Equity mutual funds (65%+ in equity) are taxed under capital gains: STCG at 20% if held up to 12 months (Section 111A) and LTCG at 12.5% if held over 12 months, on gains above a Rs1.25 lakh yearly exemption (Section 112A), with no indexation. Debt mutual funds bought on or after 1 April 2023 are always taxed at your slab rate regardless of holding period. Dividends (IDCW) are taxed at slab. These equity rates apply to redemptions on or after 23 July 2024 and continue for FY 2025-26.
Mutual Fund Tax Rates — FY 2025-26
How each fund category is taxed. "Equity-oriented" means at least 65% of the corpus is in Indian equity; anything else is taxed as a non-equity (debt-treatment) fund unless it is a 35–65% hybrid.
| Fund type | Holding | Classification | Tax rate |
|---|---|---|---|
| Equity MF / ETF (65%+ equity) | > 12 months | LTCG u/s 112A | 12.5% above Rs1.25 L/yr |
| Equity MF / ETF (65%+ equity) | ≤ 12 months | STCG u/s 111A | 20% |
| ELSS (tax-saver, 3-yr lock) | > 12 months | LTCG u/s 112A | 12.5% above Rs1.25 L |
| Debt MF (bought on/after 1 Apr 2023) | Any period | Slab (specified fund) | Slab rate |
| Debt MF (bought before 1 Apr 2023) | > 24 months | LTCG, no indexation | 12.5% |
| Hybrid 35–65% equity | > 24 months | LTCG, no exemption | 12.5% |
| International / gold FoF (debt treated) | Any period | Slab | Slab rate |
| Dividend / IDCW (any fund) | — | Income from other sources | Slab · TDS 10% over Rs5,000 |
Add 4% health & education cess (plus surcharge if applicable). Rates verified on incometax.gov.in and the AMFI FY 2025-26 tax reckoner.
Budget 2024 raised equity STCG from 15% to 20% and equity LTCG from 10% to 12.5%, lifted the yearly LTCG exemption from Rs1 lakh to Rs1.25 lakh, and removed indexation across the board. Redemptions between 1 April and 22 July 2024 still used the old 10%/15% rates; from 23 July 2024 the new rates apply. Budget 2025 left them unchanged.
Equity: STCG (20%) vs LTCG (12.5%)
STCG · held up to 12 months
- Section 111A flat rate
- No Rs1.25 lakh exemption
- Applies to the whole gain
- Taxed even for small gains
LTCG · held over 12 months
- Section 112A flat rate
- First Rs1.25 lakh/yr exempt
- No indexation
- Only the excess is taxed
Suppose you redeem equity fund units held over a year with a total long-term gain of Rs3,25,000 in FY 2025-26. Only the amount above Rs1.25 lakh is taxed at 12.5%.
LTCG on equity MF (> 12 months)
STCG on the same gain (≤ 12 months)
Holding just past the 12-month mark can more than halve the tax here. Estimate your liability with the income-tax calculator and report gains in Schedule CG of your ITR.
The Rs1.25 lakh is one combined yearly threshold across all your Section 112A gains (shares + equity funds together) — not per scheme or per redemption. It applies only to long-term equity gains, not to STCG or debt-fund gains, and it does not carry forward if unused. Booking up to Rs1.25 lakh of long-term gain each year (tax-loss harvesting) is a common way to use it.
Debt Mutual Funds — Now Taxed at Slab
For debt fund units bought on or after 1 April 2023 (a "specified mutual fund" — over 65% in debt/money-market), all gains are added to your income and taxed at your slab rate, whatever the holding period. There is no long-term category and no indexation. Units bought before 1 April 2023 and held over 24 months still get 12.5% (without indexation) after 23 July 2024.
| Purchase date | Holding | Tax treatment |
|---|---|---|
| On/after 1 Apr 2023 | Any period | Slab rate (no LTCG, no indexation) |
| Before 1 Apr 2023 | ≤ 24 months | Slab rate (STCG) |
| Before 1 Apr 2023 | > 24 months | 12.5% (LTCG, no indexation) |
"Specified mutual fund" was redefined from 1 Apr 2025 as a fund investing more than 65% in debt / money-market instruments.
Before April 2023, a debt fund held over 3 years was taxed at 20% with indexation — an effective rate often near 0–8%. Now a new-money debt-fund gain is taxed at your full slab (up to 30% + cess), the same as a fixed deposit or savings interest. International funds and most gold FoFs get the same debt treatment.
How SIP Redemptions Are Taxed (FIFO)
A SIP is treated as a fresh investment each month. Each installment has its own cost and its own 12-month clock, and units are redeemed on a FIFO (first-in-first-out) basis — the oldest units go first.
Example: Rs10,000/month for 24 months, redeemed at month 24. The first 12 installments are over a year old (LTCG at 12.5% above the Rs1.25 lakh exemption); the last 12 are under a year (STCG at 20%). Redeeming only the seasoned installments first keeps more of the gain in the long-term bucket.
Dividends and Reporting in Your ITR
- Dividends (IDCW) are added to your income and taxed at slab; the AMC deducts 10% TDS if dividend from a fund house exceeds Rs5,000 in a year (20% for NRIs).
- Download your capital-gains statement from CAMS / KFintech (or the AMC) — it shows each transaction, holding period and gain.
- In ITR-2 / ITR-3, report equity LTCG under Schedule 112A, equity STCG under 111A, and debt-fund gains under "other than 111A/112A" as per slab.
- Cross-check with the AIS on incometax.gov.in, which now carries your mutual-fund transaction data.
- To carry forward any capital loss, you must file the ITR by the due date.
More tax-efficient when
- You hold equity funds over 12 months for 12.5% LTCG
- You book up to Rs1.25 lakh of gain each year
- You pick growth over IDCW in a high slab
Watch out when
- You redeem equity within 12 months (20% STCG)
- You expect indexation on debt funds (gone)
- You hold new debt funds in the 30% slab
Redeemed mutual funds or SIPs this year? Get your capital gains computed and filed correctly.
File ITR with a CA →Frequently Asked Questions
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