The rates at a glance
| Fund type | Short term | Long term |
|---|---|---|
| Equity-oriented (65% or more in equity, including arbitrage funds) | Sold within 12 months: 20% | Sold after 12 months: 12.5% on gains above ₹1.25 lakh a year |
| Specified mutual funds (more than 65% in debt and money-market instruments), bought on or after 1 April 2023 | Slab rate | No long-term benefit: gains taxed at slab rate whatever the holding |
| Other funds (for example, hybrid funds with 35-65% equity, gold and international funds) | Slab rate if sold within 24 months | 12.5% after 24 months, without indexation |
All rates carry 4% health and education cess, and surcharge may apply at higher incomes.
How units are matched: first in, first out
Each purchase is a separate lot. When you redeem, units are treated as sold in the order bought. A SIP therefore creates a lot every month, and a redemption today uses your oldest lots first. This is why part of a redemption can be long term and part short term.
Two worked examples
Equity fund, long term. You sell units after 18 months and make a ₹3,00,000 gain. The first ₹1,25,000 of long-term gains in the financial year is exempt. Taxable gain = ₹1,75,000. Tax at 12.5% = ₹21,875, plus 4% cess = ₹22,750.
Equity fund, short term. You sell units after 8 months and make a ₹1,00,000 gain. Tax at 20% = ₹20,000, plus 4% cess = ₹20,800.
Loss set-off and carry-forward
A short-term capital loss can be set off against short-term or long-term gains. A long-term loss can be set off only against long-term gains. Unabsorbed losses can be carried forward for eight years if you file your return on time.
Grandfathering
For units bought before 1 February 2018, the cost for long-term gains on equity funds is adjusted up to the fair market value on 31 January 2018 where that is higher than your actual cost (subject to a cap at the sale value), which protects gains made before the tax was introduced.
IDCW (dividend) is different
Income distribution cum capital withdrawal (IDCW) payouts are taxed as income at your slab rate, and the fund may deduct TDS. A growth option has no payout, so there is no tax until you redeem.
How to plan around it
- Book gains in two financial years to use the ₹1.25 lakh exemption twice if you are close to a limit.
- Check the holding period before selling. Waiting a few weeks past 12 months can cut the rate from 20% to 12.5% and bring the ₹1.25 lakh exemption into play.
- Remember switches and STPs are redemptions. A switch from one fund to another triggers tax on the gain.
- Get your capital-gains statement from the AMC, CAMS, KFintech or MF Central instead of calculating by hand.
What changed with the Income-tax Act, 2025
The new Act applies from 1 April 2026 and re-numbers the old sections (for example, the 80C deduction moved to Section 123). Rates quoted for mutual fund gains were not changed by Budget 2025 or Budget 2026 coverage. If a calculator or article quotes old section numbers, the rate may still be right but the reference is not.
Questions people ask
How is mutual fund income taxed in India?
Gains are taxed on redemption by fund type and holding period.
What is the LTCG on equity mutual funds?
12.5% on gains above ₹1.25 lakh a year for units held more than 12 months.
Is there tax on SIP?
Not while you hold. Each instalment's gain is taxed on redemption by its own holding period.
Are debt funds tax-free after three years?
No. For debt funds bought after 1 April 2023, gains are taxed at your slab rate whatever the holding.
Is ELSS taxed differently?
Same as equity funds, after the 3-year lock-in.
Keep going
Run the numbers
Mutual fund capital gains calculator
Also useful: SWP calculator
Related terms
Read next
- Mutual fund taxation in India
How we can help
Sources
- ICICI Prudential AMC Tax Reckoner 2025-26
- Finance Act 2024 amendment to section 50AA
- Income-tax Act, 2025
- Income Tax Department (https://incometax.gov.in)
- CBDT notifications. Tax rules change
- confirm with a chartered accountant for your own return.
Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. This page is general education, not personal advice. Back to the full glossary