tax on mutual funds is not a single number. it depends on the type of fund, how long it was held, and when it was bought.
the difference between a 9-month holding and an 18-month holding can be significant. the same profit gets taxed at different rates .
here is how the calculation works.
step 1. identify the fund type
tax rules start with the fund category .
equity-oriented funds. invest at least 65% in equity shares of domestic companies. large-cap, mid-cap, small-cap, elss, and aggressive hybrid funds fall here .
debt and non-equity funds. invest less than 65% in equity. pure debt funds, conservative hybrids, gold funds, and international funds fall here .
specified mutual funds. debt funds with more than 65% in debt and money market instruments, bought on or after april 1, 2023 .
step 2. determine the holding period.
the holding period decides whether gains are short-term or long-term .
equity-oriented funds. held for 12 months or less = short-term. held for more than 12 months = long-term .
debt and non-equity funds. held for 24 months or less = short-term. held for more than 24 months = long-term .
specified mutual funds (debt funds bought after april 1, 2023). all gains are short-term. holding period does not matter .
step 3. calculate the capital gain
the gain is the difference between the sale price and the purchase price .
equity-oriented funds. purchase price is the cost of acquisition. sale price is the redemption value. exit loads are deducted from the sale price .
debt funds (pre-april 2023). purchase price is the cost of acquisition. sale price is the redemption value. the calculation is the same .
specified mutual funds (post-april 2023). same calculation. gains are taxed at slab rate regardless of holding period.
step 4. apply the tax rate
equity-oriented funds.
| holding period | tax rate |
|---|---|
| 12 months or less (stcg) | 20% |
| more than 12 months (ltcg) | 12.5% on gains above ₹1.25 lakh |
the first ₹1.25 lakh of ltcg in a financial year is tax-free . this limit applies to all equity investments combined, not per fund .
debt and non-equity funds (bought before april 1, 2023).
| holding period | tax rate |
|---|---|
| 24 months or less (stcg) | slab rate |
| more than 24 months (ltcg) | 12.5% |
specified mutual funds (debt funds bought on or after april 1, 2023).
| holding period | tax rate |
|---|---|
| any period | slab rate |
no indexation. no special rate. no exemption limit .
step 5. add cess and surcharge
health and education cess of 4% applies on the tax amount. surcharge may apply if total income exceeds specified limits. the rates above are base rates. add cess on top to get the effective rate .
example. equity fund ltcg.
₹5,00,000 invested in an equity fund in 2022. redeemed for ₹7,50,000 in 2026. holding period is more than 12 months .
gain = ₹2,50,000.
exemption = ₹1,25,000.
taxable gain = ₹1,25,000.
tax = ₹1,25,000 × 12.5% = ₹15,625.
cess = ₹625.
total tax = ₹16,250 .
example. short-term equity gain
₹5,00,000 invested in an equity fund. redeemed for ₹6,20,000 after 9 months .
gain = ₹1,20,000.
holding period = less than 12 months.
tax at 20% = ₹24,000.
cess = ₹960.
total tax = ₹24,960 .
by waiting 9 more months, the same investor saved ₹21,710 in tax .
special rules
sip investments. each instalment has its own holding period. fifo method is used for redemptions. the earliest units are redeemed first .
dividends. dividends from mutual funds are added to income. taxed at slab rate. tds at 10% if dividend exceeds ₹10,000 from a single payer .
elss. three-year lock-in. all redemptions are ltcg. tax at 12.5% on gains above ₹1.25 lakh. section 80c deduction up to ₹1.5 lakh is available .
frequently asked questions.
1. what is the ltcg rate on equity mutual funds in 2026?
12.5% on gains above ₹1.25 lakh in a financial year. gains within the limit are tax-free .
2. are debt funds taxed at slab rate?
debt funds bought on or after april 1, 2023 are taxed at slab rate. pre-april 2023 funds get 12.5% ltcg if held over 24 months .
3. how are sips taxed?
each instalment has its own holding period. fifo method is used for redemptions .
4. what is the ₹1.25 lakh exemption limit?
it is the annual ltcg exemption for all equity investments combined. not per fund .
5. is indexation available for debt funds?
no. indexation is not available for any debt fund redemption on or after july 23, 2024 .
