Short Term Capital Gains Tax Deductions: Note Today to Save More in FY 2026-27

Every year, lakhs of Indian investors file their ITR and silently overpay on Short Term Capital Gains - because they don't know which deductions are legally available, which rules changed this year, and which one new provision in FY 2026-27 is a genuine game-changer. 

What Is Short Term Capital Gains Tax? 

Short-term capital gains arise when assets are sold after being held for a short period. The holding period criteria vary by asset type - listed equity shares and equity-oriented mutual funds are classified as short-term if sold within 12 months, while unlisted shares and real estate are considered short-term if sold within 24 months. 

Holding Period and Rate of Tax

 Section 111A (Equity STCG)

This is for listed equity shares and equity mutual funds sold within 12 months, where STT was paid. Taxed at a flat 20%.
 
Under Section 111A, Chapter VI-A deductions (80C–80U) are explicitly prohibited. Only intra-head and inter-head set-off under Sections 70–74 apply. The basic exemption adjustment is permitted for resident assesses under proviso to Section 111A. 

Section 87A rebate is denied per Finance Act 2025 for special-rate incomes including 111A STCG and 112A LTCG.

And here's what most people get wrong about it:

• No 80C to 80U deductions allowed
• No Section 87A rebate on this tax
• No indexation benefit
• Short-term capital losses CAN be set off against it
• The new LTCL set-off provision (FY 2026-27) applies
• Unexhausted basic exemption limit CAN be adjusted (resident individuals only)

What works on Section 111A equity STCG?

• Set off short-term capital losses
• Set off LTCL (new for FY 2026-27)
• Carry-forward losses from prior years 
• Unexhausted basic exemption limit (residents only)
• Transaction costs deducted from the gain itself

Other STCG (Property, Gold, Debt, Unlisted)

Gains added to your total income, taxed at your slab. More restrictive in one way - higher tax if you're in a high slab - but more generous in another:

• Full 80C to 80U deductions available
• Section 87A rebate may apply (if total income is within limit)
• Short-term capital losses can be set off
• LTCL set-off available (FY 2026-27)

STCG Tax Saving Options

Optimising Holding Period to Avail Concessional LTCG Tax Benefits 

If listed equity shares or equity-oriented mutual funds are held for a period exceeding 12 months, the gains qualify as Long-Term Capital Gains (LTCG) under Section 112A of the Income Tax Act. Accordingly, taxpayers approaching the 12-month holding threshold may consider deferring the sale to avail the concessional LTCG tax regime instead of Short-Term Capital Gains (STCG) taxation.

Under the current provisions applicable for FY 2026-27, STCG under Section 111A is taxable at 20%, whereas LTCG under Section 112A is taxable at 12.5% after the annual exemption threshold of ₹1.25 lakh.

For instance, in the case of a ₹4 lakh capital gain:

• STCG tax liability: 20% of ₹4,00,000 = ₹80,000
• LTCG taxable amount after exemption: ₹4,00,000 – ₹1,25,000 = ₹2,75,000
• LTCG tax liability: 12.5% of ₹2,75,000 = ₹34,375

Potential tax savings: ₹45,625.

Taxpayers should verify the acquisition date through broker contract notes, demat statements, or mutual fund account statements. In cases involving multiple acquisitions of the same security, the First-In-First-Out (FIFO) method is generally applied for determining the holding period and capital gains computation.

Utilise the One-Time LTCL Set-Off Benefit for FY 2026-27

The Income Tax Bill, 2025 introduces a transitional relief allowing Long-Term Capital Losses (LTCL) incurred up to 31 March 2026 to be set off against Short-Term Capital Gains (STCG) from AY 2027-28 onwards.

Earlier, under Section 74, LTCL could be adjusted only against LTCG. Taxpayers should review prior ITRs and Schedule BFLA to identify carried-forward losses that can now be strategically utilised to reduce current tax liability.

Carry Forward Capital Losses Through Timely ITR Filing

Capital losses can be carried forward for up to 8 years and adjusted against future gains. However, this benefit is available only if the ITR is filed within the due date under Section 139(1).

STCL can be set off against both STCG and LTCG, making it more flexible for future tax planning. Ensure losses are properly reported in Schedule CFL.

Utilise Unused Basic Exemption Limit Against STCG

Resident individuals and HUFs can adjust the unutilised basic exemption limit against STCG taxable under Section 111A. Accordingly, if normal income does not fully exhaust the tax-free threshold, the balance exemption can reduce taxable equity capital gains.

However, this benefit is not available to non-resident taxpayers.

Claim Section 80C Deductions Against Eligible STCG

Chapter VI-A deductions such as Section 80C cannot be claimed against STCG taxable under Section 111A. However, they remain available against slab-rate capital gains arising from assets such as property, gold, or debt instruments.

In cases involving mixed capital gains, proper allocation of deductions can help optimise overall tax liability.

Select the Most Tax-Efficient Regime Before Year-End

Taxpayers should evaluate both the old and new tax regimes before the financial year begins to determine the more beneficial option based on total income composition, including capital gains.

While STCG under Section 111A is taxed uniformly in both regimes, the overall tax impact depends on slab-rate income and availability of deductions such as Section 80C, HRA, and NPS benefits.

In Glance

FAQs

What is the STCG tax rate on stocks and mutual funds in FY 2026-27? 

Section 111A(1): tax at 20% on STCG from transfer of listed equity shares, equity-oriented MF units, or units of business trusts, where STT is paid on both acquisition and transfer. Rate was increased from 15% to 20% by Finance (No. 2) Act 2024 w.e.f. 23.07.2024. Applicable in both old and new regimes. 

What is the new LTCL set-off rule - and how do I use it? 

Income Tax Bill 2025 introduces a transitional relief provision: LTCL incurred up to 31 March 2026 (AY 2026-27 and earlier) may be set off against STCG from AY 2027-28. Previously, Section 74 restricted LTCL set-off to LTCG only. This is a one-time legislative window - verify carried-forward LTCL in Schedule BFLA of earlier ITRs. The set-off applies before basic exemption adjustment. 

Are debt mutual fund gains always taxed as STCG now?

Finance Act 2023 amended Section 50AA: "specified mutual funds" (≥65% in debt/money-market instruments) purchased on or after 01.04.2023 are always STCG, taxed at slab. Pre-01.04.2023 units: grandfathered under old provisions - LTCG with indexation if held 36+ months. Fund of Funds (FOFs) investing in equity-oriented funds may qualify as equity funds; verify AMC classification. Check FoF structure carefully before assuming LTCG treatment. 

Can I use my ELSS or PPF investment to reduce my equity STCG tax? 

The proviso to Section 111A(1) and Section 112A explicitly bars deductions under Chapter VI-A against special-rate income. This is absolute - no discretion. For mixed portfolios (111A + non-111A STCG), allocate 80C deductions exclusively to non-111A income. Incorrect allocation in ITR-2 triggers CPC mismatch and demand under Section 143(1).