How a mutual fund is taxed depends on the type of fund and how long you held the units. Equity funds sold within 12 months: 20% on the gain. Held longer: 12.5% on gains above ₹1.25 lakh in the year. Debt funds bought on or after 1 April 2023: the gain is added to your income and taxed at your slab rate. Dividends are taxed at your slab rate.
This guide is for returns for the financial year 2025-26 (AY 2026-27), under the Income-tax Act, 1961. For shares, see our guide to capital gains tax on shares.
Mutual fund taxation at a glance
| Fund type | Long-term if held for | Short-term gain | Long-term gain |
|---|---|---|---|
| Equity-oriented fund (65% or more in Indian listed shares) | More than 12 months | 20% (section 111A) | 12.5% above ₹1.25 lakh (section 112A) |
| Debt fund (more than 65% in debt), units bought on or after 1 April 2023 | Never long-term | Slab rate (section 50AA) | ✗ |
| Debt fund, units bought before 1 April 2023 | More than 24 months (12 months if listed) | Slab rate | 12.5%, no indexation |
| Gold, silver and international ETFs (listed on a stock exchange) | More than 12 months | Slab rate | 12.5%, no indexation |
| Other funds not listed (gold funds, international funds, and hybrid funds or fund of funds that pass neither 65% test) | More than 24 months | Slab rate | 12.5%, no indexation |
Dividends from any fund are added to your income and taxed at your slab rate.
The rates are for sales on or after 23 July 2024, which covers every sale in FY 2025-26. Each row is explained below.
Which tax type is your fund?
For tax, the law sorts mutual funds into three types. The fund's name does not decide it. What it holds does.
- Equity-oriented fund. At least 65% of the money is invested in equity shares of Indian companies listed on a stock exchange. A fund of funds also counts if it puts at least 90% into units of another fund listed on a stock exchange that itself holds at least 90% in listed Indian shares.
- Specified mutual fund (debt fund). From FY 2025-26, a fund that puts more than 65% of its money in debt and money market instruments, or a fund that puts 65% or more into such a fund. Section 50AA covers these.
- Everything else. Funds that fit neither test, such as gold funds, silver funds, international funds, and hybrid funds below both 65% lines.
If you are not sure which type your scheme is, ask the fund house. The test depends on what the fund held during the year, not on its label.
Equity mutual funds: STCG and LTCG
Equity mutual fund units follow the same rules as listed shares, as long as securities transaction tax (STT) is paid when you sell.
- Held for 12 months or less: short-term capital gain (STCG), taxed at 20% under section 111A.
- Held for more than 12 months: long-term capital gain (LTCG), taxed at 12.5% under section 112A, only on the part of your gains above ₹1,25,000 in the financial year.
- The ₹1.25 lakh is shared. It covers your total long-term gains from listed shares and equity fund units together, not ₹1.25 lakh for each.
- No indexation, and no deductions under sections 80C to 80U against these gains.
Example 1. In March 2022 you invested ₹4,00,000 in an equity fund. In November 2025 you redeemed all the units for ₹6,00,000. You had no other long-term gains on shares or equity funds in FY 2025-26.
| Amount | |
|---|---|
| Sale value | ₹6,00,000 |
| Cost | ₹4,00,000 |
| Long-term capital gain | ₹2,00,000 |
| Less: tax-free amount under section 112A | ₹1,25,000 |
| Taxable gain | ₹75,000 |
| Tax at 12.5% | ₹9,375 |
| Health and education cess at 4% | ₹375 |
| Total tax | ₹9,750 |
Units bought before 1 February 2018. For equity fund units bought before 1 February 2018, your cost is the higher of what you paid and the lower of (a) the value on 31 January 2018 and (b) the sale value. For units not listed on a stock exchange, the 31 January 2018 value is the NAV on that day. Our shares guide shows this rule with numbers.
Tax on SIP in mutual funds
A systematic investment plan (SIP) is not taxed in a different way. Each SIP instalment buys units on its own date, so each instalment has its own holding period. When you redeem, every instalment is checked separately against the 12-month or 24-month line.
Example 2. You invested ₹10,000 in an equity fund on the 10th of every month from April 2024 to March 2025 (12 instalments). On 20 December 2025 you redeemed all the units.
| Instalments | Held for | Type of gain |
|---|---|---|
| April 2024 to December 2024 (9 instalments) | More than 12 months | Long-term, 12.5% above ₹1.25 lakh |
| January 2025 to March 2025 (3 instalments) | 12 months or less | Short-term, 20% |
Tax on SIP after 15 years. There is no special rule for long SIPs. Every instalment held for more than 12 months in an equity fund is long-term. Gains above ₹1.25 lakh in the year you redeem are taxed at 12.5%. If you expect a large gain, redeeming over more than one financial year spreads it across more than one ₹1.25 lakh limit.
Is SIP investment tax free? No. A SIP gives a deduction only when it goes into a fund that qualifies under section 80C, such as an ELSS, and you are on the old regime (see below). The gains are taxed when you redeem.
Tax on redemption, switch and SWP
Capital gains tax arises only when you sell (redeem) units, not while you hold them. Only the gain is taxed, not the full amount you take out.
- Redemption: the gain is the sale value minus your cost. The holding period and fund type set the rate.
- Switch: moving money from one scheme to another, or from the regular plan to the direct plan, is treated as selling the old units and buying new ones. The gain on the old units is taxed in that year.
- Merger by the fund house: if the fund house merges two schemes of the same kind (both equity-oriented, or both not), or merges plans within a scheme, and gives you new units in exchange, that is not treated as a sale.
- Systematic withdrawal plan (SWP): each withdrawal redeems some units, so each withdrawal is a small sale. Only the gain part of each withdrawal is taxed.
Example 3. You hold equity fund units bought more than 12 months ago at ₹150 each. An SWP withdrawal of ₹20,000 redeems 100 units at a NAV of ₹200.
| Amount | |
|---|---|
| Withdrawal (100 units × ₹200) | ₹20,000 |
| Cost (100 units × ₹150) | ₹15,000 |
| Long-term capital gain | ₹5,000 |
The ₹5,000 counts towards the ₹1.25 lakh tax-free amount for the year. The other ₹15,000 is your own money coming back, and it is not taxed.
Is there TDS on redemption? For a resident, the mutual fund does not deduct TDS on the capital gain when you redeem. TDS under section 194K applies to dividends.
Dividends from mutual funds and TDS
Dividends from mutual funds received on or after 1 April 2020 are taxable in your hands.
- The dividend is added to your income under "Income from other sources" and taxed at your slab rate.
- The only deduction allowed is interest on money borrowed to invest, up to 20% of the dividend income. Commission and other costs are not allowed.
- TDS: the fund deducts 10% under section 194K when the dividends it pays you in a financial year cross ₹10,000 (₹5,000 before 1 April 2025).
- The TDS is not the final tax. You add the full dividend to your income and claim the TDS as credit in your return.
Example 4. In FY 2025-26 one fund pays you dividends of ₹12,000. That is above ₹10,000, so the fund deducts TDS of ₹1,200. In your return you show ₹12,000 as income and claim ₹1,200 as tax already paid.
Debt mutual funds in brief
Units of debt funds bought after March 2023 can never be long-term.
- Units bought on or after 1 April 2023 in a specified mutual fund: the gain is always short-term under section 50AA, however long you held the units. It is added to your income and taxed at your slab rate.
- Units bought before 1 April 2023: long-term after 24 months (12 months if the units are listed on a stock exchange), taxed at 12.5% without indexation. Short-term gains are taxed at your slab rate.
- No indexation for any sale from 23 July 2024.
Example 5. You invested ₹5,00,000 in a debt fund and redeemed for ₹5,80,000 in September 2025, a gain of ₹80,000. Your other income puts you in the 30% slab.
| Bought June 2023 | Bought June 2022 | |
|---|---|---|
| Rule | Section 50AA, always short-term | Held more than 24 months, long-term |
| Tax rate | 30% (your slab) | 12.5% |
| Tax | ₹24,000 | ₹10,000 |
| Cess at 4% | ₹960 | ₹400 |
| Total tax | ₹24,960 | ₹10,400 |
From FY 2025-26, only funds with more than 65% in debt are specified mutual funds. Before that, the test was 35% or less in Indian equity shares, which also caught gold, international and some hybrid funds.
ETFs, index funds, hybrid and other funds
| Fund | Tax type | Long-term if held for |
|---|---|---|
| Index fund or ETF on Indian shares (for example, a Nifty or Sensex fund), 65% or more in listed Indian shares | Equity-oriented | More than 12 months |
| Hybrid fund (aggressive, balanced advantage, multi-asset, arbitrage) with 65% or more in listed Indian shares | Equity-oriented | More than 12 months |
| Hybrid fund with less than 65% in shares and not more than 65% in debt | Other | More than 24 months (not listed) |
| Conservative hybrid fund with more than 65% in debt | Specified mutual fund (debt) | Never long-term, if bought on or after 1 April 2023 |
| Gold or silver ETF (listed on a stock exchange) | Other | More than 12 months |
| Gold or silver fund (fund of funds, not listed) | Other | More than 24 months |
| International fund or fund of funds investing abroad | Other | More than 24 months (not listed); 12 months for a listed ETF |
| Fund of funds investing 65% or more in debt funds | Specified mutual fund (debt) | Never long-term, if bought on or after 1 April 2023 |
"Other" means short-term gains are taxed at your slab rate and long-term gains at 12.5% without indexation, with no ₹1.25 lakh tax-free amount.
The type depends on what the fund actually holds. A balanced advantage or multi-asset fund can be on either side of the 65% line. Check with the fund house before you work out the tax.
ELSS and section 80C
An equity-linked savings scheme (ELSS) gives a tax deduction when you invest.
- Investment in ELSS up to ₹1.5 lakh in a financial year can be claimed under section 80C.
- The units are locked in for three years.
- Only in the old tax regime. The new regime does not allow section 80C.
- The gains are not tax-free. ELSS is an equity fund, so its gains follow the equity rules: 20% short-term, 12.5% above ₹1.25 lakh long-term. With a three-year lock-in, every ELSS sale is long-term.
What changed and when
| From | Change |
|---|---|
| 1 April 2020 | Dividends from mutual funds became taxable in the investor's hands |
| 1 April 2023 | Units of funds with 35% or less in Indian shares, bought from this date, are always short-term (section 50AA) |
| 23 July 2024 | STCG on equity funds 15% to 20%; LTCG 10% to 12.5%, with the tax-free amount ₹1 lakh to ₹1.25 lakh; other long-term gains 12.5% without indexation; for other funds, holding periods cut from 36 months to 12 months (listed) and 24 months (not listed) |
| 1 April 2025 | TDS on mutual fund dividends starts above ₹10,000 a year, up from ₹5,000 |
| FY 2025-26 | Specified mutual fund 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 |
Losses on mutual funds
A loss on redeeming units is a capital loss, with the same rules as a loss on shares:
- A short-term capital loss can be set off against any capital gain, short-term or long-term.
- A long-term capital loss 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. Our guide to belated returns and the late fee explains what a late return costs.
Which ITR form to file and where to show mutual funds
| Your income | Form |
|---|---|
| Salary or pension, dividends, and LTCG on equity funds and shares up to ₹1.25 lakh, with no short-term gain | ITR-1 (if you meet its other conditions) |
| Any short-term gain (including every gain on a debt fund bought from April 2023), or LTCG above ₹1.25 lakh, with no business income | ITR-2 |
| Mutual fund gains along with business income, F&O or intraday | ITR-3 |
- Long-term gains on equity fund units sold with STT go in Schedule 112A as well as the capital gains schedule.
- 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 (ITR-U) if that time has passed.
Ways to pay less tax on mutual funds, legally
These come from the rules above. None of them suits everyone, and none should decide your investment on its own.
- Use the ₹1.25 lakh limit each year. Long-term gains on equity funds and shares up to ₹1.25 lakh in a financial year are not taxed.
- Know the 12-month and 24-month lines. Selling an equity fund a few days after 12 months instead of before can change the rate from 20% to 12.5%.
- Set off losses. A short-term loss reduces any capital gain. File on time so unused losses carry forward.
- ELSS under section 80C, if you are on the old regime.
- Section 54F. If you sell long-term units and put the money into one residential house in India within the time limits, part or all of the gain can be exempt. Read the section 54F guide before you rely on it.
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
How are mutual funds taxed?
By fund type and holding period. Equity funds: 20% on gains within 12 months, 12.5% above ₹1.25 lakh after that. Debt funds bought from 1 April 2023: slab rate. Other funds: slab rate if short-term, 12.5% if long-term. Dividends: slab rate.
Is capital gains tax 12.5% or 20%?
For equity funds, both. Short-term gains (12 months or less) are taxed at 20% and long-term gains at 12.5% above ₹1.25 lakh, for sales from 23 July 2024.
What is the 80% rule for mutual funds?
There is no 80% rule for mutual funds in the Income-tax Act. The tax test for an equity fund is 65% in listed Indian shares. The 80% figure is SEBI's rule that an ELSS must keep at least 80% in equity and equity-related instruments.
What will be the taxation rate for debt mutual funds in 2026?
For debt fund 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, however long you held them. Sales from 1 April 2026 fall under the Income-tax Act, 2025.
Is SIP taxable?
Yes, when you redeem. Each SIP instalment has its own purchase date, so some units can be long-term and others short-term in the same redemption.
What is the tax on SIP after 15 years?
No special rule applies. For an equity fund, every instalment held more than 12 months is long-term and taxed at 12.5% on gains above ₹1.25 lakh in the year of sale.
How do I calculate tax on mutual fund redemption?
Take the sale value, subtract what you paid for those units, and check how long you held them and what type of fund it is. That gives the rate. For equity funds, take off the ₹1.25 lakh tax-free amount from long-term gains first.
Is SWP taxable?
Yes, but only the gain part of each withdrawal. Each SWP withdrawal redeems some units, and the gain on those units is taxed by the normal rules.
Is there TDS on mutual fund redemption?
For a resident, no. Mutual funds deduct TDS only on dividends, at 10% under section 194K, when the year's dividends from that fund cross ₹10,000.
Are mutual funds tax free?
No. Gains are taxed when you redeem and dividends are taxed when paid, by the rules on this page. The two reliefs covered here are the ₹1.25 lakh limit for long-term gains on equity funds and shares, and the ELSS deduction in the old regime.
Is a switch between mutual funds taxable?
Yes. A switch from one scheme to another, or from the regular to the direct plan, is treated as selling the old units. A merger of schemes done by the fund house is not.
Is ELSS tax free?
No. ELSS gives a deduction of up to ₹1.5 lakh under section 80C in the old regime, but its gains are taxed like any equity fund.
Can I claim a tax deduction for mutual funds?
Yes, for ELSS, under section 80C, up to ₹1.5 lakh a year, and only in the old regime. The new regime does not allow section 80C.
Hinglish mein sawaal
Mutual fund par kitna tax lagta hai?
Equity fund: 12 mahine ke andar bechne par 20%, uske baad ₹1.25 lakh se upar ke gain par 12.5%. 1 April 2023 ya uske baad kharide debt fund par aapke slab rate se tax lagta hai.
SIP par tax kab lagta hai?
SIP mein paisa lagate waqt koi tax nahi lagta. Units bechne (redeem karne) par gain par tax lagta hai, aur har SIP instalment ka holding period alag ginta hai.
Last reviewed: 2 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.
