Taxation of Securities For Assessment Year 2026-27
As the financial markets continue to expand and evolve, a wide range of securities has become accessible to investors. Today, trading is no longer limited to traditional equity shares; investors actively participate in instruments such as Equity ETFs, Non-Equity ETFs, Mutual Funds, International Equity and ETFs, and Indian Fund/ETFs that invest in foreign equity. Each category of security carries distinct characteristics and tax implications. Therefore, understanding their nature and the applicable tax framework has become essential for both new and experienced investors.
SECTION 2(42A) OF INCOME TAX ACT
Section 2(42A) of the Act defines Short Term Capital Asset. In simple terms, it lays down the holding period beyond which an asset is treated as long-term. If you sell an asset before completing that prescribed period, it is considered short-term, and profits are taxed at higher rates.
The section basically defines what is short-term capital asset. According to this provision:
- Immovable property(like land, house property, or buildings) is short-term if held for less than 24 months.
- Equity shares, listed securities, mutual funds, & units of UTIare short-term if held for less than 12 months.”
- Unlisted shares and immovable propertywere earlier considered short-term if held under 36 months, but this period was reduced to 24 months in 2017 to benefit taxpayers.
Thus, Section 2(42A) forms the foundation of all capital gains taxation.
SECTION 50AA OF INCOME TAX ACT
What is Section 50AA of the Indian Income Tax Act, introduced by the Finance Act 2023 and expanded by Finance (No. 2) Act 2024, deems gains from Market-Linked Debentures (MLDs) and “Specified Mutual Funds” (those with <=35% domestic equity) as Short-Term Capital Gains (STCG), regardless of holding period, taxing them at the investor’s slab rate instead of long-term rates. This essentially covers debt funds, international funds listed in India , gold/silver ETFs, and fund-of-funds, because they do not maintain the 35% domestic equity threshold.
Introduced by the Finance Act 2023 and expanded by the Finance (No. 2) Act 2024, it also covers unlisted bonds/debentures maturing/redeemed after July 23, 2024, removing indexation benefits and shifting taxation from potentially lower LTCG rates to higher income slab rates.
SECTION 112A OF INCOME TAX ACT
Section 112A of the Income Tax Act deals with Long Term Capital Gains on sale of listed equity shares, equity oriented funds, and units of business trust. 12.5% of tax is levied on the long term capital gains. Also, it provides an exemption of Rs. 1.25 lakh on long term capital gains (LTCG) from equity investments. To apply Section 112A ,for EQUITY SHARE, STT must be paid on BOTH side : purchase and Sale of listed equity shares.
Exception:
Certain genuine transactions (e.g., IPO, FPO, bonus, rights issues, ESOP, buyback) are exempted from purchase STT requirement as per CBDT Notification No. 60/2018.
FOR Units of Equity-Oriented Mutual Funds & Business Trusts, STT is required ONLY on sale, not on purchase.
ETF IS AT PAR WITH MUTUAL FUND
ETF (Exchange Traded Fund) is a type of mutual fund, but it trades like a stock on an exchange, unlike traditional mutual funds bought from the house at daily NAV; SEBI views ETFs as passive investment vehicles that replicate an index, offering diversification, liquidity, and lower costs but requiring a trading/demat account, with SEBI actively regulating them and issuing guidelines for consistency, like recent proposals for gold ETF valuation. Thus, ETF is at par with mutual fund for taxation.
CONCLUSION
Any domestic ETF or Mutual fund having less than 35% of equity is treated as specified mutual fund and always be short term in Income tax prospective.
In conclusion, the taxation framework for various securities has been summarised and tabulated below for clear understanding. The table provides a quick comparison of tax rates, holding periods and applicable sections to help readers interpret the law with ease :
| Nature of Security | Holding Period | Tax Rate (On or after July 23, 2024) | Remark |
| Listed domestic Equity Shares / Equity Mutual Funds (STT Paid) | ≤is less than or equal to 12 month | 20% | STCG (111A) |
| Listed domestic Equity Shares / Equity Mutual Funds (STT Paid) | > 12 Months | 12.5% | LTCG (112A) |
| Debt/Silver/ Gold/ Gilt/Liquid Mutual Fund or ETF (Listed in Domestic Stock Exchange) | Any period always be STCG | Slab Rate | Section 50AA |
| International ETF listed in India (e.g. Mirae Asset Hang Seng TECH ETF) (Listed in Domestic Stock Exchange) | Any period always be STCG | Slab Rate | Section 50AA |
| International EQUITY/ETF listed outside India (e.g. US stocks ) | ≤is less than or equal to 24 month | Slab Rate | Section: 48 & 111A NOT applicable |
| International EQUITY/ETF listed outside India (e.g. US stocks ) As per Income-tax rules, foreign equity is NOT treated as listed securities in India, hence not eligible for Section 112A and subject only to Section 112. | > 24 Months | 12.5% | LTCG (112) |
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This article contains general tax information and does not constitute professional advice. Tax laws change frequently, and their application varies from case to case. Please consult your tax advisor or Chartered Accountant for specific guidance. The author is not responsible for any errors or consequences arising out of the use of this information.