Tax implications of long‑term equity investments in 2026

This article details the tax implications of long‑term equity investments in 2026, focusing on the prevailing 12.5% LTCG rate and the critical ₹1.25 Lakh annual exemption limit. We examine the impact of the 20% STCG rate, the continued relevance of the grandfathering clause for pre-2018 holdings, and the new dividend TDS threshold of ₹10,000 introduced in FY 2025-26. The guide provides actionable strategies for tax loss harvesting and portfolio rebalancing to minimize liability in the current fiscal landscape.

Navigating the equity tax landscape in FY 2025-26 requires a shift in strategy. Gone are the days of flat 10% taxes and unlimited dividend exemptions. Today, as an investor in Indian markets, you face a nuanced regime where holding periods and realized profit thresholds dictate your net returns. Whether you are a seasoned investor with a portfolio dating back to 2010 or a salaried professional starting your SIP journey, understanding these rules is no longer optional—it is a critical component of wealth preservation.

The New Normal: Equity Taxation in FY 2025-26

As of December 2025, the taxation framework for equity investments has stabilized following the major overhauls of the previous year. The distinction between short-term and long-term gains remains the primary driver of your tax liability, but the rates and exemptions have evolved.

For most investors, the “new normal” is defined by the Finance Act 2024, which reset the baseline for capital gains. If you are planning your redemptions or rebalancing your portfolio in 2026, here is the tax structure you must navigate:

Data Source: Finance Act 2024 & Union Budget 2025 provisions effective FY 2025-26.

The 12-Month Cliff

The definition of “long-term” for listed equity shares and equity-oriented mutual funds remains 12 months. Crossing this threshold is your first line of defense against high taxation. By holding an asset for just one day longer than a year, your tax liability drops from 20% to 12.5%—a direct saving of 7.5% on your gains.

Calculating Your Liability: Section 112A Explained

The core of the tax implications of long‑term equity investments in 2026 lies in Section 112A. This section governs how your long-term profits are taxed. Unlike the old regime (pre-July 2024) where the rate was 10% over ₹1 Lakh, the current rule is 12.5% over ₹1.25 Lakh.

The ₹1.25 Lakh Exemption Buffer

Every financial year, the first ₹1.25 Lakh of your aggregate long-term capital gains is tax-free. This exemption applies across all your equity assets combined—stocks, equity mutual funds, and business trusts. You cannot claim ₹1.25 Lakh separately for stocks and another ₹1.25 Lakh for mutual funds.

Example Calculation:
Imagine you sell shares of Tata Consultancy Services and units of a Nifty 50 Index Fund in March 2026, realizing a total long-term profit of ₹2,00,000.

1. Total LTCG: ₹2,00,000
2. Less Exemption: ₹1,25,000
3. Taxable Amount: ₹75,000
4. Tax @ 12.5%: ₹9,375
5. Add 4% Cess: ₹375
6. Total Tax Payable: ₹9,750

Note: If you had sold these assets within 12 months (STCG), the tax would have been ₹40,000 (20% of ₹2 Lakh) plus cess. Holding for the long term saved you over ₹30,000.

The “Crossover Point” Insight

Many investors ask if the new 12.5% rate is worse than the old 10% rate. The math reveals a “crossover point” at ₹2.25 Lakh of profit.

• If your annual gains are below ₹2.25 Lakh, you actually pay less tax now because the higher exemption (₹1.25L vs ₹1L) outweighs the higher rate.
• If your gains exceed ₹2.25 Lakh, the 12.5% rate starts to pinch harder than the old 10% regime.

The Grandfathering Clause: Protecting Old Gains

If you have been investing since before 2018, the “Grandfathering Clause” is your most valuable tax shield. The government ensures that any notional gains you made up to January 31, 2018, remain tax-free. You only pay tax on the appreciation that happened after this date.

How to Calculate Cost of Acquisition (COA)

For shares bought on or before 31st January 2018, your “Cost of Acquisition” for tax purposes is not your actual buy price. It is calculated as:

Step 1: Find the Lower of:

• Fair Market Value (FMV) on 31 Jan 2018 (Highest trading price on that day)
• Actual Sale Price

Step 2: Take the Higher of:

• Result from Step 1
• Actual Purchase Price

Real-World Example:
Suppose you bought HDFC Bank shares in 2015 at ₹500. The FMV on 31 Jan 2018 was ₹1,000. You sell them in 2026 for ₹1,800.

• Actual Cost: ₹500
• FMV (Jan 2018): ₹1,000
• Sale Price: ₹1,800

Using the formula:

1. Lower of (1,000 vs 1,800) = ₹1,000
2. Higher of (1,000 vs 500) = ₹1,000

Your deemed cost is ₹1,000. Your taxable gain is ₹1,800 – ₹1,000 = ₹800. The gain from ₹500 to ₹1,000 is completely tax-free (grandfathered).

Dividend Taxation: The FY 2025-26 Update

While capital gains get the spotlight, dividend taxation has quietly shifted. Dividends are taxed at your applicable income tax slab rates. If you are in the 30% slab, your dividends are taxed at 30% plus cess.

New TDS Threshold (₹10,000)

As per the Union Budget 2025 (effective April 1, 2025), the threshold for Tax Deducted at Source (TDS) on dividends has been increased.

• Old Rule: TDS of 10% deducted if dividends exceeded ₹5,000.
• Current Rule (FY 2025-26): TDS of 10% is deducted only if total dividends from a single company/AMC exceed ₹10,000 in a financial year.

This improves cash flow for small investors, as you receive the full dividend amount without deduction if it falls below this limit. However, remember that no TDS does not mean no tax. You must still declare this income and pay tax at your slab rate.

Strategic Tax Planning: Loss Harvesting

With the tax rate at 12.5%, “Tax Loss Harvesting” has become an essential year-end ritual. This strategy involves selling loss-making stocks to offset your realized gains, thereby reducing your taxable income.

The Set-Off Hierarchy

The Income Tax Department follows a strict hierarchy for setting off losses:

1. Long-Term Capital Loss (LTCL): Can only be set off against Long-Term Capital Gains (LTCG). You cannot use it to reduce Short-Term Gains.
2. Short-Term Capital Loss (STCL): Can be set off against both Short-Term Gains (STCG) and Long-Term Gains (LTCG).

Actionable Strategy for March 2026

If you have booked a profit of ₹3 Lakh in LTCG this year, your taxable amount (after exemption) is ₹1.75 Lakh. If you have a stock in your portfolio that is down by ₹50,000 and unlikely to recover, you can sell it to book a Long-Term Capital Loss.

• New Net Gain: ₹3,00,000 (Profit) – ₹50,000 (Loss) = ₹2,50,000
• Taxable Amount: ₹2,50,000 – ₹1,25,000 (Exemption) = ₹1,25,000
• Tax Saved: ₹50,000 * 12.5% = ₹6,250.

Important Note: You can buy the same stock back after a few days if you still believe in its long-term story, but ensure you don’t violate “wash sale” norms (though India has no specific wash sale rule, frequent churning can be flagged as business income).

Conclusion

The tax implications of long‑term equity investments in 2026 favor the patient investor. While the 12.5% rate is higher than historical norms, the increased exemption limit of ₹1.25 Lakh provides a cushion for smaller portfolios. By combining the grandfathering benefit for older stocks with smart loss harvesting for newer ones, you can significantly reduce your tax outgo. The key is to view tax planning not as a year-end chore, but as an integral part of your investment strategy.

Ready to optimize your portfolio for maximum tax efficiency? Open your PL Capital account and access advanced reports to track your capital gains and holding periods effortlessly.

FAQs on Equity Taxation

1. What is the tax rate for long-term equity gains in 2026?

As per the Finance Act 2024, the Long-Term Capital Gains (LTCG) tax rate is 12.5% plus applicable surcharge and cess. This applies to gains exceeding the annual exemption limit of ₹1.25 Lakh on listed equity shares and equity-oriented mutual funds.

2. Does the ₹1 Lakh exemption still exist?

No, the exemption limit was increased. For FY 2025-26, the exemption limit is ₹1.25 Lakh per financial year. You only pay tax on the aggregate long-term gains that exceed this amount.

3. How are dividends taxed in FY 2025-26?

Dividends are taxed at your applicable income tax slab rates. However, a new relief introduced in FY 2025-26 raised the TDS threshold to ₹10,000. TDS of 10% is deducted only if dividend income from a single entity exceeds this amount.

4. Can I set off a long-term loss against a short-term gain?

No. As per income tax set-off rules, Long-Term Capital Loss (LTCL) can only be set off against Long-Term Capital Gains (LTCG). However, Short-Term Capital Loss (STCL) can be used to set off both STCG and LTCG.

5. Is the grandfathering clause still valid in 2026?

Yes, the grandfathering clause remains valid. Any notional gains accrued on equity shares up to January 31, 2018, are exempt from tax. Your cost of acquisition is adjusted to the Fair Market Value (FMV) as of that date.