How equity LTCG tax actually works

Two facts about equity LTCG tax get repeated often: a flat 12.5% rate, and a ₹1.25 lakh exemption. Both are correct on their own. What usually gets missed is how the exemption actually applies once more than one fund or stock is involved.

The basic mechanics: a flat rate above a threshold

Equity held for more than 12 months qualifies as long-term. The first ₹1,25,000 of long-term gains in a financial year is exempt; anything above that is taxed at a flat 12.5%, plus cess: the same rate whether the investor is in the 5% income tax bracket or the 30% one, since capital gains tax doesn’t follow the income tax slabs at all. This 12.5%/₹1.25L structure is itself a relatively recent change, covered in Budget 2024’s capital gains changes, which replaced the older 10%/₹1L rules.

The exemption is shared across your whole portfolio, not per fund

The ₹1,25,000 exemption applies once per financial year, across every equity share and equity mutual fund unit sold that year combined: not a fresh ₹1,25,000 for each individual holding. Redeeming several funds in the same year, each with a modest gain, can look tax-free fund by fund while actually owing real tax once the gains are combined.

The naive per-fund read misses the entire tax bill here. Since the exemption is a single annual allowance, not a per-transaction one, the right way to check it is to total every equity long-term gain for the year first, then apply the ₹1,25,000 exemption once to that combined figure.

Why the rate doesn’t care how large the gain is

Once the exemption is used up, the 12.5% rate applies flat: there’s no escalating bracket the way income tax has, and no discount for staying invested longer than the 12-month long-term cutoff.

This is exactly the tax an ELSS redemption faces once its own 3-year lock-in clears — combined with every other equity sale made that same financial year, not assessed in isolation.