Capital Gains Tax on Equity MFs: ITR-2 Filing Guide (AY 2026-27)
Your Form 16 shows salary. Your broker's tax P&L shows ₹3L in equity mutual fund gains. Now ITR-2 is open, the July 31 deadline is 32 days away, and you're staring at a tax liability that won't shrink with the 87A rebate — because for ₹15-25L earners, it was never meant to. Here's the exact math.
Summary: Equity MF Tax Rates, AY 2026-27
| Fund Type | Holding | Tax Rate | Exemption | 87A Rebate? |
|---|---|---|---|---|
| Equity MF / ELSS / Index Fund | < 12 months (STCG, Sec 111A) | 20% + cess = 20.8% | None | No |
| Equity MF / ELSS / Index Fund | ≥ 12 months (LTCG, Sec 112A) | 12.5% + cess = 13% | ₹1.25L/year | No |
| Debt MF (bought after Apr 1, 2023) | Any | Slab rate (25–30%+ for ₹15L+ earners) | None | Only if income ≤ ₹12L |
| Hybrid equity-oriented (>65% equity) | Same as equity | Same as equity | Same | No |
Rates reflect Finance Act 2024 changes effective July 23, 2024 — applicable for the full FY 2025-26.
Why Section 87A Does Not Apply Here
The 87A rebate (up to ₹60,000 under the new regime) offsets tax on income taxed at slab rates. Capital gains from listed equity MFs — taxed at special flat rates under Section 111A (STCG, 20%) and Section 112A (LTCG, 12.5%) — are explicitly excluded.
For a ₹20L salaried professional, there are two separate reasons the rebate helps nothing:
- The rebate applies only if total income is ≤ ₹12L (new regime). A ₹20L salary already rules it out.
- Even if salary were below ₹12L, STCG/LTCG sit in Schedule SI (special-rate income) and are taxed independently — the rebate applies only to the slab-rate portion.
The Finance Act 2025 codified this (Section 202 of the Income Tax Act 2025). The ITAT Ahmedabad ruling on AY 2024-25 applied to older law — do not rely on it for the return you are filing now.
Real Example: Salaried, ₹20L CTC, Pune (FY 2025-26)
Portfolio: ₹2.5L STCG from equity MF sold after 8 months; ₹1.8L LTCG from index fund sold after 18 months.
| Item | New Regime | Old Regime (₹6.5L deductions) |
|---|---|---|
| Gross salary | ₹20,00,000 | ₹20,00,000 |
| Standard deduction | −₹75,000 | −₹50,000 |
| Other deductions (80C / HRA / 80D) | — | −₹6,50,000 |
| Taxable salary income | ₹19,25,000 | ₹13,00,000 |
| Tax on salary (with 4% cess) | ₹1,92,400 | ₹2,10,600 |
| STCG tax (₹2.5L × 20% + cess) | ₹52,000 | ₹52,000 |
| LTCG tax (₹55K × 12.5% + cess) | ₹7,150 | ₹7,150 |
| Total tax outgo | ₹2,51,550 | ₹2,69,750 |
The STCG and LTCG tax is identical in both regimes — same flat rate, same exemption. The regime decision only affects how your salary is taxed. New regime saves ₹18,200 even against ₹6.5L in deductions.
Break-even: when does old regime win for ₹20L CTC?
Old regime beats new only when total deductions (80C + HRA + 80D + home loan Section 24(b) + NPS 80CCD(2)) exceed ₹7.1L. That typically requires an active home loan + metro HRA + full 80C, all simultaneously. Without all three, new regime is the better call.
LTCG exemption: ₹1.25L per PAN, not per fund
The Section 112A exemption is per PAN per financial year. If you sold equity MF A (₹80K LTCG) and index fund B (₹90K LTCG), your combined LTCG is ₹1.7L. Taxable: ₹1.7L − ₹1.25L = ₹45K at 12.5% + cess = ₹5,850. The portal aggregates all 112A gains before applying the exemption.
Debt MF trap: slab rate at 25–30%+ for ₹15L+ earners
Debt MFs bought after April 1, 2023 are taxed at your marginal slab rate — 25% at ₹20L income under the new regime (+ 4% cess = 26%). That is worse than equity STCG at 20.8%. Do not conflate them in Schedule CG; they sit in different rows with different tax treatments, and debt MF gains do not get the ₹1.25L exemption.
Capital Loss Set-Off: Use What You Already Have
You cannot change what gains were booked in FY 2025-26, but set-off rules can reduce your liability:
- Short-term capital loss (STCL) sets off against STCG first, then LTCG, in the same year.
- Long-term capital loss (LTCL) sets off only against LTCG — not against STCG or salary.
- Capital losses cannot offset salary, business income, or interest income.
- Unabsorbed losses carry forward for 8 assessment years, but only if ITR is filed on time.
If your broker's FY 2025-26 P&L shows booked losses you forgot to account for, include them in Schedule CG — they directly reduce taxable gains.
Filing ITR-2: Schedule CG → Schedule SI, Step by Step
ITR-2 is mandatory for anyone with capital gains — even ₹1. Filing ITR-1 with capital gains results in a defective return notice from CPC.
- Open ITR-2 on the e-filing portal → navigate to Schedule CG.
- Equity MF LTCG (Sec 112A) → Section A-1(b). Equity MF STCG (Sec 111A) → Section A-1(a). Debt MF gains (post Apr 2023) → Section A-2 (STCG at slab rate).
- Cross-check your AIS (Annual Information Statement) against the CAMS/KFintech Consolidated Account Statement. AIS sometimes mislabels dividend reinvestment as a redemption gain, or uses a mismatched NAV date — both cause discrepancies with broker data.
- The portal auto-routes gains to Schedule SI (special-rate income). Download the tax computation PDF before submitting and verify the 87A rebate line shows ₹0 — for income above ₹12L, the field should be blank.
- MF dividends received in FY 2025-26 go into Schedule OS (other sources) at slab rate — separate from capital gains entirely.
What to Do This Week
- Download your Consolidated Account Statement from CAMS or KFintech; compare it line by line with AIS to catch any reclassified transactions before CPC flags them in processing.
- Check your total deductions stack. If 80C + HRA + 80D + home loan interest + NPS 80CCD(2) is under ₹7.1L on a ₹20L CTC, stay in the new regime. NPS 80CCD(2) (employer contribution) is available under the new regime — most people miss this.
- If ITR-1 was your default last year, switch to ITR-2 now — capital gains disqualify you from Sahaj regardless of amount.
- File before July 31, 2026. Late filing under Section 234F costs ₹5,000; it also forfeits carry-forward rights on capital losses for 8 years.
The Tax Is Baked In — File Accurately
The 20.8% STCG and 13% LTCG above ₹1.25L are set by law for FY 2025-26. What you control is regime selection, the deduction stack, and whether Schedule CG is populated correctly. For most ₹15-25L salaried investors, the new regime wins on the salary side and the capital gains bill is identical regardless — so the real priority is an error-free return filed before the July 31 deadline.
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