Mutual fund taxation in India used to fit on the back of a napkin. Budget 2024 and Finance Act 2023 changed that. Now the category your fund sits in, the date you bought it, and how long you held it all matter.
This is the full FY 2025-26 playbook. Every category, the current rate, the holding period, and the actual rupee impact.
The short answer
If it holds more than 65% Indian equity: 20% STCG (≤12 months), 12.5% LTCG beyond ₹1.25 lakh (>12 months). This covers pure equity funds, ELSS, equity hybrid, arbitrage.
If it's a debt fund purchased after April 1, 2023: slab rate, always. No indexation. No long-term benefit.
If it's international equity, gold ETF, or gold FoF (post-April 2025): 12.5% LTCG without indexation after 24 months; slab rate if ≤24 months.
If it's debt purchased before April 1, 2023: grandfathered – 12.5% LTCG without indexation beyond 24 months; slab if ≤24 months.
Everything else is a variation of these four buckets.
The one-table summary
| Fund category | Short-term threshold | STCG rate | LTCG threshold | LTCG rate | LTCG exemption |
|---|---|---|---|---|---|
| Equity (>65% Indian equity) | ≤12 months | 20% | >12 months | 12.5% | ₹1.25 L / year |
| ELSS | n/a (3-yr lock-in) | n/a | >12 months | 12.5% | ₹1.25 L / year |
| Arbitrage | ≤12 months | 20% | >12 months | 12.5% | ₹1.25 L / year |
| Equity hybrid (>65% equity) | ≤12 months | 20% | >12 months | 12.5% | ₹1.25 L / year |
| Debt (post Apr 1, 2023) | Any holding | Slab rate | Never | Slab rate | None |
| Debt (pre Apr 1, 2023) | ≤24 months | Slab rate | >24 months | 12.5% (no indexation) | None |
| Debt hybrid | Treated as debt based on purchase date | ||||
| Conservative hybrid (≤35% equity) | Treated as debt based on purchase date | ||||
| International equity fund | ≤24 months | Slab rate | >24 months | 12.5% (no indexation) | None |
| Gold ETF / Gold FoF | ≤24 months | Slab rate | >24 months | 12.5% (no indexation) | None |
| Silver ETF | ≤24 months | Slab rate | >24 months | 12.5% (no indexation) | None |
| Index fund / ETF (equity index) | Same as equity | ||||
| Index fund (debt index) | Same as debt | ||||
| FoF (>65% in equity MFs) | Same as equity | ||||
| FoF (debt-oriented) | Same as debt |
All the nuance is in the footnotes – read on.
Why this changed: the three reforms you need to understand
Finance Act 2023 (effective April 1, 2023) pulled the indexation benefit from debt mutual funds entirely. Any debt units bought on or after that date are taxed at slab rate regardless of holding period. The "specified mutual fund" definition in Section 50AA of the Income Tax Act is what captures this.
Budget 2024 / Finance Act 2024 (effective July 23, 2024 for most provisions) did three things that matter for MFs:
- Raised the equity STCG rate from 15% to 20%.
- Raised the equity LTCG rate from 10% to 12.5%, but also raised the exemption from ₹1 lakh to ₹1.25 lakh per year.
- Restored long-term capital gains treatment – at the new 12.5% rate, without indexation – for international funds, gold ETFs, and similar instruments, effective April 1, 2025.
Section 2(42A) clarification: "Long term" for equity means held for more than 12 months – the calendar day count matters. 12 months exactly is still short-term. For most other mutual fund categories with a 24-month threshold, same principle.
Equity mutual funds (> 65% Indian equity)
Who qualifies: any open-ended scheme that holds more than 65% of its corpus in domestic listed equities. Large-cap funds, flexi-cap, multi-cap, mid-cap, small-cap, sectoral, thematic, and focused funds all qualify. So do equity-oriented ETFs and index funds tracking Indian indices.
Short-term (≤ 12 months): 20% flat. No slab rate, no cess adjustment beyond the standard 4%. Budget 2024 raised this from 15%.
Long-term (> 12 months): 12.5% beyond ₹1.25 L exempt. The exemption is per PAN per financial year – if you gain ₹1.20 L, you pay zero. If you gain ₹2.25 L, you pay 12.5% on ₹1 L = ₹12,500.
Worked example: You invested ₹10 L in a flexi-cap fund in January 2023. You redeem in July 2025 at ₹16 L. Gain = ₹6 L over 30 months, long-term. Tax = (₹6 L − ₹1.25 L) × 12.5% = ₹59,375.
STT is paid on equity MF redemption (0.001% for open-ended), which is what qualifies them for the concessional equity rates.
For the actual calculation, use our LTCG calculator – enter purchase/sale dates and amounts, it tells you exactly what you owe.
ELSS (Equity Linked Savings Scheme)
Taxation: identical to equity funds after the 3-year lock-in expires. STCG doesn't normally apply (you can't redeem within 3 years), so every redemption is long-term at 12.5% beyond ₹1.25 L.
Section 80C deduction (old regime only): up to ₹1.5 L of ELSS investment per financial year can be deducted from gross income under Section 80C. At a 30% marginal tax bracket, that's ₹45,000 of tax saved per year.
New regime doesn't allow 80C. The default new regime (for anyone not specifically opting out) does not permit the 80C deduction. If you've moved to the new regime, ELSS is just a regular equity fund – the lock-in has no tax benefit, just a liquidity cost.
Practical rule: only prefer ELSS over a regular flexi-cap if (a) you're on the old regime and (b) you'll actually use the 80C headroom. Otherwise, any good flexi-cap without a lock-in is strictly better.
Debt mutual funds – the April 1, 2023 divide
Post April 1, 2023: slab rate, any holding period. Finance Act 2023 defined a new "specified mutual fund" category – schemes where more than 35% is invested in Indian equity are excluded (so they stay equity-taxed). Everything else debt-oriented – liquid, ultra-short, short-duration, corporate bond, gilt, credit risk, target maturity, banking & PSU, dynamic bond, conservative hybrid – gets slab-rate treatment on all gains.
Pre April 1, 2023: grandfathered. Units purchased before April 1, 2023 retain a long-term benefit. Under Finance Act 2024 rules effective July 23, 2024, their LTCG (> 24 months) is taxed at 12.5% without indexation. Previously it was 20% with indexation – for most holding periods under 10 years, 12.5% without indexation works out slightly better or the same.
Worked example (post-April 2023 purchase): You invested ₹10 L in a gilt fund in June 2024 and redeemed ₹11.50 L in April 2026. Gain of ₹1.50 L is taxed at your slab rate. If you're in the 30% bracket, tax = ₹45,000 + 4% cess = ₹46,800. If you're in the 20% bracket, tax = ₹30,000 + cess = ₹31,200.
The practical takeaway: post-April-2023, debt funds have lost their structural advantage over fixed deposits. You pick debt funds now for liquidity and risk management, not tax efficiency.
Hybrid funds – depends on equity allocation
Aggressive hybrid (>65% equity): taxed as equity. This includes "equity-oriented hybrid" and most "balanced advantage" funds that explicitly maintain >65% equity in their filings.
Balanced advantage / dynamic asset allocation: check the fund's tax status declaration. Most are structured to stay equity-taxed (maintain >65% gross equity exposure including arbitrage derivatives), but confirm in the SID (Scheme Information Document) or the AMC's fact sheet.
Conservative hybrid (≤ 25% equity): taxed as debt. Post-April-2023 purchases get slab-rate; pre-April-2023 get the grandfathered regime.
Multi-asset funds: varies. A multi-asset fund with >65% equity is equity-taxed. One that's debt-heavy is debt-taxed. Some qualify as "specified mutual fund" (slab-rate) and some don't.
This is one area where reading the fact sheet matters. AMFI categorisation doesn't automatically determine tax treatment – the actual equity percentage and the post-April-2023 purchase date do.
Arbitrage funds
Structurally equity-taxed. Arbitrage funds maintain ~65–70% equity exposure (held as cash-futures arbitrage positions) to qualify. The actual return is near-risk-free (equivalent to a liquid fund), but the tax treatment is equity.
For investors above the 20% slab, arbitrage funds are often tax-efficient alternatives to liquid funds for 3–12 month parking. 20% STCG versus 30% slab – saves 10% of gains for a year.
Warning: most arbitrage funds redistribute a lot of short-term capital gains internally, so actual post-tax return vs a liquid fund depends on the specific scheme and your holding period. Run numbers before assuming a clean tax arbitrage.
International funds and gold/silver ETFs – the FA2024 restoration
Between April 2023 and March 2025, all international funds and commodity ETFs were slab-rate taxed (they got pulled into the "specified mutual fund" net with debt).
Post April 1, 2025 (applicable for FY 2025-26), Finance Act 2024 carved them back out:
- International equity mutual funds (fund of funds investing in US/global ETFs, fund of funds investing in foreign mutual funds): > 24 months LTCG at 12.5% without indexation; ≤ 24 months at slab.
- Gold ETFs and Gold FoFs: same. > 24 months LTCG at 12.5%; ≤ 24 months at slab.
- Silver ETFs: same.
Practical impact: if you've been avoiding international funds because of the slab-rate treatment, the math is now back to reasonable. A 24-month international equity fund held at 10% CAGR pays 12.5% on gains – cleaner than it's been since April 2023.
One catch: the 24-month threshold here is stricter than the 12-month threshold for domestic equity. International funds and gold ETFs require you to hold through two full budget cycles to get the long-term rate.
Index funds and ETFs – taxed by underlying
Equity index funds and equity ETFs (Nifty 50, Nifty Next 50, Sensex, Nifty Midcap 150, etc.): full equity treatment. 20% STCG, 12.5% LTCG beyond ₹1.25 L after 12 months.
Debt index funds and debt ETFs (Bharat Bond ETF, gilt index funds, target maturity index funds): debt treatment. Post-April-2023 purchases at slab rate.
Smart beta / factor ETFs: equity-taxed if the underlying is Indian equity. Same rules as a regular equity fund.
Global index funds (e.g. Nifty 500 FoF, S&P 500 index fund, Nasdaq 100 FoF): the FA2024 international rules apply. 24-month threshold, 12.5% LTCG without indexation after that.
Fund of Funds – depends on what they hold
An FoF is taxed according to its underlying portfolio, not its own structure.
- Equity FoF (invests in domestic equity MFs, maintains >65% equity): equity-taxed.
- International equity FoF: 24-month LTCG at 12.5% (post FA2024 restoration).
- Gold FoF: 24-month LTCG at 12.5%.
- Debt FoF: slab rate (specified MF).
- Multi-asset FoF: varies – check the underlying exposure and the AMC's published tax treatment.
Dividend (IDCW) taxation
Mutual fund dividends are officially called Income Distribution cum Capital Withdrawal (IDCW) since 2021. The "cum capital withdrawal" part is honest branding – part of your dividend is literally your own money coming back to you.
Tax treatment: fully taxed at your slab rate in the year you receive them. Added to your gross income in the "Income from Other Sources" line of your ITR.
TDS: the AMC deducts 10% TDS on dividends if the total paid by that single AMC across all your schemes exceeds ₹5,000 in one financial year (Section 194K). For NRIs, the TDS is 20% plus surcharge and cess regardless of amount.
Why Growth beats IDCW for long-term investors:
- IDCW is taxed at slab rate – for a 30% bracket investor, 30% of every distribution goes to tax.
- Growth units don't generate a taxable event until redemption.
- At redemption, Growth gains get the 12.5% LTCG rate (if equity) – cheaper than 30%.
- Compounding works better when taxes aren't draining the corpus annually.
For 95% of long-term investors, Growth is the correct choice. IDCW makes sense only for retirees who specifically want predictable cash flow and are in a low-tax bracket.
STT – who pays what
Equity mutual funds, ETFs, and arbitrage funds on redemption: STT of 0.001% on the redeemed value. Trivial in rupee terms, but structurally important – paying STT is what makes the scheme "equity-oriented" for tax purposes.
Debt funds, international funds, gold funds: no STT.
ELSS at end of 3-year lock-in: same 0.001% STT on redemption.
You don't pay STT separately; it's baked into the NAV the AMC gives you at redemption. You never see it on your statement except in the capital gains report.
TDS on capital gains
For resident individuals: no TDS on capital gains from mutual funds. You self-declare and pay advance tax quarterly if your total tax liability exceeds ₹10,000 per year.
For NRIs: TDS is deducted at the time of redemption:
| Fund type | STCG TDS | LTCG TDS |
|---|---|---|
| Equity MF | 20% | 12.5% (beyond ₹1.25 L, full on the excess) |
| Debt MF (post Apr 2023) | 30% + surcharge + cess | (same as STCG – no LTCG rate) |
| Debt MF (pre Apr 2023) | 30% + cess | 12.5% + cess |
| International / Gold (post Apr 2025) | 30% + cess | 12.5% + cess |
NRIs can claim DTAA relief via Form 10F and a Tax Residency Certificate from their resident country. This often reduces the effective TDS to 10–15% depending on the treaty.
Setoff and carry-forward
Within the same year:
- Short-term capital losses (STCL) can be set off against both short-term and long-term capital gains (STCG and LTCG).
- Long-term capital losses (LTCL) can be set off only against LTCG – not against STCG.
Carry-forward:
- Unabsorbed STCL and LTCL can be carried forward for 8 assessment years.
- You must file your ITR by the due date (July 31 for non-audit cases) to carry forward losses. Miss the deadline and they're forfeited.
- Carried-forward losses retain their character – STCL stays STCL, LTCL stays LTCL.
Worked example: In FY 2025-26 you book ₹3 L equity STCG from a mid-cap fund redemption, and ₹1 L LTCL from a small-cap fund redemption. The LTCL cannot offset the STCG. You pay 20% on the full ₹3 L = ₹60,000. The ₹1 L LTCL carries forward – offset it against future LTCG to save 12.5%.
Tax loss harvesting (realising a loss to offset gains) is legal and common. Just be careful not to trigger the bed-and-breakfast rule (sell and immediately rebuy the same unit) – at which point the intent becomes questionable. Wait a few days, or buy a similar but not identical fund.
Which ITR form to file
- ITR-1 (Sahaj): salary only. If you have any capital gain, you cannot use ITR-1.
- ITR-2: salary + capital gains (MF, shares, property). Most salaried MF investors use this.
- ITR-3: salary + capital gains + business or professional income. Freelancers, consultants, and business owners.
- ITR-4 (Sugam): presumptive business income (44AD/44ADA/44AE) + salary. No capital gains allowed.
Deadlines for FY 2025-26 (AY 2026-27):
- Non-audit cases: July 31, 2026.
- Audit cases (business turnover above ₹1 Cr or professional receipts above ₹50 L): October 31, 2026.
- Belated return: January 15, 2027 (with penalty).
Capital gains schedule: ITR-2 has a dedicated Schedule CG where you report each redemption with purchase date, sale date, purchase cost, sale value, and computed gain. Your AMC issues a "Capital Gains Statement" in April–May each year – this has everything you need.
A few high-impact decisions
If you're in the 30% slab, prefer equity over debt for anything beyond emergency liquidity. Debt-fund gains at 30% slab + cess = 31.2% effective. Equity LTCG at 12.5% is 18.7 percentage points cheaper.
If you're picking between arbitrage and liquid for 3–12 month parking, and you're in the 30% bracket, arbitrage wins on tax efficiency. Below the 20% slab, the gap is too small to matter.
Always pick Growth, not IDCW, for long-term holdings. IDCW creates annual tax events at slab rate; Growth defers tax to redemption at the LTCG rate.
Harvest LTCG up to ₹1.25 L every financial year if you have appreciated equity MFs with over 12-month holding. Sell the long-term units, immediately rebuy. You reset the cost base to a higher value at zero tax cost.
If you're old-regime with ₹1.5 L headroom on Section 80C, use ELSS over PPF or tax-saver FDs for the long-term portion. Higher expected returns than either, same 80C benefit.
Calculate your actual tax
- LTCG calculator – enter purchase and redemption details, see exact tax under the current regime.
- Old vs New tax regime calculator – check your marginal slab to decide whether a slab-rate debt fund makes sense.
- Advance tax calculator – if your MF capital gains push your total tax liability above ₹10,000, you owe advance tax quarterly.
- MF returns calculator – pre-tax and post-tax return projections.
Related NYVO guides
- SIP vs Lumpsum: Which Actually Wins in Indian Markets? – how the tax you pay at redemption differs between SIP units and lumpsum.
- Index vs Active Funds: The 2026 Indian Reality – expense ratio and tax drag together determine your real return.
A note on rates
All rates in this guide are for FY 2025-26 (assessment year 2026-27). Surcharge and cess apply on top of the listed rates. The 4% health and education cess applies to the tax amount after surcharge. Surcharge kicks in at 10% above ₹50 L of taxable income, 15% above ₹1 Cr, 25% above ₹2 Cr (new regime cap) or above ₹5 Cr (old regime 37% cap).
For capital gains specifically, surcharge is capped at 15% on LTCG from listed equity – so a high-income investor who might otherwise face 25–37% surcharge pays only 15% on equity LTCG.
Tax rules change every Budget. We update this guide annually in April/May after the Union Budget settles.
If you'd like help thinking through the tax impact of specific MF redemptions or portfolio restructuring, book a free call with a NYVO advisor.
