LTCG vs STCG — The Complete Guide for Indian Investors

If you've ever sold a stock or mutual fund unit in India and wondered exactly how much tax you owe, the answer always starts with one question: is it LTCG or STCG?

These two terms — Long-Term Capital Gain and Short-Term Capital Gain — determine everything about your tax bill. Get the classification wrong, and you could underpay (risking a notice) or overpay (losing money unnecessarily). This guide breaks it down completely.

The One Rule That Decides Everything: Holding Period

For listed equity shares and equity mutual funds (funds with 65% or more allocation to Indian equities), the rule is simple:

• Held for more than 12 months → Long-Term Capital Gain (LTCG)
• Held for 12 months or less → Short-Term Capital Gain (STCG)

That's it. There's no partial credit, no rounding in your favour — if you sell even a day before the 12-month mark, the entire gain is treated as short-term.

Tax Rates Compared

The gap is significant — nearly 8 percentage points. This is exactly why patient, long-term investors pay meaningfully less tax than frequent traders, even on identical profits.

How the ₹1.25 Lakh Exemption Works

This is the part most investors misunderstand. The exemption is not per trade — it's a combined, once-a-year allowance across all your long-term equity gains in that financial year (April to March).

What About STCG? Is There Any Relief?

Short-term gains get no exemption at all — every rupee of STCG is taxed at the flat 20% rate. This is a deliberate policy choice to discourage excessive short-term trading and encourage long-term investing in Indian markets.

The "Wait a Bit Longer" Strategy

If you're sitting on a gain and you're close to the 12-month mark — say, 10 or 11 months in — it is often financially smart to simply wait. The tax saving from converting STCG (20%) to LTCG (12.5%) can be substantial, especially on larger trades.

Does This Apply to All Investments?

The 12.5%/20% LTCG/STCG framework specifically applies to:

• Listed equity shares (stocks on NSE/BSE)
• Equity-oriented mutual funds (≥65% equity allocation)

It does not apply to debt mutual funds purchased after April 1, 2023 — those are taxed entirely differently, at your income slab rate, regardless of how long you hold them. We've covered this in detail in a separate article.

Loss Set-Off Rules You Should Know

If some of your investments are at a loss, you can use them to reduce your tax bill:

• Short-term capital loss (STCL) can be set off against both STCG and LTCG
• Long-term capital loss (LTCL) can only be set off against LTCG
• Unused losses can be carried forward for 8 assessment years — but only if you file your ITR before the deadline

Quick Decision Checklist

1. Check the exact purchase date and sale date of your investment
2. Count the months held — more than 12 means LTCG
3. Add up all your LTCG transactions for the financial year
4. Subtract the ₹1.25 lakh exemption (if LTCG)
5. Apply 12.5% (LTCG) or 20% (STCG) to the taxable amount
6. Add 4% cess on the resulting tax