Mutual Fund Taxation in India: STCG, LTCG Explained

When you redeem mutual fund units at a profit, the government takes a share of that profit as tax. This is called capital gains tax, and the amount you pay depends on two things: which type of mutual fund you hold and how long you stayed invested before selling.

The rules changed significantly from July 23, 2024. Equity fund tax rates went up, indexation on debt funds was removed, and the long-term exemption limit was raised. Both Budget 2025 and Budget 2026 confirmed no changes to these mutual fund capital gains rates. This guide explains every rule in effect for FY 2026-27, with plain-language explanations, worked examples, and a master rate table, so you can plan your redemptions without any guesswork.

How Are Mutual Funds Taxed in India? 

When you sell mutual fund units at a profit, that profit is called a capital gain. Capital gains from mutual funds are taxed under the Income Tax Act, and two factors determine your tax: the type of fund you are in and how long you held it.

Fund type determines your tax bracket. SEBI classifies mutual funds into equity-oriented, debt-oriented, and hybrid, and the Income Tax Act uses this exact classification. An equity fund with 65% or more in Indian stocks gets a separate, more favourable tax treatment than a debt fund that holds mostly bonds.

Holding period determines whether the gain is short-term or long-term. Sell before the minimum period, and the profit is a Short-Term Capital Gain (STCG). Hold beyond it, and the profit becomes a Long-Term Capital Gain (LTCG). LTCG is taxed at a lower rate, which is the government's way of encouraging you to stay invested for longer.

July 23, 2024 is a key date. The Finance (No. 2) Act, 2024, passed after Union Budget 2024, changed STCG rates, LTCG rates, and indexation rules from this specific date. Any mutual fund redemption made on or after July 23, 2024 falls under the new rules. Sales made before that date in the same financial year followed the old rules.

Here is how mutual funds are broadly classified for tax purposes:

One important point: resident Indian investors do not face TDS (tax deducted at source) when they redeem equity mutual fund units. You calculate the capital gains yourself and pay the tax when filing your Income Tax Return. TDS applies only on dividend income (IDCW) from mutual funds, and for NRI investors.

What is Short-Term Capital Gain (STCG)?

A short-term capital gain is the profit you earn when you sell mutual fund units before the minimum holding period required for long-term treatment.

Example: You invest ₹1,00,000 in a large-cap fund in April 2025. In September 2025, just five months later, the fund has grown and you redeem your units for ₹1,20,000. Your ₹20,000 profit is a Short-Term Capital Gain because you held for less than 12 months.

On equity-oriented funds, STCG is taxed at a flat 20% (raised from 15% effective July 23, 2024). On ₹20,000 gain, you owe ₹4,000 in tax plus a 4% Health and Education Cess, totalling ₹4,160.

For debt mutual funds bought on or after April 1, 2023, the rules are stricter as every gain, regardless of how many years you hold, is treated as short-term and taxed at your income tax slab rate. There is no escape from the short-term classification for these funds through time alone.

The holding periods that put your gains in the short-term bucket differ by fund type:

What is Long-Term Capital Gain (LTCG)?

A long-term capital gain is the profit you earn after holding your mutual fund units beyond the minimum holding period. Long-term gains are taxed at a lower rate than short-term gains, making patience one of the most effective tax strategies available to you.

Example: You invest ₹2,00,000 in an equity fund in March 2024. In May 2025, over 12 months later, you redeem for ₹2,60,000. Your ₹60,000 gain is LTCG on an equity fund. The first ₹1,25,000 of equity LTCG per financial year is completely exempt from tax. Since your ₹60,000 gain is well under that limit, you pay zero tax.

If your LTCG were ₹1,50,000 instead, only ₹25,000 (₹1,50,000 minus the ₹1,25,000 exemption) would attract tax at 12.5%, giving a tax bill of ₹3,125 before cess.

One thing to note: the ₹1.25 lakh annual LTCG exemption applies only to equity-oriented funds (Section 112A). It does not apply to LTCG on gold funds, debt funds, or international funds.

Equity Mutual Fund Taxation (Latest Rates)

A mutual fund qualifies as equity-oriented when it invests at least 65% of its total assets in equity shares of Indian companies. This definition covers large-cap funds, mid-cap funds, small-cap funds, flexi-cap funds, focused equity funds, multi-cap funds, aggressive hybrid funds (which maintain 65-80% in equity), ELSS funds, and equity savings funds.

Short-term capital gains (held 12 months or less) are taxed at 20% under Section 111A. There is no indexation benefit, no exemption, and no slab-rate variation; it is a flat 20% for everyone. Add 4% cess to arrive at the effective rate of 20.8%.

Long-term capital gains (held more than 12 months) are taxed at 12.5% under Section 112A, but only on gains exceeding ₹1.25 lakh per financial year. The first ₹1.25 lakh of eligible equity LTCG you earn in a year is fully tax-free. This exemption is per investor, per year, and covers gains across all your equity funds and equity shares combined, not per fund.

Here is how the numbers look:

SIP investors need to know this: In a SIP, every monthly instalment is treated as a separate purchase with its own acquisition date. When you redeem, the holding period is calculated individually for each instalment. If you started a monthly SIP in January 2024 and redeem all units together in February 2025, only the January 2024 instalment qualifies as LTCG. Every installment from February 2024 onwards is held for less than 12 months and attracts STCG at 20%.

Debt Mutual Fund Taxation (Post-April 2023 Rules)

Debt mutual fund taxation is the most layered part of this subject, and the rules depend entirely on when you bought the units.

For units purchased on or after April 1, 2023:

The Finance Act 2023 introduced Section 50AA, which fundamentally changed how these funds are taxed. Under this rule, all capital gains from debt mutual funds (funds where domestic equity exposure is 35% or less) bought after April 1, 2023 are treated as Short-Term Capital Gains, regardless of how many years you hold them. There is no LTCG classification. There is no indexation benefit. It does not matter whether you hold for one year or ten years; the gain is added to your total income and taxed at your income tax slab rate.

For someone in the 30% bracket investing in a liquid fund or corporate bond fund after April 2023, the tax treatment is functionally similar to a bank fixed deposit. Both are taxed at slab rate, regardless of tenure.

For units purchased before April 1, 2023:

These investments get a more favourable treatment, but Budget 2024 did change the rules here too. Previously, these old units qualified for LTCG at 20% with indexation if held for more than 36 months. From July 23, 2024, the threshold for long-term status was shortened to 24 months, and the rate changed to a flat 12.5% without indexation.

So for pre-April 2023 purchases sold on or after July 23, 2024:

• Held for more than 24 months → LTCG at 12.5% (no indexation)
• Held for 24 months or less → STCG at your income tax slab rate

Switching between debt funds also triggers tax. When you switch from one debt fund to another, the switch is treated as a redemption of the original fund on the switch date. Capital gains tax applies that day, just as it would for a sale. Your new fund then starts with the switch date as the fresh purchase date.

Hybrid Mutual Fund Taxation: Which Rule Applies?

Hybrid funds blend equity and debt in different proportions, and your tax treatment is determined by how much of the fund is in equity.

If the fund holds 65% or more in equity: equity rules apply.

These funds, typically aggressive hybrid funds, equity savings funds, and balanced advantage funds that maintain above-65% equity, are taxed exactly like pure equity funds. STCG at 20% for holdings under 12 months, and LTCG at 12.5% (above the ₹1.25 lakh exemption) for holdings above 12 months.

If the fund holds between 35% and 65% in equity: non-equity rules apply.

These are funds like balanced hybrid funds, dynamic asset allocation funds, and multi-asset allocation funds that do not consistently cross the 65% equity threshold. They do not qualify for equity tax rates. For unlisted mutual fund units (the regular plan route), long-term status requires more than 24 months. LTCG is at 12.5% without indexation; STCG is at your slab rate.

If the fund holds 35% or less in equity: debt rules apply.

Conservative hybrid funds, which typically hold only 10-25% in equity, fall here. For units purchased after April 1, 2023, Section 50AA applies: all gains are treated as STCG and taxed at your slab rate, regardless of holding period.

To find out which bracket your hybrid fund falls into, check the monthly factsheet from the fund house. It discloses the current portfolio allocation. Some dynamic funds can shift between equity and debt categories over time, so the factsheet gives you the actual current position.

Special Cases: ELSS, International & Gold Fund Taxation

ELSS Mutual Fund Taxation

Equity Linked Savings Schemes (ELSS) are equity mutual funds with a mandatory 3-year lock-in. You cannot redeem or transfer ELSS units before completing 3 years from the date of each investment. In return, ELSS is the only mutual fund category that offers a tax deduction at the time of investing.

• At the time of investment: Under the Old Tax Regime, you can claim a deduction of up to ₹1.5 lakh per year under Section 80C for ELSS investments. If you are in the 30% bracket, this deduction alone saves you ₹46,800 per year. Note that this deduction is not available under the New Tax Regime.
• At the time of redemption: Since the minimum holding is 3 years and equity LTCG requires only 12 months, every ELSS redemption automatically qualifies as LTCG. You will never pay STCG on ELSS because early redemption is not permitted.

LTCG on ELSS is taxed the same way as any other equity fund: 12.5% on gains above the ₹1.25 lakh annual exemption.

Example: Ravi invests ₹1,50,000 in ELSS in March 2023, saving ₹46,800 in tax that year (30% bracket, old regime). He redeems in April 2026 (after the 3-year lock-in). The fund has grown to ₹2,40,000. His gain of ₹90,000 is LTCG, which falls within the ₹1,25,000 annual exemption, so he pays zero tax on exit. In this scenario, ELSS gave him a ₹46,800 upfront tax saving and a tax-free exit.

ELSS is the only instrument in the 80C basket that offers both an entry deduction and equity-like growth potential.

International Mutual Fund Taxation

International mutual funds invest in foreign stocks like US equities, global technology companies, Asian markets, and similar. Since their underlying investments are not in Indian equities, they do not qualify as equity-oriented funds under Indian tax law.

FY 2025-26 rules (currently applicable): From FY 2025-26, the Finance (No. 2) Act, 2024 narrowed the scope of Section 50AA so that it covers only debt-oriented funds. International funds moved out of the Section 50AA bracket.

For international ETFs listed on Indian exchanges: gains are long-term if held more than 12 months, taxed at 12.5% without indexation; gains are short-term (slab rate) for 12 months or less.

For international Fund of Funds (FoFs) that are unlisted: gains are long-term if held more than 24 months, taxed at 12.5%; short-term (slab rate) for 24 months or less.

FY 2024-25 note: International funds bought after April 1, 2023 were still under Section 50AA in FY 2024-25, meaning all gains were treated as short-term and taxed at slab rate. This changed from FY 2025-26 onwards.

Gold Mutual Fund / Gold ETF Taxation

Gold investments through mutual funds come in two structures, and the tax treatment differs between them.

Gold ETF (listed on a stock exchange): Being listed, it follows the listed securities holding period. Short-term if held for 12 months or less and taxed at slab rate. Long-term if held for more than 12 months and taxed at 12.5% without indexation.

Gold Mutual Fund / Gold FoF (not listed on exchange): Being unlisted, the longer 24-month threshold applies. Short-term if held for 24 months or less and taxed at slab rate. Long-term if held for more than 24 months and taxed at 12.5% without indexation.

Gold ETFs have a tax advantage over Gold FoFs as you reach long-term status in 12 months rather than 24 months, which means less time waiting to qualify for the lower 12.5% rate.

Important: The ₹1.25 lakh annual LTCG exemption under Section 112A does not apply to gold funds or gold ETFs. That exemption is reserved exclusively for equity-oriented funds.

Mutual Fund Tax Rate Table: Quick Reference

Use this master table before any redemption to check your likely tax liability.

All rates above are before the 4% Health and Education Cess. Surcharge applies for taxpayers with income above ₹50 lakh.

Budget 2024 Update: What Changed for Mutual Fund Investors?

Union Budget 2024, presented on July 23, 2024, introduced the most significant changes to mutual fund taxation since the LTCG tax was first levied on equity in 2018. Most changes apply to transactions made on or after July 23, 2024, which means for FY 2024-25, two different tax regimes applied within the same financial year depending on when you redeemed.

1. Equity STCG rate raised from 15% to 20%: If you sold equity fund units within 12 months of buying them, the tax on your profit went up by 5 percentage points. On a short-term gain of ₹1 lakh, your tax bill rose from ₹15,000 to ₹20,000.

2. Equity LTCG rate raised from 10% to 12.5%: The rate on long-term equity gains also increased. On ₹1 lakh of taxable LTCG (after the exemption), the tax went from ₹10,000 to ₹12,500.

3. Annual LTCG exemption raised from ₹1 lakh to ₹1.25 lakh: To soften the rate increase, the government raised the tax-free threshold by ₹25,000. If your entire LTCG for the year is ₹1.25 lakh or less, you pay nothing.

4. Indexation removed for older debt fund units: Debt funds bought before April 1, 2023 previously enjoyed a benefit called indexation, which adjusted your purchase cost for inflation and significantly reduced taxable gains. Budget 2024 removed this benefit for all debt fund sales made on or after July 23, 2024. In its place, the LTCG rate dropped from 20% to 12.5%, and the qualifying holding period shortened from 36 months to 24 months. Whether this trade-off benefits or hurts a specific investor depends on their individual purchase cost and how long they held.

5. No relief from the Section 50AA slab-rate rule: The 2023 change that made all gains from new debt fund purchases taxable at slab rate, regardless of holding period, remained untouched. Budget 2024 did not modify or reverse this.

6. Holding periods simplified for non-equity funds: The long-term holding threshold for most non-equity mutual funds was uniformly set at 24 months, down from 36 months. This is an improvement, as investors now reach long-term status faster.

7. Budget 2025 and Budget 2026 made no changes to capital gains rates: The February 2025 Budget kept all the July 2024 changes intact. Budget 2026 (Union Budget 2026-27, presented February 1, 2026) also confirmed no changes to mutual fund STCG or LTCG rates. The only Budget 2026 change relevant to equity investors was a revision to buyback taxation, which does not affect mutual fund capital gains. All rates applicable for FY 2025-26 carry over unchanged into FY 2026-27.

How to Calculate Capital Gains Tax on Mutual Funds 

Example 1: Equity fund LTCG with exemption

Ananya invests ₹3,00,000 in a mid-cap fund in June 2024 and redeems in August 2025 for ₹4,00,000.

• Gain: ₹1,00,000
• Holding: approx. 14 months → LTCG
• Taxable LTCG: ₹1,00,000 − ₹1,25,000 exemption = Negative; fully exempt
• Tax payable: ₹0

Example 2: Equity fund STCG

Ananya instead redeems after 8 months for ₹3,60,000.

• Gain: ₹60,000
• Holding: 8 months → STCG
• Tax: 20% of ₹60,000 = ₹12,000
• Cess: 4% of ₹12,000 = ₹480
• Total tax: ₹12,480

Waiting those extra 4 months to cross 12 months would have saved her the entire ₹12,480.

Example 3: Debt fund purchased after April 2023

Suresh invested ₹5,00,000 in a corporate bond fund in September 2023. He redeems in September 2026 for ₹6,20,000.

• Gain: ₹1,20,000
• Holding: 3 years, but Section 50AA applies (purchased after April 1, 2023)
• Tax: slab rate; at 30% bracket: 30% × ₹1,20,000 = ₹36,000 + cess
• Effective tax: ~₹37,440 (including 4% cess)

If Suresh had been in the 5% bracket, his tax would be only ₹6,240. Slab rate means different investors pay very different amounts on the same gain.

Example 4: SIP with mixed STCG and LTCG

Meera runs a ₹10,000 monthly SIP in a large-cap fund starting January 2024. She redeems all units together in February 2025.

The January 2024 SIP instalment was purchased more than 12 months ago → LTCG. Every installment from February 2024 onwards was held for less than 12 months → STCG at 20%.

This is why SIP redemptions require careful tracking. 

How Are Dividends (IDCW) Taxed in Mutual Funds?

When a mutual fund pays out income to its investors, it is called IDCW: Income Distribution cum Capital Withdrawal. SEBI renamed dividends to IDCW in April 2021 to clarify that part of each payout comes from your own invested principal, not just from profits.

IDCW is always taxed at your income tax slab rate. There is no flat rate, no exemption, and no lower rate for long-term holdings. Whether you hold the fund for 2 months or 20 years, every rupee of IDCW is added to your total income for that year and taxed at your applicable slab.

TDS is deducted by the AMC when your annual IDCW from them exceeds ₹10,000. Under Section 194K, the fund house deducts TDS at 10% on dividends crossing this threshold per financial year per AMC. This threshold was ₹5,000 up to FY 2024-25 and was raised to ₹10,000 from April 1, 2025. If you have not linked your PAN with the fund, TDS is deducted at a higher rate of 20%.

The TDS deducted is not a final tax. When you file your ITR, you report the full gross IDCW as income under "Income from Other Sources," apply your slab tax, and claim the TDS already deducted as a credit.

Growth option vs IDCW option: In the Growth option, no periodic payout is made. Profits stay inside the fund, compounding your NAV. Tax arises only when you redeem and only as capital gains, which at equity LTCG rates (12.5%) can be lower than slab rates for many investors. The IDCW option is more useful for investors who need regular income from their investments; the Growth option is generally more tax-efficient for wealth accumulation.

STT (Securities Transaction Tax) on Mutual Funds

Securities Transaction Tax is a small levy collected at the time of sale of equity-oriented mutual fund units. It was introduced in India in 2004 and is collected directly through the stock exchange or the AMC, you never need to calculate it separately.

STT applies only to equity-oriented fund redemptions. When you sell or redeem units of an equity-oriented mutual fund (a fund with 65% or more in Indian equity), STT is levied at 0.001% of the transaction value. On a redemption of ₹1,00,000, the STT works out to ₹1. It is deducted automatically and does not require any action from you.

STT does not apply to debt funds, gold funds, international funds, or any non-equity fund. It also does not apply to the purchase side of mutual funds; only on the sell/redemption side.

STT is more than a token charge, it qualifies you for the concessional tax rate. The 20% STCG rate under Section 111A and the 12.5% LTCG rate under Section 112A are available only when STT was paid on the transaction. If, for any unusual reason, STT was not paid, you could lose the right to these lower rates. In practice, for normal mutual fund redemptions through standard platforms, STT is always deducted automatically, so this condition is met without any effort on your part.

How to Save Tax on Mutual Fund Returns

There are several straightforward, legal strategies that can meaningfully reduce your mutual fund tax bill. None of them require complicated financial manoeuvring.

1. Hold beyond the long-term threshold. This is the single most effective move. Crossing 12 months on an equity fund shifts your gain from 20% STCG to 12.5% LTCG. On a ₹1 lakh gain, that gap is ₹7,500. On ₹5 lakh gain, it is ₹37,500. Simply waiting a few more days or weeks around the 12-month mark can make a real difference.

2. Use the ₹1.25 lakh annual equity LTCG exemption every year. Every financial year, the first ₹1.25 lakh of long-term equity capital gains you realise is completely tax-free. Many investors let this exemption go unused. If you have accumulated unrealised LTCG in your equity funds, you can redeem and immediately reinvest that amount each April to use the exemption systematically. This is called tax harvesting.

Here is how it works: You have invested ₹3 lakh in an equity fund two years ago, and the fund has grown to ₹5.25 lakh (unrealised LTCG of ₹2.25 lakh). Instead of redeeming all at once and paying 12.5% on ₹1 lakh (₹2.25L minus ₹1.25L exemption), you redeem ₹1.25 lakh of gains this year, paying zero tax, and leave the rest. In the next financial year, a fresh ₹1.25 lakh exemption becomes available, letting you harvest another tranche tax-free.

3. Invest in ELSS for the Section 80C deduction (under Old Tax Regime). Every rupee you put into ELSS (up to ₹1.5 lakh per year) is deducted from your taxable income under Section 80C. At 30% bracket, that is a guaranteed ₹46,800 saving upfront. On exit after the 3-year lock-in, gains are taxed as equity LTCG, often zero, if they stay within the ₹1.25 lakh annual exemption.

4. Set off capital losses against gains. If you sold some mutual funds at a loss and others at a profit in the same financial year, the losses can be used to reduce the taxable gain.

• Short-term capital losses can be set off against both short-term and long-term capital gains.
• Long-term capital losses can only be set off against long-term capital gains, not against STCG.
• Any unused losses can be carried forward for up to 8 assessment years, as long as you file your ITR by the due date.

How to Show Mutual Fund Capital Gains in ITR

Mutual fund capital gains are taxed only when you redeem your units, not while you hold them. You must report them in your Income Tax Return for the financial year in which the redemption happened.

Which ITR form to use:

Any investor with capital gains must file ITR-2. The simpler ITR-1 form cannot accommodate capital gains reporting (with one exception: salaried individuals with equity LTCG up to ₹1.25 lakh can now use ITR-1 from AY 2025-26 onwards). If you also have business or professional income, use ITR-3 instead.

Getting your capital gain statement:

Before you open the ITR portal, download your Consolidated Account Statement from CAMS (www.camsonline.com) or KFintech (www.kfintech.com). These are the two registered transfer agents that handle the backend processing of most mutual fund transactions in India. The capital gain report from either platform will give you the exact date of each purchase, date of each redemption, purchase value, redemption value, and the calculated gain or loss; already split by holding period and fund type. Most modern tax filing platforms accept this statement and can auto-populate your Schedule CG.

Where to enter it in the ITR:

For equity LTCG (on equity-oriented funds and ELSS): Enter each transaction under Schedule 112A. This schedule requires transaction-level detail; the ISIN of the fund, number of units, purchase date, sale date, purchase value, and sale value.

For equity STCG (on equity funds where STT was paid): Enter under Schedule CG, under the Section 111A head.

For debt and non-equity gains: Enter under Schedule CG under the relevant short-term or long-term head, depending on holding period and fund category.

For IDCW income: Do not put this under Schedule CG. IDCW goes under Schedule OS (Other Sources) as dividend income.

The July 23, 2024 split rule (for AY 2025-26):

For AY 2025-26 returns (FY 2024-25 income), the Income Tax Department required capital gains to be reported separately depending on whether they arose before or after July 23, 2024. If you redeemed equity fund units in, say, April 2024 (pre-Budget, at the old 10% LTCG rate) and again in September 2024 (at the new 12.5% LTCG rate), these must be reported in separate rows within Schedule 112A. Your capital gain statement from CAMS or KFintech will typically have this breakup ready for you.

Documents to keep handy before filing:

• Capital gain statement from CAMS / KFintech
• Form 26AS and Annual Information Statement (AIS) from the IT portal
• IDCW credit statements from your AMC (if applicable)
• Transaction confirmation statements for any mutual fund switches done during the year