Capital Gains Tax & Your Tax Slab — How the New Rules Reshape Your 2026 Investments

Here's a sobering reality: Indian investors lose an estimated ₹4.2 trillion annually to suboptimal tax planning—money that could have compounded into substantial wealth.(see the generated image above) The culprit? A fundamental misunderstanding of how capital gains taxation intersects with income tax slabs. In January 2026, as inflation hovers at just 0.71% (lower than usual)(see the generated image above) and equity markets continue their upward trajectory, understanding these rules isn't optional—it's essential for protecting your investment gains.

This isn't a tax loophole story. It's about clarity. The past year has brought significant changes to capital gains taxation in India, and most middle-class investors remain unaware of how these rules directly impact their take-home returns. Whether you earned ₹15 lakhs or ₹50 lakhs last year, your capital gains are taxed differently than your salary income—and that difference can mean the difference between a 10% net return and a 15% net return on your equity investments.

Key Takeaways (TL;DR)

• Long-term capital gains (LTCG) on equities are now taxed at a flat 12.5% for gains exceeding ₹1.25 lakh per financial year, regardless of your income tax slab. This uniform rate actually benefits higher earners who previously paid 20-30% slab rates.(see the generated image above)
• The ₹1.25 lakh exemption limit is cumulative across all equity investments (stocks, mutual funds, ETFs) in a single financial year. Plan your exit strategy accordingly—you can claim one ₹1.25 lakh exemption, not one per asset.(see the generated image above)
• Short-term capital gains (STCG) still follow your income tax slab rates (5% to 30%), making a 12-month holding period worth roughly 7-17 percentage points in tax savings depending on your income bracket.​

Deep Dive: How Capital Gains Taxation Works Across Income Slabs

The Fundamental Misconception

Most investors believe that capital gains inherit the tax slab of their regular income. Partially true—but the devil is in the details.

Here's the reality: Capital gains in India are taxed as separate income streams with their own tax rules. Your salary is taxed at your slab rate (5% to 30% in 2026). But your capital gains? They follow a parallel taxation system entirely.

Under the new income tax regime effective FY 2025-26, the basic exemption limit has increased to ₹4 lakh for individuals under 60 years. However, this exemption applies to regular income, not capital gains. This distinction is critical.​

Long-Term Capital Gains (LTCG): The Game-Changer

Beginning July 23, 2024, the taxation landscape shifted dramatically. The government introduced a uniform 12.5% tax rate on all long-term capital gains exceeding ₹1.25 lakh. This replaced the earlier tiered system (10% with indexation).​

What does this mean for you?

Scenario 1: You're earning ₹12 lakhs annually (15% slab)

• Regular income tax: ₹60,000 + 15% on income above ₹8 lakh = ₹1.2 lakhs
• LTCG of ₹3 lakhs from selling mutual funds: ₹1.25 lakh is exempt. Remaining ₹1.75 lakhs × 12.5% = ₹21,875
• Total tax on gains: ₹21,875 (7.3% effective rate)

This actually benefits you compared to the old regime, where your entire ₹3 lakh would be taxed at your 15% slab rate (₹45,000).

Scenario 2: You're earning ₹45 lakhs annually (30% slab)

• Without the new rule: You'd pay 30% on capital gains = ₹90,000 on ₹3 lakhs
• With the 12.5% LTCG rule: You pay ₹21,875 on the same ₹3 lakhs gain
• Tax savings: ₹68,125—a 75.8% reduction in capital gains tax

The Critical Caveat: No Indexation Benefit

Here's what investors overlook: the removal of indexation benefit partially offsets the lower 12.5% rate. Indexation allowed you to adjust your cost of acquisition for inflation.

Example: If you bought ₹100,000 in stocks in 2015 and sold for ₹300,000 in 2024, with indexation, your cost could inflate to ₹200,000, resulting in a ₹100,000 taxable gain. Without it, the entire ₹200,000 gain is taxable—a significant difference.

However, long-term investors holding assets for 5+ years still come ahead with the 12.5% flat rate versus the previous indexed-adjusted slab rate for higher earners.

Short-Term Capital Gains (STCG): Your Slab Rate Applies

If you sell an equity investment within 12 months of purchase, your gains are taxed as short-term capital gains, and these are added to your regular income and taxed at your income tax slab rate.

The same ₹3 lakh gain, held for 8 months:

• 15% slab taxpayer: ₹3 lakh × 15% = ₹45,000
• 30% slab taxpayer: ₹3 lakh × 30% = ₹90,000

This explains why wealth managers constantly emphasize the 12-month holding period. Crossing the 12-month threshold can reduce your effective tax rate from 30% to 12.5%—a 58% tax reduction for higher earners.

The Interaction Between Income Slabs and Capital Gains: A Real-World Example

Let me walk through a scenario that illustrates the complete tax picture:

Investor Profile: Deepak, Age 35, Bengaluru-based Software Engineer

• Salary income: ₹18 lakhs
• Income tax slab: 20% (₹16–20 lakhs range under new regime)
• He sold ₹10 lakhs worth of equity mutual funds purchased 15 months ago
• Cost of acquisition: ₹8 lakhs
• LTCG: ₹2 lakhs

Tax Calculation:

1. Regular income tax:
   • Up to ₹4 lakh: Nil
   • ₹4–8 lakh (₹4 lakh × 5%): ₹20,000
   • ₹8–12 lakh (₹4 lakh × 10%): ₹40,000
   • ₹12–16 lakh (₹4 lakh × 15%): ₹60,000
   • ₹16–18 lakh (₹2 lakh × 20%): ₹40,000
   • Total regular income tax: ₹1,60,000
2. LTCG tax:
   • First ₹1.25 lakh: Exempt
   • Remaining ₹0.75 lakh × 12.5% = ₹9,375
   • Total LTCG tax: ₹9,375
3. Total tax liability: ₹1,69,375
4. Effective tax rate on ₹20 lakh income: 8.47%

Without the ₹1.25 lakh exemption, his LTCG tax would be ₹25,000—a saving of ₹15,625. This exemption disproportionately benefits middle-income investors like Deepak, explaining why the government increased it from ₹1 lakh to ₹1.25 lakh in 2024.

Comparison Table: LTCG vs. STCG vs. Regular Income Taxation

This table reveals an underappreciated truth: equity long-term capital gains are currently the most tax-efficient investment category for Indian investors across all income slabs.

Section 87A Rebate: Doesn't Apply to Capital Gains

A critical misunderstanding: Under new regime, individuals earning up to ₹12 lakhs receive a ₹60,000 rebate under Section 87A. However, this rebate explicitly does not apply to long-term capital gains.​

If you're a freelancer earning ₹8 lakhs in project income plus ₹2 lakhs in LTCG (total ₹10 lakhs), you cannot claim the Section 87A rebate to offset your capital gains tax. The rebate only applies to your ₹8 lakh regular income.

This distinction particularly impacts early-career investors who might assume their below-slab-limit income qualifies them for complete tax exemption.

The Surcharge Factor (For Higher Earners)

If your income exceeds ₹1 crore, a surcharge applies:

• ₹1–2 crore: 10% surcharge
• ₹2+ crores: 15% surcharge

Crucially: Surcharge does NOT apply to long-term capital gains under Section 112A. This creates a significant tax arbitrage for ultra-high-net-worth individuals.​

Example: A ₹2 crore earner pays:

• 30% tax + 15% surcharge on regular income = 34.5% effective rate
• 12.5% tax on LTCG (no surcharge) = 12.5% effective rate

This 22-percentage-point difference explains why HNI tax planning often focuses on reallocating income through capital gains structures.

Capital Loss Harvesting: Your Underutilized Tax Tool

From FY 2025-26, you can now adjust long-term capital losses against long-term capital gains. This wasn't always the case.

Why this matters: If you sold a losing investment at ₹1.5 lakh loss and a winning investment at ₹2.5 lakh gain, you can offset the loss against the gain, reducing taxable LTCG to ₹1 lakh (below the exemption limit, so zero tax).

Tax-loss harvesting strategies are particularly valuable in volatile markets. As inflation remains low at 0.71% in November 2025, with RBI projecting 4% inflation for H1:2026-27, equity volatility may increase, creating harvesting opportunities.​

The Contrarian Take: Why 12.5% LTCG Isn't Always Better

Here's where most financial writers shy away: the new 12.5% LTCG rate benefits high earners far more than low earners.

A self-employed individual in the 5% slab with ₹50 lakh in capital gains pays:

• New rule: ₹50 lakh × 12.5% = ₹6.25 lakhs
• Old rule (10% with indexation): ₹50 lakh × 10% = ₹5 lakhs

They're actually paying more in tax under the new regime (without indexation). However, if this same person earned ₹1 crore in annual income, placing them in the 30% slab, they'd save significantly:

• Old rule: ₹50 lakh × 30% = ₹15 lakhs
• New rule: ₹50 lakh × 12.5% = ₹6.25 lakhs

The uncomfortable truth: The government's framing of "uniform 12.5% tax" masks a regressive policy for lower-income investors. It helps the wealthy far more than the middle class—the opposite of the stated intention.

This isn't a reason to avoid equity investing. Rather, it's a reason to hold equities long-term, maximize the ₹1.25 lakh exemption annually, and consider tax-loss harvesting strategies.

My Take: Capital Gains Taxation in 2026

As someone who's tracked tax policy across multiple budget cycles, I believe the 2024-2025 capital gains taxation framework represents a trade-off, not a revolution.

The good: A flat 12.5% rate simplifies calculations and genuinely benefits higher earners, potentially encouraging equity investment among affluent households.

The problematic: Removing indexation without sufficiently lowering rates impacts long-term investors (10+ years) who would've benefited from inflation-adjusted cost bases. And the regressive impact on lower-income investors contradicts the policy's stated equity-access goals.

My recommendation: Use 2026 as your framework year to implement a systematic capital gains strategy:

1. Realize gains strategically across financial years to maximize the ₹1.25 lakh exemption annually
2. Harvest losses in volatile quarters (likely as 2026 progresses and RBI's projected inflation materializes)
3. Hold core long-term positions for 12+ months to access the 12.5% rate, accepting the indexation trade-off
4. Rebalance annually in December to lock in losses before year-end

The investors who'll benefit most from these rules aren't waiting passively—they're planning around them.

Three Actionable Next Steps

Step 1: Audit Your Current Holdings
Create a spreadsheet of every equity and mutual fund you own, noting:

• Purchase date and cost
• Current value
• Holding period (< or > 12 months)
• Unrealized gain/loss
• Applicable tax rate (STCG vs. LTCG)

This audit takes 90 minutes but reveals immediate tax-saving opportunities. Many investors find that reordering their exit sequence can reduce tax by ₹30,000–₹100,000+ without changing investment philosophy.

Step 2: Set Up a ₹1.25 Lakh Annual Exemption Strategy
With the exemption limit fixed at ₹1.25 lakhs per financial year, coordinate your gain realization:

• Realize ₹1.25 lakhs in LTCG in April, zero tax
• Defer remaining gains to the next financial year
• Use the calendar strategically—FY runs April–March, not Jan–Dec

For instance, if you have ₹5 lakhs in LTCG, realize ₹1.25 lakhs in April 2026 and ₹1.25 lakhs in April 2027. Each realization is zero-taxed (up to the exemption), and the remaining ₹2.5 lakhs is taxed at 12.5% in a separate financial year.

Step 3: Calculate Your STCG Hold-Period Threshold
For each holding under 12 months:

• Calculate the STCG tax at your current income slab rate
• Project the 12-month holding date
• Ask: Will market volatility risk offset the tax savings?

If you're in the 20% slab and hold ₹10 lakhs in STCG gains, the tax is ₹2 lakhs. Reaching 12 months would reduce this to ₹1.25 lakhs (12.5%). Unless you believe a 5% correction is imminent, holding 4 more months to save ₹75,000 is typically rational.

Disclaimer

This article is for educational purposes and does not constitute financial, tax, or investment advice. Capital gains taxation rules are complex and depend on individual circumstances (residency status, asset type, holding period, income bracket, etc.). Always consult a qualified Chartered Accountant or tax professional before making investment or tax-planning decisions. Tax laws are subject to change. The information in this article reflects regulations as of January 2026 and may be outdated by the time you read it. The author and explainitlikeim5.com assume no liability for errors, omissions, or changes in tax policy.

References / Source Links

• ClearTax. (January 2026). Income Tax Slabs for FY 2025-26 (AY 2026-27). https://cleartax.in/s/income-tax-slabs​

• Bajaj FinServ. (December 2025). Income Tax Slabs and Rates for FY 2025-26 (AY 2026-27). https://www.bajajfinserv.in/investments/income-tax-slabs​

• Bajaj FinServ. (November 2025). Long Term Capital Gain Tax - LTCG Tax Rate AY 2025-26. https://www.bajajfinserv.in/investments/understanding-long-term-capital-gains-tax​

• ClearTax. (January 2026). Long Term Capital Gains on Shares - Section 112A. https://cleartax.in/s/long-term-capital-gains-on-shares​

• Income Tax Department, Ministry of Finance. (2025). Tax Rates (Section 112A Surcharge Exemption). https://incometaxindia.gov.in/Tutorials/2%20Tax%20Rates.pdf​
• RBI Monetary Policy Statement. (December 2025). CPI Inflation Projection: Annual for 2026. https://www.ceicdata.com/en/india/rbi-monetary-policy-statement-inflation-projection​
• Economic Times. (December 2025). India inflation likely to remain low in 2026, new CPI series on anvil. https://bfsi.economictimes.indiatimes.com/articles/india-inflation-likely-to-remain-low-in-2026-new-cpi-series-on-anvil/12626295​
• Tata Capital Moneyfy. (August 2025). Section 112A of Income Tax Act: LTCG Exemption in 2025. https://www.tatacapitalmoneyfy.com/blog/mutual-funds/section-112a-income-tax-act/

PiyushK

Piyush is a portfolio management executive with 15 years of experience in digital transformation and strategic finance. He holds an MBA from IIM Kozhikode and specializes in personal finance strategy, investment fundamentals, and AI-driven financial tools. He writes about making financial concepts accessible and building sustainable wealth through technology and automation.