The ₹1.25 lakh long-term capital gains tax exemption resets every financial year on April 1, according to recent guidance from Fund Advisor. This exemption applies to eligible long-term capital gains from listed equity shares, equity-oriented mutual funds, and specified business trusts (REITs and InvITs). The exemption serves as an annual tax-free limit for eligible long-term capital gains, with tax becoming payable only on net gains above ₹1.25 lakh during a financial year. As reported by Fund Advisor, this reset mechanism ensures that the exemption starts afresh each year, meaning using it in one financial year does not reduce or carry forward to the next year.
The confusion often arises because investors mix up two distinct rules. The holding period requirement determines whether gains qualify as long-term (more than one year for listed equity shares and equity-oriented mutual funds), while the annual exemption determines how much of those long-term gains is tax-free in a financial year. As reported by Fund Advisor, these rules serve different purposes - holding period classifies gains as long-term, while the exemption determines tax-free limits for the year. Recent guidance emphasizes that these are separate concepts that must be correctly applied to ensure proper tax calculation.
The exemption applies to net eligible long-term capital gains for the financial year, not to individual sales. According to Fund Advisor, if net LTCG from all eligible equity investments during FY 2026-27 is ₹2 lakh, the first ₹1.25 lakh is exempt from tax, with only the remaining ₹75,000 being taxable at applicable LTCG tax rates. The exemption starts afresh every April 1, meaning using it in one financial year does not reduce or carry forward to the next year. Recent reporting clarifies that exempted gains must still be entered in Schedule CG under Section 112A, with the system automatically adjusting the exemption amount.
For large redemptions, timing can significantly affect tax liability. As reported by Fund Advisor, if expecting gains of around ₹2 lakh, selling part before March 31 and the rest after April 1 could spread gains across two financial years, allowing use of the exemption in both years. However, this strategy should align with investment goals rather than tax considerations alone, as tax planning should support investment strategy rather than dictate it. Recent guidance emphasizes the importance of accurate reporting, noting that leaving exemption fields blank because no tax is owed is treated as non-disclosure.
