Overview

Most investors understand diversification as the practice of not putting all your eggs in one basket: spread across a few funds, add some gold, and keep some cash. That logic works at most wealth levels. 

A family holding listed equities, PMS, debt instruments, AIFs, real estate, and gold is not dealing with one tax rulebook – it is dealing with at least half a dozen, each with its own holding period, rate, and surcharge treatment.

The current framework for capital gains taxation in India applies a uniform LTCG rate of 12.5% across nearly all asset classes. Indexation – the mechanism that allowed investors to adjust the purchase price of an asset for inflation before computing the taxable gain – no longer applies to most assets. The full nominal gain is taxable.

This ready-reckoner covers what each asset class looks like under the current framework, what has changed, and what matters most at the filing stage.

Listed equities and equity mutual funds

Note: Both listed shares and equity mutual funds (where domestic equity exposure exceeds 65%) are subject to STT on trades and qualify for the rates below.

Note: Both listed shares and equity mutual funds (where domestic equity exposure exceeds 65%) are subject to STT on trades and qualify for the rates below.

Current rates for FY 2025–26:

1. LTCG: 12.5% on gains above ₹1.25 lakh per financial year. Holding period: more than 12 months.
2. STCG: 20% on gains from assets held 12 months or fewer.
3. Surcharge cap: Surcharge on equity STCG and LTCG is capped at 15% under Sections 111A and 112A – regardless of total income level.

What this surcharge cap means in practice: for a portfolio generating multiple income types, equity gains carry a lower effective tax burden than most other income at the same rupee value – a point the surcharge section below quantifies in full.

Key takeaway: The ₹1.25 lakh annual LTCG exemption and the 15% surcharge cap make the tax treatment of listed equities and equity mutual funds among the most efficient in the current framework.

Portfolio Management Services (PMS)

Definition: Portfolio Management Services (PMS) is a professionally managed investment service in which securities are held directly in the investor’s demat account – unlike mutual funds, where the investor holds units in a pooled vehicle. This structural difference has significant tax consequences.

How PMS taxation differs from mutual funds:

1. In a mutual fund, the fund entity pays tax on internal transactions; the investor pays tax only at the point of redemption.
2. In PMS, every buy and sell executed by the portfolio manager is a taxable event in the investor’s name – instructed or not.
3. High-turnover PMS strategies accumulate short-term capital gains throughout the year, reflected in the investor’s Annual Information Statement (AIS).
4. Management fees may be deductible against capital gains – but this is typically available only in non-discretionary PMS where fees are separately billed. Confirm eligibility with a tax adviser before claiming.

Current rates: LTCG at 12.5% for holdings over 12 months; STCG at 20% for holdings under 12 months.

Key takeaway: In PMS, the portfolio manager’s trading activity is the investor’s taxable activity. Turnover and holding period directly determine post-tax returns – not just gross performance.

Debt instruments and debt mutual funds

Definition: Debt mutual funds are collective investment vehicles that primarily invest in fixed-income instruments such as government securities, corporate bonds, and money market instruments. Their tax treatment changed fundamentally on 1 April 2023 – and the purchase date of your units remains the single most consequential variable when filing today.

How the two regimes work:

Units purchased before 1 April 2023:

1. Gains held for more than 24 months qualify as LTCG, taxed at 12.5%.
2. Gains on units held under 24 months are taxed at the investor’s applicable income slab rate.

Units purchased on or after 1 April 2023:

1. All gains – regardless of holding period – are classified as short-term capital gains under Section 50AA.
2. These gains are taxed at the investor’s slab rate – for high net-worth investors, 30% plus applicable surcharge and cess.
3. A UHNI investor in the highest bracket pays the same rate on a debt fund held for five years as on one redeemed in three months.
4. The LTCG advantage debt mutual funds once held over fixed deposits no longer exists for post-March 2023 units.

Listed bonds and debentures: LTCG after 12 months at 12.5%; STCG at slab rate. Interest income across all debt instruments is taxed at slab rate separately from capital gains.

Key takeaway: For debt mutual fund units purchased after 31 March 2023, there is no LTCG benefit – all gains are taxed at slab rate. The purchase date of every unit must be verified before filing.

Gold

Definition: Gold as a capital asset exists in three distinct legal and financial forms in India – Sovereign Gold Bonds (SGBs), Gold ETFs, and physical gold (jewellery, coins, and bars). Each form is governed by a different holding period and tax rate, and the tax treatment across the three is not interchangeable.

Tax treatment by form – the three formats carry meaningfully different tax outcomes:

1. Sovereign Gold Bonds (SGBs):

• Redemption at RBI maturity (8 years): capital gains fully exempt – for FY 2025–26 returns being filed now, this exemption applies to all holders.
• Premature redemption via the RBI window after 5 years: exempt for FY 2025–26.
• Annual interest of 2.5% is taxed at slab rate; price appreciation over the holding period is fully shielded.
• No new SGBs have been issued since FY 2023–24.
• ⚠ Budget 2026 change – effective from FY 2026–27 onwards: The maturity exemption now applies only to original subscribers who hold continuously until maturity. Investors who purchased SGBs from the secondary market (NSE/BSE) will no longer qualify for the capital gains exemption on maturity. Premature RBI redemption is also no longer exempt. This does not affect FY 2025–26 returns, but it materially changes the tax treatment of secondary market SGB purchases made from 1 April 2026 onwards.

2. Gold ETFs:

• LTCG at 12.5% after 12 months for all units (holding period standardized to 12 months effective 23 July 2024).
• STCG at slab rate for units held 12 months or fewer.
• No GST on ETF transactions.

3. Physical gold (jewellery, coins, bars) – least favourable tax treatment:

• LTCG at 12.5% after 24 months; slab rate applies below that threshold.
• For purchases made before 23 July 2024: resident individuals and HUFs may choose between 12.5% without indexation or 20% with CII indexation – whichever results in the lower liability.
• The CII for FY 2025–26 is 376.

Key takeaway: For FY 2025–26 returns, SGBs held to maturity carry the most favourable tax treatment of the three gold formats – fully exempt from capital gains for all current holders. From FY 2026–27 onwards, that exemption is restricted to original subscribers only. For physical gold acquired before 23 July 2024, run both the indexed (20%) and non-indexed (12.5%) calculations – do not assume the lower rate always produces a lower liability.

Alternative Investment Funds (AIFs)

Definition: Alternative Investment Funds (AIFs) are privately pooled investment vehicles registered with SEBI under the AIF Regulations, 2012. They are classified into three categories – Category I, II, and III – and their tax treatment differs fundamentally based on category, primarily because of how income is recognised and at which level tax is applied.

How taxation works by AIF category:

Category I and II (pass-through taxation):

1. Income is taxed in the hands of the investor – not at the fund level.
2. Capital gains pass through at the applicable rate: 12.5% LTCG or 20% STCG on equity-oriented assets.
3. Business income generated by the fund is taxed at the fund level, even for Category I and II.
4. The character of income – capital gain vs business income vs interest – determines the investor’s tax outcome more than the SEBI category label.

Category III (fund-level taxation):

1. Tax is applied at the fund level before returns are distributed to investors.
2. Investors receive post-tax returns; they cannot apply personal exemptions or rates to the underlying income.
3. For short-term-oriented strategies, the effective tax rate at fund level can significantly exceed what a direct investor would pay on the same gain.

Key takeaway: Two AIF funds with identical pre-tax returns can leave meaningfully different amounts in an investor’s hand based purely on their SEBI category and income character. For Category III structures in particular, understanding the effective tax rate at fund level – not just the gross return – gives a more accurate picture of what the investment actually delivers.

REITs and InvITs

Definition: Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are SEBI-regulated pass-through vehicles that pool investor capital to own income-generating real estate or infrastructure assets. Their distributions carry multiple income components, each subject to a different tax treatment.

The most common filing error with REITs and InvITs is treating the total distribution as a single tax line. It is not.

How to correctly classify a REIT/InvIT distribution:

1. Interest distributions: taxed at the investor’s applicable slab rate.
2. Dividends: taxed at slab rate (dividend treatment depends on whether the underlying SPV has opted for the concessional corporate tax regime).
3. Capital repayment: not taxed at the time of distribution, but reduces the investor’s cost of acquisition. This increases the capital gain – and therefore the tax liability – when units are eventually sold.
4. Capital gains on unit sale:
   • STCG at 20% for units held under 12 months.
   • LTCG at 12.5% above ₹1.25 lakh for units held over 12 months.
5. Source document: The annual distribution notice from the trust specifies the component breakdown. That document – not the bank credit – determines your filing. Ensure your tax adviser has it before returns are prepared.

Key takeaway: A single REIT or InvIT distribution contains multiple income types taxed at different rates. Filing based on the total credit amount – rather than the trust’s component breakdown notice – is a common and avoidable error.

The surcharge picture across your portfolio

Definition: A surcharge is an additional levy on income tax, applied as a percentage of the base tax liability. In India, higher income levels attract progressively higher surcharge rates – with one critical exception for capital gains on specified assets, where the surcharge is statutorily capped at 15%.

Where the 15% surcharge cap applies (Sections 111A, 112, and 112A):

1. Equity STCG and LTCG – listed shares, equity mutual funds, PMS.
2. LTCG on physical gold, listed bonds, and real estate.

Where the cap does not apply:

1. Debt fund gains taxed as STCG under Section 50AA (post-April 2023 units) are taxed at slab rate with full surcharge applicable.

What this means in numbers:

Key takeaway: A debt fund gain and an equity LTCG of the same rupee amount are not the same tax event. The surcharge differential alone can create a gap of over 25 percentage points in effective tax rate between the two.

This article is for general informational purposes only and does not constitute tax or investment advice. Tax laws are subject to change. Please consult a qualified tax adviser for guidance specific to your situation and financial year.