If you’ve redeemed, switched, or even just held mutual funds this year, there’s something you should know.
Some of the tax rules you remember may already be outdated.
Equity funds now have different tax rates. Debt funds have lost their old long-term tax advantage. Gold and international funds have also seen changes in how they are treated. Accordingly, there has been changes with mutual fund taxation.
And that’s where things get tricky.
The tax you pay depends on three things: what you invested in, when you invested, and when you sold.
So before you calculate your gains, first figure out which tax rule applies to your fund.
This guide makes that simple.
You’ll find a master table you can scan quickly, followed by a breakdown of equity funds, debt funds, SIPs, ELSS, gold, international funds and switching.
The figures are for FY 2025–26 (AY 2026–27). Budget 2025 and Budget 2026 did not change the capital gains rates covered here.
However, this is general information, not tax advice. Your actual tax treatment will depend on your fund, investment dates, sale dates and income.
The quick answer
Here’s the 2026 mutual fund tax cheat sheet.
The rates below are base rates, excluding surcharge and 4% cess. Equity rates apply only when STT conditions are met.
| Fund type | Short-term holding | STCG rate | Long-term holding | LTCG rate |
| Equity-oriented funds (≥65% in domestic equity), including ELSS | 12 months or less | 20% | More than 12 months | 12.5% on gains above ₹1.25 lakh/year (Section 112A); gains up to ₹1.25 lakh are tax-free |
| Debt / specified funds, units bought on/after 1 Apr 2023 | Any holding period | Slab rate | No long-term benefit | Slab rate (Section 50AA) |
| Debt funds, units bought before 1 Apr 2023 | 24 months or less | Slab rate | More than 24 months | 12.5% (no indexation) |
| Gold ETFs / international ETFs (listed) | 12 months or less | Slab rate | More than 12 months | 12.5% (no ₹1.25 lakh exemption) |
| Gold FoFs / international FoFs (unlisted) | 24 months or less | Slab rate | More than 24 months | 12.5% (no ₹1.25 lakh exemption) |
| Hybrid funds | Taxed like equity if the fund holds ≥65% equity; otherwise like a debt/other fund based on its composition |
The ₹1.25 lakh long-term exemption is shared across all your eligible equity gains (shares plus equity funds), it is not a separate limit per fund.
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What changed in mutual fund taxation, and when
The overhaul came from the Finance (No. 2) Act, 2024, and applies to transfers made on or after 23 July 2024.
For fund investors, three changes matter most.
First, the short-term tax rate on equity-oriented funds went from 15% to 20% under Section 111A.
Second, the long-term rate went from 10% to 12.5% under Section 112A. At the same time, the annual tax-free amount increased from ₹1 lakh to ₹1.25 lakh.
Third, indexation, the old inflation adjustment, was removed wherever the new 12.5% regime applies.
This is the first full assessment year in which these changes apply from start to finish. That is also why you may still see “15%” and “20%” quoted side by side across the internet.
To be clear, for the current year, the equity figures are 20% and 12.5%.
Mutual fund taxation is administered by the Central Board of Direct Taxes (CBDT), while fund categories are defined under SEBI’s rules. So whether your fund qualifies as an “equity-oriented” fund depends on its SEBI classification. The tax treatment then follows that classification.
How equity funds are taxed
A fund is equity-oriented if it invests at least 65% in equity shares of domestic companies.
Most large-cap, mid-cap, flexi-cap and equity ELSS funds qualify.
Sell within 12 months? Your gain is short-term. It is taxed at a flat 20%.
Sell after more than 12 months? It becomes long-term. The first ₹1.25 lakh of eligible equity long-term gains each financial year is tax-free. Gains above that are taxed at 12.5%.
For example, if your long-term gain is ₹1,80,000, the first ₹1,25,000 is exempt. The remaining ₹55,000 is taxed at 12.5%, which is about ₹6,875 before cess.
One legacy rule matters for older holdings. If you bought equity units on or before 31 January 2018, your cost is taken as the higher of:
- What you actually paid, or
- The fund’s value on 31 January 2018.
This protects gains built up before that date.
Want to explore equity funds? Get in touch with us to know more.
How debt funds are taxed
This is where the biggest change of recent years sits. For debt funds and other “specified” funds covered by Section 50AA, the long-term/short-term distinction no longer exists.
This applies to units bought on or after 1 April 2023. Every gain is added to your income. It is taxed at your slab rate.
It does not matter whether you held the units for three months or ten years. There is also no indexation. The old tax advantage of holding debt funds for the long term is gone for these units.
A “specified fund” now means a fund that invests more than 65% of its money in debt and money market instruments.
This definition applies from FY 2025–26. It also includes a fund-of-funds that mostly holds such funds.
Liquid, overnight, ultra-short, corporate bond, gilt and similar categories fall here.
There is one important point to remember. Debt fund units bought before 1 April 2023 still follow the older rules. They become long-term after 24 months and are taxed at 12.5%.
So with debt funds, your purchase date can matter as much as the fund itself.
SIP taxation, the part everyone gets wrong
A SIP feels like one investment. For tax purposes, it isn’t. Each instalment is treated as a separate purchase. Each one has its own date and its own holding-period clock.
When you redeem, units are sold using the first-in, first-out (FIFO) method. That means your oldest instalments are sold first.
This can trip up many investors. One redemption can produce both short-term and long-term gains. Say you started a monthly equity SIP two years ago and redeem a chunk today.
The instalments held for more than 12 months are long-term. The instalments from the last several months are short-term. So, the same transaction can have gains taxed at different rates.
Before redeeming, check your capital gains statement.
You can get it from your AMC or through CAMS/KFintech. This will show how much of each type of gain you are actually triggering.
Want help with taxation? Call us to get professional help.
ELSS and Section 80C
ELSS is the one mutual fund category that also offers a tax deduction when you invest.
Under Section 80C, you can claim up to ₹1.5 lakh a year, within your overall 80C limit.
But there is an important condition.
You can claim this only under the old tax regime. Section 80C is not available under the new, default regime.
ELSS also has a three-year lock-in. That is the shortest among 80C options.
On exit, ELSS is taxed just like any other equity-oriented fund.
Because of the three-year lock-in, every ELSS gain is automatically long-term.
So the 12.5% tax on gains above ₹1.25 lakh applies.
In practice, a modest ELSS redemption can be entirely tax-free if the gain falls within your ₹1.25 lakh annual exemption.
The point here is to explain how ELSS is taxed.
It is not a suggestion to buy it. Whether ELSS suits you depends on your tax regime and goals. That is a conversation for a tax adviser.
Gold, international funds, switching, and indexation
A few loose ends worth knowing
Gold and international funds: From FY 2025–26, these moved out of the Section 50AA slab-rate treatment. They are now taxed under the normal non-equity rules.
Listed funds, such as gold ETFs, become long-term after 12 months. Unlisted fund-of-funds become long-term after 24 months.
The long-term rate is 12.5%, with no indexation. The ₹1.25 lakh equity exemption does not apply.
The exact treatment depends on the fund’s composition and your purchase date, so check your specific fund.
Switching: Switching is a taxable event. Moving between schemes, regular to direct, or growth to IDCW is treated as selling the old units and buying new ones.
So, capital gains can be triggered even if no money reaches your bank account.
Indexation: For mutual funds, indexation is effectively no longer available. It was removed under the 12.5% regime. Debt funds bought after April 2023 are also taxed at slab rates without indexation.
Dividends: IDCW income is taxed at your slab rate. The fund house deducts 10% TDS under Section 194K once your dividend income from that AMC exceeds ₹10,000 in a year.
This applies to dividends, not capital gains on redemption.
Frequently Asked Questions
Q: What’s the LTCG rate on mutual funds in 2026?
A: For equity-oriented funds, 12.5% on long-term gains above the ₹1.25 lakh annual exemption (held more than 12 months). For debt funds bought on/after 1 April 2023, there is no long-term rate; gains are taxed at your slab rate.
Q: What’s the STCG on equity funds now?
A: 20% (up from 15%), for equity-oriented funds held 12 months or less, under Section 111A. This applies to transfers on or after 23 July 2024.
Q: How are debt funds taxed after April 2023?
A: Units bought on or after 1 April 2023 are taxed entirely at your income slab rate under Section 50AA, regardless of how long you hold them, with no indexation and no separate long-term rate.
Q: Is there tax on SIPs?
A: Yes, on the gains when you redeem. Each SIP installment has its own holding period, units are sold FIFO, and one redemption can generate both short-term and long-term gains together.
Q: How much MF LTCG is tax-free?
A: Up to ₹1.25 lakh of eligible equity long-term gains per financial year is exempt. This limit is shared across your equity shares and equity funds combined; it is not per fund, and it does not apply to debt, gold, or international funds.
Q: How is ELSS taxed?
A: ELSS gives an 80C deduction of up to ₹1.5 lakh on entry (old tax regime only), has a three-year lock-in, and is taxed as an equity fund on exit, long-term at 12.5% above the ₹1.25 lakh exemption.
Q: Do I pay tax when switching funds?
A: Yes. A switch is treated as a redemption plus a fresh purchase, so it is a taxable event and can create capital gains even though you did not withdraw cash.
Q: Is indexation still available?
A: For mutual funds, effectively no. It was removed under the 12.5% regime from 23 July 2024, and post-April-2023 debt funds are slab-taxed without indexation.
Q: Are gold and international funds taxed like equity?
A: No. They are not equity-oriented, so they do not get the ₹1.25 lakh exemption. From FY 2025-26 they follow the non-equity grid: long-term at 12.5% after 12 months (listed) or 24 months (unlisted fund-of-funds), short-term at your slab rate.
This article is for educational and general information purposes only. It reflects publicly available information as of the date of publication and is not tax, legal, investment or financial advice, nor a recommendation of any fund or scheme. Rates shown are base rates and exclude applicable surcharge and cess, and tax treatment depends on your specific fund, acquisition dates and income. Tax rules can change; please verify current details with official sources such as the Income Tax Department / CBDT and consult a qualified tax professional before acting. Figures are illustrative.
