With the rapid evolution of financial markets, Indian investors today have access to a wide spectrum of securities extending far beyond traditional equity shares. Instruments such as Equity ETFs, Non-Equity ETFs, Mutual Funds, International Equities, overseas ETFs, and Indian funds investing in foreign assets are now commonplace in investment portfolios.
However, while investment avenues have diversified, their tax treatment has become increasingly nuanced. Each category of security is governed by distinct provisions under the Income-tax Act, 1961, particularly after the amendments introduced through the Finance Act, 2023 and Finance (No. 2) Act, 2024. For Assessment Year (AY) 2026–27, understanding these provisions is critical for accurate tax planning and compliance.
Section 2(42A) of the Income-tax Act defines a Short-Term Capital Asset (STCA). In essence, it prescribes the holding period that determines whether a capital asset is short-term or long-term. Any asset sold before completing the specified holding period is treated as short-term, generally attracting higher tax rates.
Immovable Property (land, building, house property):
Short-term if held for less than 24 months
Equity Shares (listed), Listed Securities, Equity Mutual Funds, Units of UTI:
Short-term if held for less than 12 months
Unlisted Shares:
Short-term if held for less than 24 months
Earlier, unlisted shares and immovable property required a 36-month holding period. This was reduced to 24 months from FY 2017-18, providing relief to taxpayers.
Section 2(42A) thus forms the base provision upon which all capital gains taxation rests.
Section 50AA was introduced by the Finance Act, 2023 and significantly expanded by the Finance (No. 2) Act, 2024. This provision fundamentally alters the taxation of certain financial instruments by deeming gains as Short-Term Capital Gains (STCG), irrespective of the holding period.
Section 50AA applies to:
Market-Linked Debentures (MLDs)
Unlisted bonds or unlisted debentures transferred, redeemed, or maturing on or after 23 July 2024
Specified Mutual Funds
With effect from 1 April 2026, the definition of “Specified Mutual Fund” has been revised. A specified mutual fund means:
A mutual fund investing more than 65% of its total proceeds in debt and money market instruments, or
A fund investing 65% or more of its proceeds in units of such debt-oriented funds.
This change replaces the earlier 35% domestic equity threshold and narrows the scope of funds falling under Section 50AA.
Holding period becomes irrelevant
Gains are always treated as STCG
Taxed at normal slab rates
Indexation benefits are not available
In practical terms, this provision covers:
Debt mutual funds
Gold, silver, gilt, liquid funds
Commodity ETFs
International funds listed in India
Fund-of-funds (non-equity oriented)
Section 112A governs the taxation of Long-Term Capital Gains (LTCG) arising from:
Listed equity shares
Equity-oriented mutual funds
Units of business trusts
LTCG taxed at 12.5%
Exemption of ₹1.25 lakh on aggregate LTCG from equity investments
Applicable only when STT (Securities Transaction Tax) conditions are satisfied
Listed Equity Shares: STT must be paid on both purchase and sale
Exception: Certain genuine transactions such as IPOs, FPOs, bonus issues, rights issues, ESOPs, and buybacks are exempt from purchase-side STT as per CBDT Notification No. 60/2018.
Equity-Oriented Mutual Funds & Business Trusts: STT is required only at the time of sale
An Exchange Traded Fund (ETF) is legally a mutual fund but trades on a stock exchange like an equity share. SEBI categorises ETFs as passive investment vehicles designed to replicate an index, offering:
Diversification
Liquidity
Lower expense ratios
From a taxation perspective:
ETFs are treated at par with mutual funds
Equity ETFs follow equity mutual fund taxation
Non-equity ETFs (gold, debt, international ETFs) are taxed as per Section 50AA or Section 112, as applicable
Even though these ETFs trade on Indian stock exchanges, they typically do not meet domestic equity thresholds. Accordingly:
Always treated as Specified Mutual Funds
Taxed as STCG at slab rates under Section 50AA, irrespective of holding period
Foreign equities are not regarded as “listed securities” under Indian tax law.
Tax treatment:
Holding period ≤ 24 months:
STCG taxed at slab rates (Sections 48; Sections 111A & 112A not applicable)
Holding period > 24 months:
LTCG taxable at 12.5% under Section 112
| Nature of Security | Holding Period | Tax Rate | Applicable Section | Remarks |
|---|---|---|---|---|
| Listed domestic equity shares / equity mutual funds (STT paid) | ≤ 12 months | 20% STCG | Section 111A | Short-term |
| Listed domestic equity shares / equity mutual funds (STT paid) | > 12 months | 12.5% LTCG (after ₹1.25 lakh exemption) | Section 112A | Long-term |
| Debt / Gold / Silver / Gilt / Liquid MF or ETF (listed in India) | Any period | Slab rate | Section 50AA | Always STCG |
| Unlisted bonds / debentures (redeemed or transferred on or after 23-07-2024) | Any period | Slab rate | Section 50AA | Always STCG |
| International ETF listed in India | Any period | Slab rate | Section 50AA | Always STCG |
| International equity / ETF listed outside India | ≤ 24 months | Slab rate | Section 48 | STCG |
| International equity / ETF listed outside India | > 24 months | 12.5% LTCG | Section 112 | LTCG |
For Assessment Year 2026–27, the taxation of securities has decisively shifted towards substance over form. Any domestic mutual fund or ETF not meeting the prescribed equity threshold—now aligned with a 65% debt-centric definition—is treated as a Specified Mutual Fund and taxed as short-term, irrespective of how long it is held.
Investors must therefore evaluate not just returns, but also the underlying asset composition and applicable tax provisions, before making allocation decisions. Strategic tax planning today requires a granular understanding of Sections 2(42A), 50AA, and 112A, especially in an era where financial innovation continues to outpace conventional tax assumptions.
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