How Mutual Fund Returns Are Actually Taxed in India (LTCG, STCG, Debt Funds)

Short answer: Equity mutual funds pay 20% tax on gains if you sell within 12 months. After 12 months, you pay 12.5% on gains above ₹1.25 lakh a year. Debt funds bought after 1 April 2023 pay tax at your slab rate, the rate on your total income. Holding longer does not reduce it.

Key Facts

Equity funds (65% or more in Indian shares): units sold within 12 months face 20% tax on gains.
Equity funds: units sold after 12 months face 12.5% tax, only on gains above ₹1.25 lakh a year.
Debt funds (more than 65% in bonds) bought on or after 1 April 2023: gains always follow your slab rate.
Hybrid and gold funds that fall in the middle: gains turn long-term after 24 months and then face 12.5% tax.
These rules apply to FY 2026-27 (April 2026 to March 2027). Tax rules were last checked on 11 October 2026.

Many first-time investors check only the returns of a mutual fund. But tax decides how much of that return you keep. Two investors can earn the same return and still keep different amounts after tax.

The tax depends on two things. First, the type of fund. Second, how long you held it. This guide explains each rule in simple words, with rupee examples you can follow.

How are mutual fund returns taxed in India? A quick table

The tax rate depends on your fund type and your holding period. Your holding period is the time between buying and selling your units. The table shows the main rules for FY 2026-27.

Fund type	Held for	Gain is called	Tax rate
Equity fund (65% or more in Indian shares)	12 months or less	Short-term (STCG)	20%
Equity fund	More than 12 months	Long-term (LTCG)	12.5% on gains above ₹1.25 lakh a year
Debt fund (more than 65% in debt and money market), bought on or after 1 April 2023	Any period	Always short-term	Your slab rate
Debt fund bought before 1 April 2023	24 months or less	Short-term	Your slab rate
Debt fund bought before 1 April 2023	More than 24 months	Long-term	12.5%, no ₹1.25 lakh exemption
Hybrid, gold or international fund of funds (unlisted units)	24 months or less	Short-term	Your slab rate
Hybrid, gold or international fund of funds (unlisted units)	More than 24 months	Long-term	12.5%, no ₹1.25 lakh exemption

All rates add 4% cess, which is an extra charge on the tax. High earners may also pay a surcharge. Listed gold ETFs follow a 12-month holding period. Please verify the rule for your own fund.

Deepak Gokul holds the CWM® certification, is NISM-Series-XVII: Retirement Adviser Certified, and is an IRDAI Licensed Insurance Advisor. His firm, Deepak Wealth Framework Pvt Ltd, is AMFI Registered as a Mutual Fund Distributor. The team in Pallikaranai, Chennai, helps families across India understand tax before they invest or redeem.

What are STCG and LTCG?

A capital gain is the profit you make when you sell units for more than you paid. Short-term capital gain (STCG) means profit from units you held for a short time. Long-term capital gain (LTCG) means profit from units you held for longer.

The cut-off is 12 months for equity funds. It is 24 months for most other funds. A loss is not taxed. But you can use it to reduce your other gains.

How are equity mutual funds taxed?

An equity fund invests 65% or more of its money in shares of Indian companies. Large-cap, mid-cap, flexi-cap, index and ELSS funds usually fall here. Some hybrid funds also qualify if they hold 65% or more in Indian shares.

Short-term gains on equity funds

If you sell within 12 months, the gain is short-term. The tax rate is a flat 20%. Your income slab does not change this rate. Before 23 July 2024, the rate was 15%.

Long-term gains on equity funds

If you sell after 12 months, the gain is long-term. The first ₹1.25 lakh of long-term gains in a financial year is tax-free. You pay 12.5% only on the amount above that.

The limit covers all your equity funds and listed shares together. It does not apply to each fund separately. Before 23 July 2024, the rate was 10% and the limit was ₹1 lakh.

Equity funds do not get indexation. Indexation means raising your buying price to match inflation, so that your taxable gain becomes smaller.

How are debt mutual funds taxed?

A debt fund invests mostly in bonds and other lending products. Liquid, short-duration and gilt funds are common examples. The law calls it a "specified mutual fund" if it puts over 65% in debt and money market products. Money market products are very short-term lending instruments.

If you bought such units on or after 1 April 2023, the gain is always short-term. It does not matter if you hold them for 1 year or 10 years. You add the gain to your income. Then your slab rate applies. Slab rate means the tax rate for your income level. So a person in the 30% slab pays 30% on the gain.

Units bought before 1 April 2023 follow older rules. If you sell them after 24 months, the gain is long-term and the rate is 12.5% without indexation. If you sell earlier, your slab rate applies. Please check your purchase dates before you sell.

What about hybrid, gold and international funds?

Some funds do not fit the equity or debt group. Their equity share is below 65%, and their debt share is also below 65%. Examples include hybrid funds with 35% to 65% in equity, many gold funds and international funds.

For unlisted units, the holding period is 24 months. After 24 months, gains face 12.5% tax without indexation. Before that, your slab rate applies. A fund of funds invests in other mutual funds. If it invests mostly in debt funds, it can follow the debt fund rules. Check your scheme’s factsheet before you sell.

Worked example: how much tax will you pay?

Here are three simple cases. The names are only examples. Each person invests ₹4,00,000.

Meera, equity fund, sold after 2 years. Her units are worth ₹5,40,000, so her gain is ₹1,40,000. The first ₹1,25,000 is tax-free. She pays 12.5% on the other ₹15,000. That is ₹1,875. With 4% cess, her total tax is ₹1,950.

Arun, equity fund, sold after 8 months. His units are worth ₹4,40,000, so his gain is ₹40,000. This is short-term. He pays 20%, which is ₹8,000. With 4% cess, his total tax is ₹8,320.

Divya, debt fund bought in 2024, sold after 3 years. Her units are worth ₹4,80,000, so her gain is ₹80,000. The gain is short-term, whatever the holding time. She is in the 30% slab, so her tax is ₹24,000. With 4% cess, her total tax is ₹24,960.

Notice the difference. Meera earned the most, yet she paid the least tax. The fund type and the holding period made the difference.

How does tax work on SIP investments?

A Systematic Investment Plan (SIP) means you invest a fixed amount every month. Each monthly instalment is a separate purchase. So each one has its own holding period.

When you sell, the fund house uses the first-in, first-out rule. It treats your oldest units as sold first. For example, you invest ₹5,000 a month for 24 months and then sell everything. Roughly the first 12 instalments are long-term. The last 12 are short-term.

Do NRIs pay tax in a different way?

Yes. An NRI (Non-Resident Indian) faces tax deducted at source (TDS) when selling units. TDS means the fund house deducts the tax before it pays you. For equity funds, the TDS is 20% on short-term gains and 12.5% on long-term gains. For debt and hybrid funds, it is 30% on short-term gains and 12.5% on long-term gains. Surcharge and cess are extra.

Residents do not face TDS on capital gains when they sell. NRIs may also get relief under a tax treaty. Please verify your case with a tax professional. You can also read our NRI financial planning guide.

Did the new Income-tax Act change mutual fund tax?

The Income-tax Act, 2025 started on 1 April 2026. It replaced the 1961 Act. The section numbers changed. For example, the old Sections 111A and 112A now fall under Sections 196 to 198.

But the rates and holding periods in this guide stayed the same for FY 2026-27. Returns for FY 2025-26 still use the old section numbers. Please verify the latest rules on the Income Tax Department website.

What simple ideas can help you plan tax?

Check your holding period before you sell. A few days can change the rate from 20% to 12.5%.
Remember the ₹1.25 lakh limit. It resets every financial year.
Use losses wisely. A short-term loss can reduce short-term or long-term gains. A long-term loss can reduce only long-term gains.
Do not sell only to save tax. Your goal and your time frame come first.

Tax rules change often. Please verify this information from the latest official source before you redeem. You can also read the AMFI website for investor education.

Frequently asked questions

What is the tax on equity mutual funds in India in 2026?

If you sell within 12 months, short-term gains face 20% tax. After 12 months, long-term gains above ₹1.25 lakh in a financial year face 12.5% tax. The first ₹1.25 lakh is tax-free. A 4% cess applies on the tax. These rates apply to FY 2026-27 as per our latest check.

How are debt mutual funds taxed after April 2023?

If you bought units on or after 1 April 2023, the gain is always short-term. You add it to your income, and your slab rate applies. Holding the units longer does not reduce the tax. Units bought earlier follow older rules, where gains after 24 months face 12.5% tax.

Is there a tax-free limit on mutual fund gains?

Yes, but only for long-term gains on equity funds. The first ₹1.25 lakh of such gains in a financial year is tax-free. The limit covers all your equity funds and listed shares together. Debt funds and short-term gains do not get this limit.

Do I pay tax if I switch from one fund to another?

Yes. A switch counts as selling one fund and buying another. So the gain on the fund you leave faces tax under the same rules. The new fund starts a fresh holding period. Check the holding period of your units before you switch.

How is IDCW (dividend) from a mutual fund taxed?

IDCW stands for Income Distribution cum Capital Withdrawal. It is the new name for a mutual fund dividend. You add the IDCW to your income and pay tax at your slab rate. The fund house may also deduct tax at source (TDS) before it pays you.

Is the tax different for Regular Plans and Direct Plans?

No. The tax rules are the same for both. Tax depends on your fund type and holding period, not on the plan option. The plans differ in their expense ratio, which is the yearly fee a fund charges. Tax applies only to your gains.