The tax on a debt mutual fund depends on when you bought the units. Bought on or after 1 April 2023: the gain is always short-term under section 50AA. It is added to your income and taxed at your slab rate, however long you held the units. Bought before 1 April 2023: held more than 24 months (12 months if listed), the gain is long-term and taxed at 12.5% without indexation. Liquid funds follow the same rules.
This guide is for returns for the financial year 2025-26 (AY 2026-27), under the Income-tax Act, 1961. For equity funds, SIPs and dividends, see our guide to mutual fund taxation.
Debt fund tax at a glance
| Units bought | Sold | Long-term if held for | Short-term gain | Long-term gain |
|---|---|---|---|---|
| On or after 1 April 2023 | Any time | Never long-term | Slab rate (section 50AA) | ✗ |
| Before 1 April 2023 | On or after 23 July 2024 | More than 24 months (12 months if listed) | Slab rate | 12.5%, no indexation |
| Before 1 April 2023 | Before 23 July 2024 | More than 36 months | Slab rate | 20% with indexation |
Every sale in FY 2025-26 falls in one of the first two rows. The last row is the old rule, which matters only for returns of earlier years.
Which funds count as debt funds for tax?
For tax, a debt fund is a specified mutual fund under section 50AA. From FY 2025-26, that means:
- a fund that puts more than 65% of its money in debt and money market instruments, or
- a fund that puts 65% or more of its money into units of such a fund (a debt fund of funds).
The 65% is the average across the year, worked out from daily figures. The fund's name does not decide it. What it holds does.
Liquid, overnight, money market, gilt, corporate bond, banking and PSU, and target maturity funds, and fixed maturity plans (FMPs), are kinds of debt funds. Each one is a specified mutual fund if it keeps more than 65% in debt and money market instruments. If you are not sure what your fund holds, ask the fund house.
A hybrid fund with 65% or less in debt is not a specified mutual fund from FY 2025-26. Our mutual fund taxation guide explains how those funds are taxed.
Debt funds bought on or after 1 April 2023: section 50AA
Section 50AA covers units of a specified mutual fund bought on or after 1 April 2023.
- The gain is always short-term, even if you held the units for five or ten years.
- It is added to your total income and taxed at your slab rate.
- The gain is the sale value minus what you paid and any expense of the sale. There is no indexation.
- It applies when you sell (redeem) the units, or when they mature, as with an FMP.
- There is no tax-free amount like the ₹1.25 lakh for equity funds.
Example 1. In July 2023 you invested ₹3,00,000 in a debt fund. In August 2025 you redeemed all the units for ₹3,48,000. Your other income puts you in the 30% slab.
| Amount | |
|---|---|
| Sale value | ₹3,48,000 |
| Cost | ₹3,00,000 |
| Short-term capital gain (section 50AA) | ₹48,000 |
| Tax at your 30% slab | ₹14,400 |
| Health and education cess at 4% | ₹576 |
| Total tax | ₹14,976 |
If your slab is lower, the tax is lower. If your total income, including the gain, is below the basic exemption limit, no tax is due.
Debt fund SIPs. Each SIP instalment buys units on its own date. If your SIP started before April 2023, the instalments paid on or after 1 April 2023 fall under section 50AA. The older instalments follow the rules in the next section.
Debt funds bought before 1 April 2023
Units bought before 1 April 2023 are outside section 50AA. They follow the normal capital gains rules.
- Long-term if held for more than 24 months, or more than 12 months if the units are listed on a stock exchange (for example, units of a debt ETF).
- Long-term gain: 12.5% under section 112, without indexation, for any sale on or after 23 July 2024.
- Short-term gain: added to your income and taxed at your slab rate.
- There is no ₹1.25 lakh tax-free amount on these long-term gains. That limit is only for equity shares and equity funds.
Any unit not listed on a stock exchange that you bought before 1 April 2023 and sold on or after 1 April 2025 has been held for more than 24 months. So a sale in FY 2025-26 of such units gives a long-term gain.
Example 2. Two people each invest ₹3,00,000 in the same debt fund. Both redeem in August 2025 for ₹3,90,000, a gain of ₹90,000. Both are in the 30% slab. Only the purchase date differs.
| Bought 20 March 2023 | Bought 5 April 2023 | |
|---|---|---|
| Rule | Held more than 24 months, long-term | Section 50AA, always short-term |
| Tax rate | 12.5% | 30% (slab) |
| Tax | ₹11,250 | ₹27,000 |
| Cess at 4% | ₹450 | ₹1,080 |
| Total tax | ₹11,700 | ₹28,080 |
A few days in 2023 change the tax by ₹16,380 here.
Tax on liquid funds
A liquid fund is a type of debt fund. For tax, it is treated like any other debt fund.
- Liquid fund units bought on or after 1 April 2023: the gain is short-term under section 50AA and taxed at your slab rate, however long you held them.
- Units bought before 1 April 2023: long-term after 24 months (12 months if listed), taxed at 12.5% without indexation.
- Only the gain is taxed, not the full amount you take out.
- The gain is taxed in the year you redeem, not while you hold the units.
- For a resident, the fund does not deduct TDS when you redeem.
Example 3. In May 2025 you put ₹38,500 in a liquid fund. In December 2025 you redeem it for ₹40,000.
| Amount | |
|---|---|
| Redemption value | ₹40,000 |
| Cost | ₹38,500 |
| Short-term capital gain | ₹1,500 |
| Tax at 30% slab, plus 4% cess | ₹468 |
Only ₹1,500 is added to your income. The other ₹38,500 is your own money coming back, and it is not taxed.
Liquid fund or fixed deposit: how the tax compares
This table compares only the tax. It does not say which is the better investment.
| Fixed deposit | Liquid or debt fund (units bought from 1 April 2023) | |
|---|---|---|
| What is taxed | Interest | Gain on redemption |
| Head of income | Income from other sources | Capital gains (short-term) |
| Rate | Your slab rate | Your slab rate |
| TDS | 10% under section 194A when the year's interest from a bank, co-operative bank or post office is above ₹50,000 (₹1,00,000 for senior citizens) | None on redemption for a resident |
| Losses | ✗ | A loss can be set off against capital gains |
Senior citizens: see TDS on FD interest for senior citizens.
Both are taxed at your slab rate. A liquid fund gain is taxed in the year you redeem, and there is no TDS on redemption for a resident.
How to calculate tax on a debt fund
- Find the purchase date of each unit, or of each SIP instalment.
- Check the rule. Bought on or after 1 April 2023: short-term under section 50AA. Bought before: check whether you held it for more than 24 months (12 months if listed).
- Work out the gain: sale value minus cost and any expense of the sale. No indexation for any sale on or after 23 July 2024. Our capital gains calculator does this for you.
- Apply the rate: slab rate for short-term gains, 12.5% for long-term gains.
- Add 4% cess on the tax (plus surcharge, if your income is high enough).
Indexation on debt funds: the old rule
Indexation raised your cost by the rise in the Cost Inflation Index (CII), so a smaller gain was taxed. For debt fund units it applied only when:
- the units were bought before 1 April 2023,
- they were held for more than 36 months, and
- they were sold before 23 July 2024.
Such gains were taxed at 20% with indexation. For any sale on or after 23 July 2024, there is no indexation on debt fund units. Units bought on or after 1 April 2023 never had indexation.
Example 4 (old rule, for a sale in FY 2024-25). You bought debt fund units in May 2019 for ₹2,89,000 and sold them in June 2024 for ₹4,00,000.
| Amount | |
|---|---|
| Sale value | ₹4,00,000 |
| Cost | ₹2,89,000 |
| Indexed cost (₹2,89,000 × 363 ÷ 289) | ₹3,63,000 |
| Long-term capital gain | ₹37,000 |
| Tax at 20% | ₹7,400 |
| Cess at 4% | ₹296 |
| Total tax | ₹7,696 |
Without indexation, the gain would have been ₹1,11,000. The full CII table, including the latest value, is in our cost inflation index table. If you left a sale like this out of an earlier return, an updated return (ITR-U) may still be possible.
Debt fund tax: what changed and when
| From | Change |
|---|---|
| 1 April 2023 | Units bought from this date in a fund with 35% or less in Indian shares are always short-term (section 50AA) |
| 23 July 2024 | Indexation removed; other long-term gains 20% to 12.5%; holding period for units not listed cut from 36 months to 24 months, and for listed units to 12 months |
| FY 2025-26 | Specified mutual fund now means more than 65% in debt (before, 35% or less in Indian shares) |
| 1 April 2026 | Sales from this date fall under the new Income-tax Act, 2025 |
Dividends from debt funds
A dividend (IDCW) from a debt fund is added to your income and taxed at your slab rate. The fund deducts 10% TDS under section 194K when the dividends it pays you in a year cross ₹10,000. The mutual fund taxation guide explains dividends in detail.
Losses on debt funds
- A loss on units covered by section 50AA is a short-term capital loss. It can be set off against any capital gain, short-term or long-term.
- A long-term capital loss (units bought before April 2023) can be set off only against long-term capital gains.
- A capital loss cannot be set off against salary or other income. Unused losses can be carried forward for up to 8 assessment years, but only if you file your return by the due date. See belated returns and the late fee for what a late return costs.
How to report debt mutual funds in your ITR
| Your income | Form |
|---|---|
| Any debt fund gain, short-term or long-term, with no business income | ITR-2 |
| Debt fund gains along with business income, F&O or intraday | ITR-3 |
- Debt fund gains go in Schedule CG (capital gains), as short-term or long-term. They do not go in Schedule 112A, which is for equity shares and equity funds.
- ITR-1 cannot be used, because it allows no short-term gain and no long-term gain other than up to ₹1.25 lakh on equity.
- Dividends go under income from other sources.
- Before you file, check the Annual Information Statement (AIS) on the e-filing portal against your own records.
For the other conditions of each form, see which ITR form to file. If you already filed and left out a redemption, you can correct it with a revised return, or with an updated return if that time has passed.
Which law applies
This guide uses section numbers from the Income-tax Act, 1961, which governs the financial year 2025-26 and earlier. Sales from 1 April 2026 fall in tax year 2026-27, under the Income-tax Act, 2025, which uses different section numbers.
How FilingSetu can help
We file income tax returns with capital gains from mutual funds, shares and property.
- A chartered accountant checks every return before filing.
- We help you e-verify the return.
- You get a named manager, and the consultation is free.
Frequently asked questions
What will be the taxation rate for debt mutual funds in 2026?
For units bought on or after 1 April 2023 and sold in FY 2025-26, the gain is short-term and taxed at your slab rate. For units bought before 1 April 2023, held more than 24 months (12 if listed), the gain is taxed at 12.5% without indexation. Sales from 1 April 2026 fall under the Income-tax Act, 2025.
How is capital gains tax calculated on debt funds?
Take the sale value and subtract your cost and any sale expense. If the units were bought on or after 1 April 2023, add the gain to your income at your slab rate. If bought earlier and held more than 24 months (12 months if listed), tax it at 12.5%. Add 4% cess.
How to report debt mutual funds in ITR?
Use ITR-2, or ITR-3 if you also have business income. Show the gain in Schedule CG as short-term or long-term. Debt fund gains do not go in Schedule 112A.
How are liquid funds taxed?
Like any other debt fund. Units bought on or after 1 April 2023 give a short-term gain taxed at your slab rate, however long you held them. Only the gain is taxed, in the year you redeem.
Which is better, liquid fund or FD?
For tax, both are taxed at your slab rate. A liquid fund gain is taxed only when you redeem, with no TDS on redemption for a resident. FD interest is income from other sources, with TDS above the yearly limit. Which is the better investment depends on more than tax.
Do I have to pay tax if I sell my liquid fund of ₹40,000?
Only the gain is taxed, not the ₹40,000. If you put in ₹38,500, the gain is ₹1,500, and that amount is added to your income at your slab rate. If your total income is below the basic exemption limit, no tax is due.
What happens if my long-term capital gain is more than ₹1.25 lakh?
For debt funds, the ₹1.25 lakh limit does not apply. A long-term gain on debt fund units bought before 1 April 2023 is taxed at 12.5% from the first rupee. The ₹1.25 lakh limit is only for equity shares and equity funds.
Is there indexation on debt mutual funds now?
No. Indexation is not available for any sale on or after 23 July 2024. Units bought on or after 1 April 2023 never had it.
What is the tax on debt funds after 3 years?
The old 3-year rule no longer applies. Units bought on or after 1 April 2023 are short-term at any holding period. Units bought before that are long-term after 24 months (12 if listed) and taxed at 12.5%.
Is there TDS on debt fund redemption?
For a resident, no. Mutual funds deduct TDS only on dividends, at 10% under section 194K, when a year's dividends from that fund cross ₹10,000.
How is an FMP taxed?
A fixed maturity plan is a debt fund. If it keeps more than 65% in debt and you bought it on or after 1 April 2023, the gain at maturity or sale is short-term and taxed at your slab rate.
Can I set off a loss on a debt fund?
Yes. A loss on units covered by section 50AA is a short-term capital loss and can be set off against any capital gain. It cannot be set off against salary.
Is a debt fund bought before April 2023 still long-term?
Yes, if you held it for more than 24 months (12 months if listed). Every such unit sold in FY 2025-26 has been held for more than 24 months.
Hinglish mein sawaal
Debt fund par kitna tax lagta hai?
1 April 2023 ya uske baad kharide debt fund units par gain hamesha short-term hota hai aur aapke slab rate se tax lagta hai. Usse pehle kharide units 24 mahine (listed ho to 12 mahine) ke baad long-term hote hain, jin par 12.5% tax lagta hai.
Liquid fund bechne par tax kab lagta hai?
Liquid fund units bechne (redeem karne) wale saal mein, sirf gain par tax lagta hai. Redemption par resident se TDS nahi kata jaata.
Last reviewed: 11 October 2026
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This page explains the law as it stands on the review date. It is not advice on your specific case.
