Long term capital gain tax on mutual funds
What the fund holds decides the rate: equity, debt or something in between.
Long-term capital gain on a mutual fund depends on what the scheme holds. Units of an equity-oriented fund held for more than 12 months are taxed at 12.5% on gains above ₹1.25 lakh a year. Units of a debt-heavy 'specified mutual fund' bought on or after 1 April 2023 never produce long-term gains at all: every gain is taxed at your slab rate.
These rules now sit in the Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026. The rates did not change with the new Act; the section numbers did. Old numbers are shown in brackets because the V-A workbook and most articles still use them.
Mutual fund capital gains tax for tax year 2026-27
Rates before surcharge and cess. 'Slab' means the gain is added to your income and taxed at your normal rate.
Equity-oriented (at least 65% in listed Indian equity)
Long-term if held
More than 12 months
Short-term gain
20% (s.196, old s.111A)
Long-term gain
12.5% above ₹1.25 lakh a year (s.198, old s.112A)
Specified mutual fund, units bought on or after 1 April 2023 (more than 65% in debt and money market)
Long-term if held
Never: always short-term
Short-term gain
Slab (s.76, old s.50AA)
Long-term gain
Not applicable
Debt fund units bought before 1 April 2023
Long-term if held
More than 24 months
Short-term gain
Slab
Long-term gain
12.5%, no indexation (s.197, old s.112)
Other unlisted units (for example hybrid funds with 35-65% equity, most gold and international FoFs)
Long-term if held
More than 24 months
Short-term gain
Slab
Long-term gain
12.5%, no indexation (s.197)
Other listed units (for example gold ETFs)
Long-term if held
More than 12 months
Short-term gain
Slab
Long-term gain
12.5% (s.197)
| Type of fund | Long-term if held | Short-term gain | Long-term gain |
|---|---|---|---|
| Equity-oriented (at least 65% in listed Indian equity) | More than 12 months | 20% (s.196, old s.111A) | 12.5% above ₹1.25 lakh a year (s.198, old s.112A) |
| Specified mutual fund, units bought on or after 1 April 2023 (more than 65% in debt and money market) | Never: always short-term | Slab (s.76, old s.50AA) | Not applicable |
| Debt fund units bought before 1 April 2023 | More than 24 months | Slab | 12.5%, no indexation (s.197, old s.112) |
| Other unlisted units (for example hybrid funds with 35-65% equity, most gold and international FoFs) | More than 24 months | Slab | 12.5%, no indexation (s.197) |
| Other listed units (for example gold ETFs) | More than 12 months | Slab | 12.5% (s.197) |
Worked examples
Illustrative numbers only, for a resident individual in tax year 2026-27, ignoring surcharge and cess.
- 1
Equity fund, held 22 months
Bought for ₹5,00,000 in January 2025, redeemed for ₹7,00,000 in November 2026. Long-term gain ₹2,00,000. The first ₹1,25,000 is exempt, so tax is 12.5% of ₹75,000 = ₹9,375. The ₹1.25 lakh is a yearly limit shared with all such gains on listed shares and equity-oriented units.
- 2
Debt fund, bought in June 2023
Bought for ₹3,00,000, redeemed for ₹3,60,000 in October 2026. The ₹60,000 gain is short-term under section 76 despite a holding of over three years, and is taxed at the slab rate. At a 20% slab that is ₹12,000.
- 3
Debt fund, bought in January 2022
Bought for ₹3,00,000, redeemed for ₹3,90,000 in October 2026. Held over 24 months, so the ₹90,000 gain is long-term and taxed at 12.5% without indexation: ₹11,250.
Terms the rules depend on
- Equity-oriented fund
- A mutual fund scheme with at least 65% of its proceeds in equity shares of listed Indian companies, measured on the annual average of monthly opening and closing figures. A fund of funds qualifies only if 90% is in a listed fund that itself has 90% in such shares.
- Specified mutual fund
- A fund with more than 65% in debt and money market instruments, or one with 65% or more in units of such a fund, measured on the annual average of daily closing figures.
- STT condition
- The equity rates apply to equity-oriented fund units only if securities transaction tax is paid on the transfer.
- Grandfathering
- For equity-oriented units bought before 1 February 2018, the cost is the higher of the actual cost and the lower of (a) the value on 31 January 2018 (the NAV for unlisted units) and (b) the sale price. Gains up to that date stay untaxed.
Free account, this exam preselected.
Rules people miss
- check_circleNo indexation on mutual fund units any more. Section 197 keeps an indexation-based comparison only for land or buildings bought before 23 July 2024 by resident individuals and HUFs.
- check_circleChapter VIII deductions (such as those for insurance premium or provident fund) cannot be set against equity gains taxed under sections 196 and 198, and the rebate under section 156 does not reduce the tax on section 198 gains.
- check_circleA resident individual whose other income is below the basic exemption limit can use the unused limit against these gains first.
- check_circleIDCW is not a capital gain. It is taxed at slab rate as income from other sources, with TDS at 10% once income from units crosses ₹10,000, and no deduction for interest paid to earn it.
- check_circleEach SWP payment, STP instalment or switch between schemes is a redemption and can create a gain.
How V-A tests taxation
Expect classification questions: a scheme with a stated equity share, a holding period, and four rate options. Decide the fund type first, then the holding period, then the rate. The commonest trap is applying the 24-month rule to a debt fund bought after 1 April 2023; for those units holding period does not matter.
Workbooks written before 2024 show older rates (10% long-term on equity above ₹1 lakh, 15% short-term, indexation on debt). If an option uses those numbers, it is describing the old law.
FAQs
What is the long term capital gain tax on mutual funds?expand_more
For equity-oriented funds held over 12 months, 12.5% on gains above ₹1.25 lakh a year. For debt funds bought before 1 April 2023 and held over 24 months, 12.5% without indexation. Debt funds bought on or after 1 April 2023 have no long-term category; gains are taxed at slab.
How is a debt mutual fund taxed now?expand_more
Units of a specified mutual fund bought on or after 1 April 2023 are taxed at your slab rate however long you hold them. Older units held over 24 months are taxed at 12.5% without indexation.
Is the ₹1.25 lakh exemption per fund?expand_more
No. It is one yearly limit for all long-term gains on listed equity shares, equity-oriented fund units and business trust units together.
Is there tax if I switch from one fund to another?expand_more
Yes. A switch is a redemption from one scheme and a purchase in another, so any gain on the redeemed units is taxable.
Which law applies to mutual fund tax from April 2026?expand_more
The Income-tax Act, 2025. Section 198 replaces section 112A, section 196 replaces 111A and section 76 replaces 50AA, with the same rates.
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