debt mutual funds are not taxed the same way. the rate depends on when the units were bought. and when they were sold.
the rules changed in 2023. changed again in 2024. budget 2026 brought no new changes.
here is how it works now.
the big split. before and after april 1, 2023.
the cutoff date is april 1, 2023.
for units bought on or after that date, section 50aa applies. gains are always short-term. regardless of holding period. no indexation. no special rate.
for units bought before that date, older rules apply. long-term treatment is still possible. but indexation is gone for redemptions after july 23, 2024.
for units bought before april 1, 2023
these units still follow the older structure.
held for 24 months or less. short-term capital gains. taxed at slab rate.
held for more than 24 months. long-term capital gains. taxed at 12.5%. no indexation.
for redemptions before july 23, 2024. the old 36-month rule applied. 20% with indexation. that no longer applies to current redemptions.
for units bought on or after april 1, 2023
section 50aa applies. all gains are short-term. does not matter how long the units are held.
the gain is added to total income. taxed at slab rate. no indexation. no special ltcg rate.
this applies to any fund with more than 65% in debt and money-market instruments. conservative hybrid funds. debt-oriented funds of funds.
what changed in 2024.
finance act 2024 made two changes.
holding period for ltcg on debt funds reduced from 36 to 24 months. only for units bought before april 1, 2023.
indexation removed for all long-term gains. debt funds. property. gold. the 20% rate with indexation is gone.
tax on debt funds (fy 2026-27).
| purchase date | holding period | tax rate | indexation |
|---|---|---|---|
| before april 1, 2023 | 24 months or less | slab rate | no |
| before april 1, 2023 | more than 24 months | 12.5% | no |
| on or after april 1, 2023 | any period | slab rate | no |
what indexation did. and why it mattered.
indexation adjusted the purchase price for inflation. the cost inflation index (cii) was used. the formula was simple. original cost × (cii of sale year ÷ cii of purchase year).
example. ₹1,00,000 invested in fy 2016-17. cii of 264. sold in fy 2021-22. cii of 317. indexed cost = ₹1,00,000 × (317 ÷ 264) = ₹1,20,076.
without indexation, gain on ₹1,50,000 sale is ₹50,000. with indexation, gain is ₹29,924. taxable gain reduced. tax reduced.
indexation is no longer available for any debt fund redemption on or after july 23, 2024.
what this means for investors.
for new investments after april 1, 2023, debt funds are less tax-efficient. the advantage over fixed deposits has narrowed. both are taxed at slab rate.
for pre-april 2023 investments, the 12.5% ltcg rate is still available. only if held for more than 24 months. consider holding periods before redemption.
the industry has requested indexation restoration. amfi has asked for it in budget 2026. no changes have been announced yet.
FAQs
1. are debt funds taxed at slab rate in 2026
yes. for units bought on or after april 1, 2023. all gains are short-term. taxed at slab rate.
2. do debt funds have indexation benefit in 2026
no. indexation is not available for any debt fund redemption on or after july 23, 2024. pre-april 2023 funds get 12.5% ltcg. no indexation.
3. what is the ltcg rate on debt funds for 2026
for pre-april 2023 funds held over 24 months. 12.5% flat rate. no indexation.
4. why was indexation removed for debt funds
finance act 2023 removed it to align debt funds with fixed deposits. both now taxed at slab rate. the industry has requested restoration in budget 2026.
5. what happens if a debt fund is held for 10 years after april 2023
same as holding it for 10 months. all gains are short-term. taxed at slab rate. no benefit for long holding.
