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Guide · Capital Gains

Tax on Mutual Funds in India Equity 12.5% · Debt at Slab

How equity, debt and hybrid mutual funds are taxed after Budget 2024 — the 12.5% equity LTCG rate, the Rs1.25 lakh exemption, 20% STCG, the debt-fund slab-rate change and how SIPs and dividends are treated.

Written by
TaxClue Editorial Desk
Updated
18 August 2026
Reading time
6 min
Questions
15 answered
  • Updated for AY 2026-27
  • CA reviewed
  • Post Budget 2024 rates
Quick Answer

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.

At a glance

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 typeHoldingClassificationTax rate
Equity MF / ETF (65%+ equity)> 12 monthsLTCG u/s 112A12.5% above Rs1.25 L/yr
Equity MF / ETF (65%+ equity)≤ 12 monthsSTCG u/s 111A20%
ELSS (tax-saver, 3-yr lock)> 12 monthsLTCG u/s 112A12.5% above Rs1.25 L
Debt MF (bought on/after 1 Apr 2023)Any periodSlab (specified fund)Slab rate
Debt MF (bought before 1 Apr 2023)> 24 monthsLTCG, no indexation12.5%
Hybrid 35–65% equity> 24 monthsLTCG, no exemption12.5%
International / gold FoF (debt treated)Any periodSlabSlab rate
Dividend / IDCW (any fund)—Income from other sourcesSlab · 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.

What changed on 23 July 2024

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.

Short vs long term

Equity: STCG (20%) vs LTCG (12.5%)

20%

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
12.5%

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)

Total LTCGRs3,25,000
Less: yearly exemptionRs1,25,000
Taxable LTCGRs2,00,000
Tax @ 12.5%Rs25,000
Tax payable (+cess)≈ Rs26,000

STCG on the same gain (≤ 12 months)

Total STCGRs3,25,000
ExemptionNil
Taxable STCGRs3,25,000
Tax @ 20%Rs65,000
Tax payable (+cess)≈ Rs67,600

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 exemption is per year, not per fund

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.

The April 2023 change

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 dateHoldingTax treatment
On/after 1 Apr 2023Any periodSlab rate (no LTCG, no indexation)
Before 1 Apr 2023≤ 24 monthsSlab rate (STCG)
Before 1 Apr 2023> 24 months12.5% (LTCG, no indexation)

"Specified mutual fund" was redefined from 1 Apr 2025 as a fund investing more than 65% in debt / money-market instruments.

Debt funds lost their edge over FDs

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.

Installment by installment

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.

  1. 1Each SIP = a lotOwn date & cost per installment
  2. 2FIFO on exitOldest units redeemed first
  3. 3Age each lot>12m = LTCG, ≤12m = STCG
  4. 4Tax each part12.5% or 20% accordingly

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.

Reporting & dividends

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 →
Sources
  1. Sections 111A, 112A & capital-gains rules, Income-tax Act: incometax.gov.in
  2. Equity rates 20% / 12.5% & Rs1.25 lakh exemption (Budget 2024, eff. 23 Jul 2024)
  3. Debt "specified mutual fund" slab-rate rule: Finance Act 2023 & redefinition from 1 Apr 2025
  4. AMFI Tax Regime for Mutual Funds & FY 2025-26 tax reckoner

Disclaimer: This guide is general information based on the law and notifications in force when it was last updated. It is not professional advice for your case — rates, thresholds and due dates change, so check the current position with the official source before you act on it.

People also ask

Questions, answered

Short, direct answers to the 15 questions readers ask most on this topic.

Equity mutual funds (65% or more in equity) are taxed under capital gains. Long-term gains (held over 12 months) are taxed at 12.5% on the amount above a Rs1.25 lakh yearly exemption, with no indexation. Short-term gains (held 12 months or less) are taxed at 20%. These rates apply to redemptions on or after 23 July 2024 and continue for FY 2025-26. Add 4% cess on the tax. Earlier the rates were 10% LTCG and 15% STCG.

For equity-oriented mutual funds held over 12 months, LTCG is taxed at 12.5% on gains above Rs1.25 lakh in the financial year, without indexation, under Section 112A. For debt funds bought before 1 April 2023 and held over 24 months, LTCG is 12.5% without indexation. Debt funds bought on or after 1 April 2023 have no LTCG rate at all — gains are taxed at your slab.

The first Rs1.25 lakh of long-term capital gains from equity mutual funds and listed equity shares combined is exempt every financial year. Only the gain above Rs1.25 lakh is taxed at 12.5%. It is a single combined threshold, not per scheme or per redemption, and it does not carry forward if unused. Booking gains up to this limit each year is a common tax-saving move.

Short-term capital gains on equity mutual funds held for 12 months or less are taxed at a flat 20% under Section 111A (plus 4% cess), for redemptions on or after 23 July 2024. There is no Rs1.25 lakh exemption for STCG — the whole gain is taxed. Before 23 July 2024 the STCG rate was 15%.

ELSS (Equity Linked Savings Scheme) is an equity mutual fund with a 3-year lock-in. Your investment qualifies for the Section 80C deduction up to Rs1.5 lakh (old regime only). Because the lock-in is 3 years, every redemption is long-term and taxed at 12.5% on gains above the Rs1.25 lakh yearly exemption, with no indexation.

For debt fund units bought on or after 1 April 2023, all gains are added to your income and taxed at your slab rate, regardless of holding period — there is no long-term category and no indexation. So a 3-year debt-fund gain is taxed at 30% if you are in the 30% slab. Units bought before 1 April 2023 and held over 24 months still get 12.5% without indexation.

No. Indexation on debt funds was removed for units bought on or after 1 April 2023, and indexation was withdrawn more broadly from 23 July 2024. Only debt units bought before 1 April 2023 and held over 24 months get the 12.5% long-term rate, and even that is now without indexation.

Most international funds and gold funds-of-funds invest below 65% in Indian equity, so they are treated as non-equity (debt-treatment) funds. If bought on or after 1 April 2023, their gains are taxed at your slab rate irrespective of holding period. Some gold ETFs and newer gold structures may differ, so check the fund category before you redeem.

Each SIP installment is a separate investment with its own cost and its own 12-month holding clock, and units are redeemed FIFO (oldest first). When you redeem, installments older than 12 months give LTCG at 12.5% and those 12 months or younger give STCG at 20%. Redeeming the oldest, long-term installments first keeps more of the gain in the lower-taxed bucket.

Hybrid funds with 65% or more in equity are taxed exactly like equity funds — 20% STCG up to 12 months, 12.5% LTCG above Rs1.25 lakh beyond 12 months. Hybrid funds with equity between 35% and 65% are taxed at slab for holdings up to 24 months and at 12.5% (no exemption) beyond 24 months. Funds with under 35% equity get full debt treatment.

Yes. A switch (including switching from regular to direct plan, or between schemes of the same fund house) is treated as a redemption of the old units and a fresh purchase of the new ones. Capital gains tax applies on the redeemed units exactly as if you had sold them, and a new holding period starts for the new units.

Yes. Mutual fund dividends (now called IDCW — Income Distribution cum Capital Withdrawal) are added to your total income and taxed at your slab rate. The AMC deducts 10% TDS if your dividend from that fund house exceeds Rs5,000 in a year (20% for NRIs). For most investors in higher slabs, the growth option with LTCG at 12.5% is more tax-efficient than IDCW taxed at slab.

Download the capital-gains statement from CAMS or KFintech, then use ITR-2 or ITR-3. Report equity LTCG in Schedule 112A (scheme-wise with cost, sale value and dates), equity STCG under 111A, and debt-fund gains under "other than 111A/112A" as per slab. Cross-check the figures against your AIS on incometax.gov.in before filing, and offset any capital losses available.

For resident investors, no TDS is deducted on capital gains from redeeming mutual fund units — you pay the tax yourself as advance tax or at filing. TDS applies only to dividends (10% over Rs5,000). For NRIs, TDS is deducted on both capital gains and dividends under Sections 195/196A at the applicable rates.

Hold equity funds beyond 12 months for the 12.5% LTCG rate instead of 20% STCG; book gains up to the Rs1.25 lakh exemption each year (tax-loss harvesting); prefer growth over IDCW in a high slab; and set off any capital losses against gains. For debt exposure, remember new debt funds no longer beat FDs on tax, so choose based on returns and risk, not the old indexation advantage.