Four rules carry most of what a retail Indian investor needs, and the fourth is the one that's worth real money.
How are investment returns taxed in India?
Start with listed equity and equity-oriented units. A gain on a listed share or an equity-oriented mutual fund unit on which securities transaction tax has been paid is short-term if the holding period is twelve months or less and long-term beyond that. The short-term rate is 20% and the long-term rate is 12.5%, both carrying a 4% cess on the tax. Long-term gains are exempt up to an annual threshold of ₹1,25,000 [verify: Sections 196 and 198 of the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 from 1 April 2026. The new Act speaks of the "tax year" where the old Act used "previous year" and "assessment year". Sections 111A and 112A of the 1961 Act, as amended by the Finance (No. 2) Act 2024, still govern tax years up to 2025-26. See incometaxindia.gov.in. Every one of these numbers is set by a Finance Act, so confirm the figure as of the date you read it (checked October 2026)].
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Debt and specified funds are the second rule. A mutual fund that holds more than a stated proportion in debt and money-market instruments is a "specified" fund, and its gains are deemed short-term and taxed at the investor's slab rate however long the units were held. No long-term rate. No indexation. Ever, for that category [verify: the deeming provision introduced by the Finance Act 2023 and refined by the Finance Act 2024]. If you learned Indian debt-fund taxation before 2023, you're carrying a rule that's now wrong. It's the clearest illustration on this page of why the perishable-number rule exists.
Dividends are taxed in the shareholder's hands at the slab rate, and the company withholds tax at source above an annual threshold per company. A holder at a 30% slab with 4% cess pays an effective 31.2% on dividend income and takes credit for the withholding when filing [verify: the withholding provision and its threshold, which was raised by a recent Finance Act, incometaxindia.gov.in].
How does the loss set-off ladder work?
The set-off ladder, which is rule four and the one worth money. Losses may be set off against gains, but not in any order you like:
- A short-term capital loss may be set off against both short-term and long-term capital gains.
- A long-term capital loss may be set off only against long-term capital gains.
- Whatever remains unabsorbed may be carried forward for eight assessment years, and the carry-forward is conditional on filing the return by the due date. Miss the due date and the loss is gone [verify: the set-off and carry-forward provisions and the filing condition, incometaxindia.gov.in].
The ladder is asymmetric, and the asymmetry has a price. A short-term loss is the more valuable instrument because it can reach both kinds of gain, so it should be spent against the highest-taxed gain available. Take a year with ₹2,40,000 of short-term gains, ₹3,10,000 of long-term gains, ₹95,000 of short-term losses and ₹1,40,000 of long-term losses. Set the short-term loss against the short-term gain first, where it saves tax at 20%, and the year's tax is ₹36,010. Set the short-term loss against the long-term gain instead, where it saves tax at 12.5%, and the tax is ₹49,920. The wrong order costs ₹13,910 on identical facts, and the return form will accept either. Nobody will stop you.
A second, subtler timing error costs less but is more common. Set-off inside a year is compulsory, so the year in which you realise a loss decides the rate at which it gets spent. Do not realise a loss in a year whose only available gain is taxed at the lower rate. In the portfolio audited in worked example 1, a short-term loss of ₹8,827 was realised in a year whose only gains were long-term. Absorbing it there saved ₹1,147 of tax at 12.5% plus cess. Held back to a year with short-term gains and spent at 20% plus cess, the same loss would have been worth ₹1,836. Realising it early destroyed ₹688 of its value, or 37.5%. A loss is an asset with a tax rate attached, and you spend it where the rate is highest.
Is there a wash-sale rule in India?
India has no general wash-sale rule. You can sell at a loss and buy the same security straight back, and nothing comparable to the American mechanism blocks it. What is policed, narrowly, is dividend stripping and bonus stripping, where a loss manufactured around a dividend or bonus record date is disallowed to the extent of the income received. The full treatment of both mechanisms, and the contrast with the American rule, belongs to the private-wealth branch's tax-aware investing material.