he has no other gains. He redeems in March and reinvests ₹7.2 lakh a few days later. The ₹1.2 lakh gain is tax-free, and his new cost is ₹7.2 lakh. If he had held on and sold years later in a year when his gains were well above the exemption, that same ₹1.2 lakh would have cost ₹15,000 in tax (12.5%), plus ₹600 cess.

Watch three costs. The repurchased units start a fresh 12-month holding period. Shares attract STT of 0.1% on both the sale and the repurchase, plus brokerage and depository charges. And mutual fund redemptions take a day or two to settle, so you are out of the market briefly. For equity funds, also check for an exit load. Many long-term investment strategies fit this neatly as a once-a-year March routine.

4. Grandfathering for shares bought before 1 February 2018

LTCG on listed shares became taxable from 1 April 2018. To protect gains made before that, shares and equity fund units acquired on or before 31 January 2018 get a deemed cost:

Cost = higher of (actual cost) and (lower of the fair market value on 31 January 2018 and the sale price)

The fair market value (FMV) is the highest price quoted on a recognised exchange on 31 January 2018. Three hypothetical cases for 100 shares:

Case	Actual cost	FMV on 31 Jan 2018	Sale price	Deemed cost	LTCG on 100 shares
A	₹200	₹500	₹900	₹500	₹40,000
B	₹200	₹500	₹400	₹400	Nil (no loss either)
C	₹600	₹500	₹900	₹600	₹30,000

In case A, the ₹300 per share gained before February 2018 is never taxed. In case B, the rule cannot create an artificial loss. In case C, the actual cost is higher, so it is used. If you hold old shares, especially physical certificates later converted to demat, find the 31 January 2018 price before you sell. Your broker’s tax report may not have it for transferred holdings.

5. Gifting shares to family, and the clubbing rules

Gifts of shares to “relatives” as defined in tax law (spouse, children, parents, siblings and some others) are tax-free for the person receiving them. When they later sell, the giver’s original cost and holding period carry over. So each adult family member’s own ₹1.25 lakh exemption can be used.

The catch is clubbing. Income from assets gifted to a spouse or a minor child is added to the giver’s income, and that includes capital gains on selling the gifted shares. A minor’s income is clubbed with the parent who earns more, with a small exemption of ₹1,500 per child a year. Gifts to an adult child or to parents are not clubbed.

Worked example: gift to an adult child

Suppose Mr Rao holds long-held shares with unrealised LTCG of ₹3.5 lakh. If he sells everything: (₹3,50,000 − ₹1,25,000) × 12.5% = ₹28,125, plus ₹1,125 cess.

Instead he gifts shares carrying ₹2 lakh of gain to his 24-year-old daughter, a student with no income, through a proper transfer of shares into her demat account. Each then sells:

• Mr Rao: ₹1,50,000 − ₹1,25,000 = ₹25,000 taxable, tax ₹3,125
• Daughter: ₹2,00,000 − ₹1,25,000 = ₹75,000. As a resident with no other income, she can adjust this against her unused basic exemption limit (₹4 lakh under the new regime), so her tax is nil.
• Family total: ₹3,125 + ₹125 cess = ₹3,250, against ₹29,250. Saving: ₹26,000.

The gift must be real: the shares and the sale money belong to her. Record it with a simple gift deed. Had he gifted the same shares to his wife, the gain would have been clubbed back into his income and nothing would be saved.

6. The ₹60,000 rebate does not cover equity gains

Under the new regime, resident individuals get a tax rebate of up to ₹60,000 (formerly Section 87A of the 1961 Act), which makes income up to ₹12 lakh tax-free. Many investors assume this covers capital gains. It does not. The Income Tax Department’s FAQ says the rebate applies only to tax at slab rates, not to capital gains or other income taxed at special rates. Finance Act 2025 wrote this into the 1961 Act from FY 2025-26, and the FAQ confirms the same position under the 2025 Act.

Suppose Kavya’s taxable salary (after the standard deduction) is ₹11 lakh and she has STCG of ₹1 lakh from shares. Her slab tax on ₹11 lakh is ₹50,000 (5% on ₹4–8 lakh = ₹20,000, plus 10% on ₹8–11 lakh = ₹30,000), and the rebate wipes that out. But the ₹20,000 tax on her STCG (20% of ₹1 lakh) stays payable, plus ₹800 cess. Her total income is exactly ₹12 lakh, yet she owes ₹20,800.

7. Buybacks: what changed in October 2024 and April 2026

Buyback tax has changed twice in two years, so the date matters.

• Before 1 October 2024: the company paid buyback tax and shareholders received the money tax-free.
• 1 October 2024 to 31 March 2026: the full buyback amount was taxed in the shareholder’s hands as dividend, at slab rate, with 10% TDS. The cost of the shares became a capital loss that could be set off against other gains or carried forward.
• From 1 April 2026 (Budget 2026): buybacks are taxed as capital gains, only on the buyback price minus your cost. Promoters pay an extra tax that takes their effective rate to 22% (corporate promoters) or 30% (other promoters).

Suppose Neha, a non-promoter in the 30% slab who has already used her ₹1.25 lakh exemption, tenders 100 shares bought two years ago at ₹1,000 into a ₹1,500 buyback. Under the 2024–26 rules, ₹1,50,000 was dividend income: tax ₹45,000 plus ₹1,800 cess, with a ₹1,00,000 capital loss she could use only against other gains. Under the current rules she has LTCG of ₹50,000: tax ₹6,250 plus ₹250 cess.

8. STT: what it is and why it matters

Securities Transaction Tax (STT) is charged on trades done on an exchange. Paying it is the condition for the 20% and 12.5% equity rates. It is not deductible when you work out capital gains.

Transaction	STT rate (as of October 2026)
Equity delivery	0.1% on buy and on sell
Equity intraday	0.025% on sell
Equity mutual fund redemption	0.001% on sale
Futures	0.05% on sell (up from 0.02% from 1 April 2026)
Options sold	0.15% of premium (up from 0.1% from 1 April 2026)

For long-term investors, STT is a small cost. It matters more if you harvest gains often or trade actively, as explained in our guides to intraday trading and options trading.

Other legal options worth knowing

• Use the basic exemption limit. A resident with little other income can set equity STCG and LTCG against the unused basic exemption, as in the Rao example. This helps retired parents and adult children who are studying.
• Reinvest in a house. The reinvestment exemption that was Section 54F of the 1961 Act (carried into the 2025 Act under a new number) lets you exempt LTCG from shares if you invest the sale proceeds in one residential house within the time limits. The exemption is capped at ₹10 crore and does not apply if you already own more than one other house.
• Prefer growth options in funds. Dividends are taxed at your slab rate every year. In a growth option, gains are taxed only when you redeem, and at equity rates. Index funds and ETFs follow the same equity rules, as covered in our ETF vs mutual fund comparison.

A March checklist

1. Download your broker’s tax P&L and the capital gains statement from CAMS/KFintech for mutual funds.
2. Add up realised STCG and LTCG for the year so far.
3. Check for holdings close to the 12-month mark. Delay those sales if you can.
4. If you have gains, look for loss-making holdings you no longer want to keep, and book short-term losses first.
5. If your LTCG is below ₹1.25 lakh, harvest gains up to the limit.
6. Finish all trades a few days before 31 March so they settle within the financial year.
7. File your ITR by the due date, especially in a loss year, so losses can be carried forward.

Common mistakes

• Selling one day before the 12-month mark and paying 20% instead of 12.5%.
• Filing late in a loss year and losing the 8-year carry-forward.
• Assuming the ₹12 lakh rebate makes small capital gains tax-free.
• Gifting shares to a spouse to “split” gains, which clubbing undoes.
• Selling a good long-term holding only for a tax saving, then missing the rebound. Tax should shape the timing of a decision, not replace it.

FAQ

Is there any way to pay zero tax on share profits?

Yes, within limits. LTCG up to ₹1.25 lakh a year is exempt, losses can offset gains, and a resident with low other income can use the basic exemption limit. Larger gains can be exempted by reinvesting in a residential house under the rules that were Section 54F of the 1961 Act.

Can I sell and buy back the same share to book a loss?

Yes, but buy back on a later trading day. A same-day sell and buy is usually treated as intraday, which means no delivery loss is booked. Keep records showing the trades were genuine.

Does the ₹1.25 lakh exemption apply to short-term gains?

No. It applies only to long-term gains on listed equity shares, equity mutual funds and similar units. Short-term gains are taxed at 20% from the first rupee, unless your other income is below the basic exemption limit.

How long can I carry forward a capital loss?

For 8 years after the year of the loss, provided the ITR for the loss year was filed by the due date. A carried-forward short-term loss can offset either kind of gain. A long-term loss can offset only long-term gains.

Did Budget 2026 change capital gains tax on shares?

Not the rates or the exemption. The 20% STCG, 12.5% LTCG and ₹1.25 lakh limit continue. The main changes were capital gains treatment for buybacks and higher STT on futures and options, both from 1 April 2026.

Is gifting shares to my parents a valid way to save tax?

Yes, if the gift is genuine. Clubbing does not apply to parents or adult children, so the gain is taxed in their hands and they can use their own exemption and basic limit. The shares and the money must really become theirs.