Selling equity at 11 months vs 12: the tax gap

The cliff at 12 months

For listed shares and equity mutual funds, the line between short and long term is more than 12 months. One day either side of it changes the rate:

• Short-term: 20% of the whole gain.
• Long-term: 12.5% of the gain above ₹1.25 lakh a year.

Both carry 4% cess. A resident whose other income is below the basic exemption limit can use the unused part against these gains, but in the new regime the section 87A rebate does not cover tax on them. The example below assumes other income already uses up the exemption limit.

A worked case

You invested ₹8 lakh in an equity fund eleven months ago. It is now worth ₹10 lakh, a gain of ₹2 lakh. You need the money and are deciding whether to sell now or in five weeks.

Waiting saves ₹31,850, about 3.2% of what you would take home. Over five weeks that is a large return for doing nothing.

The table assumes no other long-term gains this year. If you have already used the ₹1.25 lakh exemption elsewhere, the long-term tax is ₹2,00,000 × 12.5% × 1.04 = ₹26,000 and the saving shrinks to ₹15,600.

What the wait risks

The saving only holds if the price stays put. During the wait the ₹10 lakh is still invested. If the fund falls by a fraction x:

• Sell now: you get 10,00,000 − 41,600 = ₹9,58,400.
• Sell later: you get 10,00,000 × (1 − x) minus long-term tax on the smaller gain. Each rupee the value falls also cuts the taxable gain by a rupee, so it only costs 1 − 0.13 = 87 paise after tax.

The two are equal when 31,850 = 8,70,000 × x, so x ≈ 3.66%. If the fund falls by more than about 3.7% before you can sell long-term, selling now would have been better. Less than that, and waiting wins. A rise only adds to the advantage of waiting.

An equity fund can easily move 3.7% in five weeks, either way. So the rule is not "always wait". It is closer to: if you can afford to keep the money invested for the rest of the period, waiting is usually worth it; if the money must not shrink, sell and pay the tax.

Practical points

• Check each instalment. With a SIP, the oldest units may already be long-term while recent ones are not. Redeem a specific amount and the units go out oldest first. See how SIP redemptions are taxed, FIFO.
• Watch the exit load. Many equity funds charge 1% if you redeem within a year. Selling at 11 months may cost the load too, which makes the case for waiting stronger. See exit load break-even.
• Count the dates carefully. "More than 12 months" means selling a day after the anniversary of allotment is safe. Selling on the anniversary is not.
• Short-term losses are useful. If you have them, they can be set against short-term gains first. The order is worked through in the tax-loss set-off order.

Reading this

• The fund values and gain are invented for the example.
• Rates are those for transfers on or after 23 July 2024, plus 4% cess; surcharge is ignored.
• The break-even fall assumes the gain stays above ₹1.25 lakh after the fall, which holds here.