One line, two very different outcomes

The last post said the holding period decides most of what happens to a capital gain. This post is about exactly where that line sits and how it’s counted, because the difference either side of it is large and entirely mechanical. Everything here is for Tax Year 2026-27 (FY 2026-27); FY is financial year, and STCG and LTCG are short-term and long-term capital gains.

For listed equity and equity mutual funds:

Held for Classified as Rate
12 months or less Short-term 20%
More than 12 months Long-term 12.5% above ₹1,25,000 a year

These rates are in the Income-tax Act, 2025 (sections 196 and 198), and the Finance Act, 2026 did not change them. Cess and any surcharge are extra.

Sold at exactly 12 months, a ₹5,00,000 gain is short-term and taxed at 20% — ₹1,00,000. Sold just over 12 months, the first ₹1,25,000 is exempt and the rest is taxed at 12.5%, which comes to ₹46,875. Same investment, same gain, a day or so apart, and less than half the tax. The rest of this post is about how that line is drawn.

The two holding periods, Tax Year 2026-27

The line isn’t in the same place for everything:

Asset Long-term after
Listed shares (NSE, the National Stock Exchange, or BSE, the Bombay Stock Exchange) 12 months
Equity mutual funds (the equity-oriented test below) 12 months
Listed bonds and debentures (market-linked debentures are the exception: always short-term) 12 months
Unlisted shares 24 months
Property (land, buildings) 24 months
Listed gold ETFs 12 months
Physical gold, jewellery; unlisted gold funds of funds 24 months
Specified debt funds, units bought on or after 1 April 2023 No long-term rate at all — slab rate always

The gold rows show listed gold ETFs (exchange-traded funds) at 12 months and gold funds of funds at 24. Those lines follow from the Act’s wording as we read it: a listed security gets twelve months, and an unlisted fund unit falls to the general twenty-four. How gold funds were classified changed in recent years, so an older sale may have followed different rules.

Two things worth noting.

“Equity fund” has a definition. For tax, a fund qualifies as equity-oriented only if at least 65% of its money is in equity shares of domestic listed companies. A fund that invests through another listed fund has a stricter test: 90% in that fund, which must itself hold 90% in such shares (section 198(8) of the Act). Some funds you’d assume are equity funds — certain international funds, some hybrids, funds of funds — may not meet it and then fall under the other rules. The factsheet tells you; the post on reading one covers where to look.

That last row is not an oversight. For specified debt funds the gain is taxed at the slab rate whatever the holding period. The debt funds post in this series covers the definition.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Imagine a shop that gives you a discount for being a loyal customer — but only once you’ve been a member for a full year.

Buy something on day 364 of your membership and you pay full price. Buy the same thing on day 366 and you get the discount. Nothing about the item changed. Nothing about you changed. Only the date did.

Tax on investments works the same way: the rate depends on a date, not on anything about the investment.

How the period is counted

Three rules that catch people out.

Count from the date of acquisition to the date of transfer. Not from when the money left your account, and not from the financial year. For a mutual fund purchase the date that matters is generally the date units were allotted, which can differ from the date you placed the order; check your statement.

“More than 12 months” means more than. Exactly twelve months is not long-term. Someone who bought on 15 March 2025 crosses the line only after 15 March 2026.

Each purchase has its own clock. This is the one that matters most in practice. Buy the same fund in five separate transactions and you hold five lots with five different acquisition dates. Redeeming “the fund” redeems specific lots, each classified on its own. That’s the subject of the FIFO (first in, first out) post in this series, and it’s why a single SIP (systematic investment plan) redemption can produce both long-term and short-term gains at once.

Worked example: one day either side

The numbers here are round and illustrative, not taken from a real fund’s history. Suppose a ₹5,00,000 investment in an equity fund gained ₹5,00,000 — a clean doubling — and compare selling just before and just after the twelve-month mark. Assumptions: no other long-term equity gains in the year, so the full exemption is available, and surcharge is excluded (it can change the answer at high incomes):

Sold at 12 months Sold at 12 months + 1 day
Gain ₹5,00,000 ₹5,00,000
Classified as Short-term Long-term
Exempt — ₹1,25,000
Taxable ₹5,00,000 ₹3,75,000
Rate 20% 12.5%
Tax ₹1,00,000 ₹46,875
Plus 4% cess ₹1,04,000 ₹48,750
Difference in tax   ₹55,250 lower

The same gain carries ₹55,250 less tax on the right-hand side. That is a mechanical comparison, not a reason to hold or sell: the price can move between the two dates by far more than the tax difference, in either direction.

Common mistakes

  • Applying the 12-month rule to everything. Physical gold and property need 24 months. Getting this wrong on a property sale changes the tax.
  • Assuming any equity-sounding fund gets equity treatment. A minimum-share test in the Act decides it, not the fund’s name.
  • Counting from the wrong date. Allotment to transfer, not financial-year boundaries, and not the date you placed the order.
  • Treating “12 months” as inclusive. The test is more than twelve months, and each purchase has its own clock: one holding is many lots.

Sources

Takeaway: For listed equity and equity funds the line between short-term and long-term gains is 12 months, and for most other assets 24, counted from allotment or purchase to transfer and needing to be more than, not equal to. Each purchase carries its own clock, so one holding can contain both kinds of lot.