Chapter 2 of 4
Mutual fund tax in practice
8 min read
The basics by fund type
- Equity-oriented funds: same rates as listed shares, with 12 months as the long-term threshold.
- Debt funds bought on or after 1 April 2023: gains are taxed at your income-tax slab rate, regardless of how long you held.
- Hybrid funds: treatment depends on whether the fund holds enough equity to count as equity-oriented. Check the scheme's classification.
SIPs: every instalment has its own clock
Each SIP instalment buys units on its own date, so each is a separate purchase with its own holding period. When you redeem, the oldest units are sold first (first in, first out).
A SIP redemption
- You start a ₹10,000 SIP on the 5th of every month from January 2025.
- On 15 March 2026 you redeem part of the holding.
- The January, February and March 2025 units were held for more than 12 months, so they are long-term.
- Units bought from April 2025 onwards are still short-term.
Switches and rebalancing
Moving money from one fund to another, even within the same fund house, is treated as a sale followed by a fresh purchase, so it can trigger tax.
Dividend (IDCW) options
Payouts from the Income Distribution cum Capital Withdrawal option are taxed as income at your slab rate, with tax deducted at source if the amount in a year exceeds ₹10,000. Growth options defer tax until you redeem.
- Download your capital-gains statement from the registrar (CAMS or KFintech) each year.
- Plan redemptions with the 12-month mark and the ₹1.25 lakh exemption in mind, but do not let tax override your goal.
Key takeaways
- Every SIP instalment has its own holding period.
- Switches are sales and can create tax.
- Registrar statements make reporting far easier.
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.