Equity Mutual Fund Taxation: Short and Long-Term Gains

Equity mutual fund taxation depends on how long you held the units. Units held for 12 months or less are taxed at 20%, while units held for longer are taxed at 12.5% on gains above ₹1.25 lakh a financial year. Both rates carry a 4% cess, an extra levy on the tax.

Tax is charged on the gain, not on the amount you invest. If you put ₹5,00,000 into a fund and later sell all the units at a ₹60,000 gain, tax is worked out on the ₹60,000 only. These rates apply to units sold on or after 23 July 2024, and Budget 2026 left them unchanged.

Events that trigger tax on fund gains

Tax arises when you sell or redeem units, or switch them into another scheme, because a switch is treated as a redemption followed by a fresh purchase. While units stay invested, the rising value of the fund is not taxed in that year. Each sale is taxed on the gain of the units sold, and the capital gains statement issued by the registrar shows the figures for each sale.

Holding period sets the rate

The holding period is the time between buying a unit and selling it. Units held for 12 months or less produce short-term capital gains (STCG), and exactly 12 months still counts as short-term. Units held for more than 12 months produce long-term capital gains (LTCG).

Equity-oriented funds invest at least 65% of their money in domestic listed equity. The rates below apply to these funds where securities transaction tax (STT) is paid on the sale, which is the treatment used in the examples in this article.

Current equity mutual fund taxation rates

The rates changed for units sold on or after 23 July 2024. The table sets the earlier and current rules side by side.

Rates before surcharge and cess. The earlier rules apply to units sold before 23 July 2024.

Under the current rules, short-term gains are taxed at 20%, and long-term gains are taxed at 12.5% once they cross the ₹1.25 lakh yearly exemption. A 4% cess applies on top of the tax. Surcharge depends on total income, so the examples below leave it out.

Worked examples with the 4% cess

The examples below use hypothetical gains. Each assumes the gain is the only capital gain of the year.

Cess at 4%. Surcharge ignored.

A short-term gain of ₹60,000 is taxed at 20%, giving ₹12,000 before cess. The ₹480 cess brings the total to ₹12,480.

A long-term gain of ₹1,00,000 falls below the ₹1.25 lakh yearly exemption, so the tax for that year is nil.

A long-term gain of ₹3 lakh leaves ₹1,75,000 after the exemption. Tax at 12.5% is ₹21,875, cess adds ₹875, and the total is ₹22,750. That is about 7.58% of the whole gain, which is lower than 12.5% because the first ₹1.25 lakh is exempt.

Losses and set-off

A loss on one equity fund can reduce the tax on a gain made elsewhere. The Income-tax Act lets capital losses be set off against capital gains, and unused losses can be carried forward to later years under its conditions. The rules on which gain a loss may offset differ for short-term and long-term losses, so match each loss to the right kind of gain before you file.

Funds that count as equity-oriented

Most diversified equity funds, such as large cap, mid cap and small cap funds, meet the equity-oriented test. ELSS gains are taxed at the same rates. Arbitrage funds are also taxed as equity-oriented funds, although their returns come mainly from price gaps between the cash and futures markets rather than from shares rising. Funds that hold less equity follow different rules. For debt funds, see how debt mutual fund gains are taxed.

Timing sales around the 12-month mark

The short-term rate is 20%, while the long-term rate is 12.5% after the yearly exemption. A sale a few days before or after the 12-month mark can therefore change the tax bill sharply. For a SIP, each instalment has its own purchase date, so the timing applies instalment by instalment. The SIP instalment tax guide explains how this works in practice.

Timing should still be weighed against the fund's performance and your goals, not tax alone.

Equity fund tax in the wider picture

For the broader view across fund types, read how mutual funds are taxed in India. The rules in this article are as of October 2026 and apply to units sold on or after 23 July 2024. Surcharge, which depends on total income, is added before the cess for higher earners, so their effective rate is above the figures shown here.

Frequently asked questions

What tax applies to equity fund gains on units held 12 months or less?

Short-term capital gains on equity-oriented mutual fund units are taxed at 20% for units sold on or after 23 July 2024, plus 4% cess. Surcharge can add to this depending on total income. For example, a ₹60,000 short-term gain attracts ₹12,480 in tax including cess, before any surcharge.

Does the ₹1.25 lakh limit apply to each fund separately?

The limit is a yearly total of long-term gains on equity-oriented units, so it is shared across all such gains booked in the same financial year, not applied separately to each fund. Gains above that total are taxed at 12.5%, plus 4% cess.

Can capital losses reduce tax on equity fund gains?

Capital losses can be set off against capital gains, and losses not used up in a year can be carried forward, subject to the conditions in the Income-tax Act. Which gains a loss can offset depends on whether the gain is short-term or long-term, so check those conditions before relying on a loss in your return.