Rebalancing involves buying & selling stocks to ensure that your smallcase's constituents are true to the theme. Since most smallcases are rebalanced quarterly, short term capital gains tax or long term capital gains tax (depending on the duration for which the stock was held) would be applicable on the stocks sold at the time of rebalancing.

STCG is applicable at 15% of the gains and LTCG is applicable at 10% of the gains, only if the gains for that particular year exceed Rs. 1,00,000. 

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