Explainer
Mutual fund taxation in India
Updated: October 2026 · Rules shown for FY 2025-26 (AY 2026-27) · Baasava Hathiwala
Important: tax rules change with each Budget and depend on your personal situation. The figures below reflect widely-applicable rules for FY 2025-26 (AY 2026-27) and are for general understanding only — always confirm the current treatment with a qualified tax professional before acting.
How your mutual fund gains are taxed in India depends on two things: what kind of fund it is (equity vs debt) and how long you held it (short-term vs long-term). Here is the whole picture.
Equity mutual funds
An equity-oriented fund holds at least 65% in Indian equities. The capital-gains rules (post the July 2024 Budget):
| Holding period | Type | Tax rate |
|---|---|---|
| 12 months or less | Short-term (STCG) | 20% |
| More than 12 months | Long-term (LTCG) | 12.5% (first ₹1.25 lakh of LTCG per year exempt) |
So if your long-term equity gains in a financial year are under ₹1.25 lakh, there is no LTCG tax on them; only the amount above ₹1.25 lakh is taxed at 12.5%.
Debt mutual funds
For debt fund units purchased on or after 1 April 2023, the entire gain is added to your income and taxed at your slab rate, regardless of holding period — there is no separate long-term rate or indexation benefit. Units bought before that date follow the older rules for the relevant period; confirm the exact treatment with a tax adviser.
How SIPs are taxed
Every SIP instalment counts as a separate purchase with its own holding-period clock. When you redeem, gains are computed first-in-first-out (FIFO). This means that in a single redemption, older units may qualify as long-term while the most recent instalments are still short-term.
Dividends (IDCW)
If you choose the IDCW (dividend) option, those payouts are added to your income and taxed at your slab rate. TDS applies on dividend payouts above the prescribed threshold. For most long-term investors, the growth option is more tax-efficient than IDCW.
ELSS and tax-saving
ELSS (Equity Linked Savings Scheme) funds offer a deduction under Section 80C (within the overall ₹1.5 lakh limit) under the old tax regime, with a 3-year lock-in. The 80C benefit does not apply under the new tax regime. Gains on ELSS are taxed as equity (as above) when redeemed after the lock-in.
A quick summary
| Fund type | Short-term | Long-term |
|---|---|---|
| Equity (≥65% equity) | ≤12 mo → 20% | >12 mo → 12.5% (₹1.25L exempt) |
| Debt (bought on/after 1 Apr 2023) | Slab rate, any holding period | |
Plan around it with the right tools
- SIP calculator — project growth before tax.
- SWP calculator — plan tax-aware withdrawals.
- SIP vs lumpsum and how to start investing.
Frequently asked questions
How are equity mutual funds taxed in India?
For equity-oriented funds (65%+ in Indian equities), gains on units held 12 months or less are short-term and taxed at 20%. Gains on units held more than 12 months are long-term, taxed at 12.5%, with the first ₹1.25 lakh of long-term equity gains in a financial year exempt. These rates follow the changes made in the July 2024 Budget.
How are debt mutual funds taxed?
For debt fund units purchased on or after 1 April 2023, the entire gain is added to your income and taxed at your slab rate, with no long-term benefit or indexation, regardless of how long you hold. Units bought before that date follow the older rules for the period concerned — confirm the exact treatment with a tax adviser.
What is the tax on SIP investments?
Each SIP instalment is treated as a separate purchase with its own holding period, and gains are taxed on a first-in-first-out (FIFO) basis when you redeem. So some units from an SIP may qualify as long-term while more recent ones are still short-term.
Is there TDS on mutual fund redemptions for residents?
For resident individual investors, there is generally no TDS on redemption of mutual fund units; you report the capital gains in your income tax return. Dividends (IDCW) are taxed in your hands at slab rate, and TDS applies on dividends above a threshold. Rules differ for NRIs.
How are hybrid and other funds taxed?
It depends on the fund's equity allocation. Funds that meet the equity-oriented threshold are taxed like equity funds; others may be taxed like debt or under specific rules. Always check the fund's tax status in its scheme document, as categories and rules have changed in recent years.
For general education only — not tax or investment advice. Tax laws change and depend on your individual circumstances; the rules above are a simplified summary for FY 2025-26 (AY 2026-27). Consult a qualified chartered accountant or tax adviser before making decisions. See our disclaimer.