Mutual Fund Foundations

Chapter 12 of 12

How mutual fund gains are taxed

8 min read

Tax applies when you redeem units and have a gain. How much depends on the type of fund and how long you held it. The rules below reflect FY 2026-27 and can change with each Budget.

Equity-oriented funds

  • Held for 12 months or less: gains are short term and taxed at 20%.
  • Held for more than 12 months: gains are long term. The first ₹1.25 lakh of long-term gains in a financial year is exempt, and the rest is taxed at 12.5%.
  • Surcharge and cess apply on top where relevant.

Equity long-term example

  • You redeem units with a long-term gain of ₹2,00,000 in a year.
  • The first ₹1,25,000 is exempt. Tax applies on ₹75,000 at 12.5%, which is ₹9,375, plus cess.

Debt funds

For debt fund units bought on or after 1 April 2023, gains are taxed at your income-tax slab rate regardless of how long you held them. There is no separate long-term rate for these units.

ELSS

ELSS funds carry a three-year lock-in. Under the old tax regime they allow a deduction under Section 80C, up to the limit; under the new regime that deduction is not available. Their gains are taxed like other equity funds.

Using tax sensibly

  • Tax is paid only on redemption, so holding longer defers it and lets gains compound.
  • Do not let a tax saving force you into an unsuitable fund.
  • Keep records of purchase dates and amounts; your statement from the registrar helps.

Key takeaways

  • Equity: 20% short-term, 12.5% long-term above ₹1.25 lakh a year.
  • Debt funds bought from April 2023 are taxed at your slab rate.
  • Rules change; verify before you act.

This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.