Mutual fund taxation in India: equity, debt and everything between
The current capital-gains rules for every fund type — equity LTCG/STCG, the debt overhaul, hybrids, SIPs and IDCW — with worked examples.
Mutual fund tax in India depends on two things: what kind of fund it is (equity, debt, or in between) and how long you held the units. Rates below are the rules in force for FY 2025-26 — the July 2024 Budget set them, and Budget 2025 and Budget 2026 made no changes to capital-gains rates. Verify before acting; rates do change.
Equity funds (≥65% in Indian equities)
| Holding period | Type | Rate |
|---|---|---|
| More than 12 months | LTCG | 12.5% on gains above ₹1.25 lakh/year (exemption shared across all your equity LTCG) |
| 12 months or less | STCG | 20%, no exemption |
Plus 4% health & education cess (and surcharge at high incomes) on both.
Worked example. You redeem an equity fund held 2 years with a ₹2,00,000 gain: the first ₹1,25,000 is exempt, the remaining ₹75,000 is taxed at 12.5% = ₹9,375 (plus cess). The same ₹2,00,000 gain after only 6 months: STCG at 20% = ₹40,000 (plus cess).
This covers large cap, flexi cap, ELSS, index funds and other equity-oriented schemes — including aggressive hybrid funds, which keep ≥65% equity precisely to get this treatment.
Debt funds (the 2023 overhaul)
For units bought on or after 1 April 2023, debt fund gains are simply added to your income and taxed at your slab rate — regardless of holding period. No indexation, no LTCG rate. This covers liquid, ultra short, corporate bond, gilt and other funds with ≤35% equity.
Units bought before April 2023 follow transition rules — if you hold old debt units, the treatment depends on purchase date; worth a CA conversation before a large redemption.
The funds in between
Funds with 35–65% equity (some balanced hybrids, many multi asset funds) get a middle treatment: held more than 24 months → LTCG at 12.5% (no indexation); otherwise slab. The fund's actual equity percentage decides its bucket — check the scheme documents, not the name.
Four rules that surprise people
- Every SIP instalment has its own clock. Redeeming a 3-year-old SIP means some units are long-term and the newest are short-term — redemptions are matched first-in-first-out. The XIRR explainer covers measuring returns across instalments.
- Switches are sales. Moving from one scheme to another — including regular → direct of the same fund — is a redemption for tax purposes, even though no cash reached your bank.
- Nothing is taxed while you hold. Growth-option investors pay tax only on redemption. There is no annual tax on unrealised gains.
- IDCW (dividends) are taxed at slab in the year received, and the fund deducts 10% TDS above a small annual threshold — one reason growth options usually compound better after tax.
Legitimate ways people manage the bill
- Harvest the exemption yearly: realising up to ₹1.25 lakh of equity LTCG each financial year (and optionally re-buying) uses an exemption that otherwise lapses.
- Redeem across two financial years to use two years' exemptions on a large gain.
- Losses offset gains: short-term losses set off against both STCG and LTCG; long-term losses against LTCG only; unused losses carry forward 8 years (file your return on time).
NiveshLens is an independent analytics platform, not a SEBI-registered investment adviser. Everything above is education — how these products work — not a recommendation to buy or sell anything. Tax rules and rates change; verify current figures before acting.