Tax Exemptions on Capital Gains from Mutual Funds and Shares: Key Provisions Explained

A taxpayer may not always be liable to pay tax on long-term capital gains (LTCG) and short-term capital gains (STCG) arising from the sale of equity mutual funds and shares. The Income-tax Act, 1961, provides several exceptions and exemptions that could apply based on an individual’s specific circumstances. These provisions aim to reduce or eliminate the tax burden on certain transactions, making the tax landscape more favourable for taxpayers.

Conditions Where Taxes are Exempt

LTCG and STCG on the sale of equity mutual funds and shares are exempt from taxation under the following conditions:

Income Below the Basic Exemption Limit

If a taxpayer’s total income, including capital gains, is below the prescribed basic exemption limit, no tax is payable on the capital gains derived from the sale of equity shares or mutual funds.

Non-Taxable Transactions

Certain transactions are not considered ‘transfers’ under the Income Tax Act and are, therefore, not subject to capital gains tax. For example, transfers made as gifts or through irrevocable trusts are excluded from taxation, provided the transfer is made by an individual or a Hindu Undivided Family (HUF).

Capital Gains Within the Exemption Limit

Under Section 112A of the Income Tax Act, long-term capital gains up to ₹1.25 lakh in a financial year from the sale of equity shares or equity-oriented mutual funds (where Securities Transaction Tax, or STT, has been paid) are exempt from tax.

Reinvestment Under Section 54F

LTCG on equity shares or mutual funds may also be exempt if the gains are reinvested in a residential house property, subject to specific conditions outlined in Section 54F. For reference, the basic exemption limit is ₹2.5 lakh under the old tax regime and ₹4 lakh under the new tax regime, effective from FY 2025-26.

Also Read: ITR Filing 2025: A Step-by-Step Guide to Using the ‘e-Pay Tax’ Feature

Conclusion

While taxpayers are generally required to pay tax on long-term and short-term capital gains from the sale of equity mutual funds and shares, there are various exemptions and exceptions available under the Income-tax Act, 1961. Understanding these provisions and ensuring compliance with the applicable conditions can significantly reduce or eliminate the tax liability on such transactions, making it essential for individuals to stay informed about their specific tax obligations.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.