How Are Mutual Funds Taxed in India? Complete Guide
- Tax
Mutual fund taxation in India depends on what the fund holds and how long you stay invested. As of October 2026, equity funds pay 20% on short-term gains and 12.5% on long-term gains above ₹1.25 lakh in a financial year. Debt funds bought on or after 1 April 2023 are taxed at your income tax slab rate.
A gain is either a short-term capital gain (STCG) or a long-term capital gain (LTCG), depending on how long you held the units. The rules below apply to resident individuals for tax year 2026-27. If you are new to funds, start with what a mutual fund is.
Mutual fund taxation rules at a glance
| Fund type | Short-term rule | Long-term rule |
|---|---|---|
| Equity-oriented funds (at least 65% in domestic listed equity) | 20% if held up to 12 months | 12.5% if held more than 12 months, on gains above ₹1.25 lakh a financial year |
| Debt funds (more than 65% in debt), bought on or after 1 April 2023 | Slab rate, whatever the holding period | Slab rate, whatever the holding period |
| Other funds, listed units (such as gold ETFs) | Slab rate if held up to 12 months | 12.5% without indexation if held more than 12 months |
| Other funds, unlisted units | Slab rate if held up to 24 months | 12.5% without indexation if held more than 24 months |
Rates as of October 2026, for tax year 2026-27. Plus 4% health and education cess on the tax. Surcharge is not included.
Equity funds: 20% and 12.5% rates
Equity-oriented funds hold at least 65% in domestic listed equity. These rates apply to units sold on or after 23 July 2024. Before that date, the rates were 15% short-term and 10% long-term above ₹1 lakh. The concessional rates apply to units on which securities transaction tax (STT) was paid, which covers equity fund redemptions.
The ₹1.25 lakh exemption is per financial year. It applies across all equity funds and shares you sell in that year, not to each fund separately. Long-term gains up to that amount are not taxed, and only the excess is charged at 12.5%.
ELSS funds are equity funds, so the same rules apply to them. See whether ELSS is worth it under the new tax regime for the wider picture.
Debt funds bought on or after 1 April 2023
Funds that invest more than 65% in debt and money-market instruments are taxed as short-term gains on units bought on or after 1 April 2023. Gains are taxed at your slab rate whatever the holding period, so holding a debt fund for years does not lower the rate. Units bought before that date follow older rules, which this guide does not cover.
Other funds: gold, international and some hybrids
Other funds include gold funds, international fund-of-funds and, generally, hybrid funds with 35–65% equity. Long-term gains are taxed at 12.5% without indexation, so the purchase price is not adjusted for inflation. The holding period is 12 months for listed units, such as gold ETFs, and 24 months for unlisted units. Short-term gains are taxed at your slab rate.
IDCW payouts and TDS
IDCW (income distribution cum capital withdrawal) payouts are added to your income and taxed at your slab rate, whatever the fund type. For resident investors, the fund deducts 10% TDS when income from your units exceeds ₹10,000 in a financial year. If your PAN is inoperative, for example because it is not linked to Aadhaar, the TDS rate is 20%.
Worked examples of mutual fund tax
These illustrative figures cover one sale in one financial year.
| Case | Gain (₹) | Tax rate | Taxable gain (₹) | Tax before cess (₹) | Tax with 4% cess (₹) |
|---|---|---|---|---|---|
| Equity fund held over 12 months | 2,00,000 | 12.5% | 75,000 | 9,375 | 9,750 |
| Equity fund held 12 months or less | 50,000 | 20% | 50,000 | 10,000 | 10,400 |
| Debt fund bought on or after 1 April 2023, investor in 30% slab | 50,000 | 30% | 50,000 | 15,000 | 15,600 |
The long-term case deducts the ₹1,25,000 exemption: ₹2,00,000 less ₹1,25,000 leaves ₹75,000, taxed at 12.5%. Surcharge is ignored, and the 4% cess is added.
Illustrative figures. Surcharge ignored.
SIP instalments and switches for tax
Each SIP instalment is a separate purchase with its own holding period. On redemption, the units bought first are treated as sold first (first in, first out). An early instalment can therefore qualify as long-term while a recent one is still short-term.
Switching between plans or schemes counts as a sale. The units you switch out are taxed as if redeemed, even though the money stays invested. Plans include direct and regular options, so moving from one to the other is a sale too.
Budget 2026 made no change
Budget 2026 did not change the mutual fund rates above. The 20% and 12.5% rates, the ₹1.25 lakh exemption and the slab treatment for debt funds carry into tax year 2026-27 under the Income-tax Act, 2025, which took effect on 1 April 2026.
Frequently asked questions
Are switches between funds taxed?
Yes. Switching from one scheme or plan to another counts as a sale of the units you switch out. The gain on those units is taxed under the rule for that fund type and holding period, even when the money is reinvested in the new scheme.
How is each SIP instalment taxed?
Each SIP instalment is a separate purchase with its own purchase date. When you redeem, the earliest instalments are treated as sold first, so part of the sale may be long-term while the rest is short-term. Each part is taxed at the rate for its own holding period, and the ₹1.25 lakh exemption applies to the total long-term equity gain in the year.
Do debt funds get the long-term tax rate?
Not for units bought on or after 1 April 2023. Gains on those units are taxed at your slab rate whatever the holding period. This applies to funds investing more than 65% in debt and money-market instruments. Units bought before that date follow older rules, which this guide does not cover.
What is the TDS on mutual fund IDCW?
For resident investors, the fund deducts 10% TDS when income from your units exceeds ₹10,000 in a financial year. The IDCW payout is still part of your income and is taxed at your slab rate. If your PAN is inoperative, the TDS rate is 20%.
Disclaimer
This article reflects the author's views as of 24 October 2026. Past performance does not indicate future returns. Examples that use assumed returns are for illustration only and are not projections. Consider your own goals and risk profile before investing.
Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
The securities quoted are for illustration only and are not recommendatory.
Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
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