How are mutual fund gains taxed in India?

Last reviewed: 26 Oct 2026 · Noema Research · 4 min read

Many investors think the whole redemption is taxed. Only the gain is taxed, and the rate depends on fund type and holding period. For equity funds (65% or more in Indian equity), gains on units held 12 months or less are taxed at 20%; above 12 months, long term gains above ₹1.25 lakh a year are taxed at 12.5%. Debt funds bought on or after 1 Apr 2023 are taxed at your slab rate whatever the holding period. Add surcharge and 4% cess where they apply.

Create an account to map this answer against your salary allocation.

Only the gain is taxed

If you redeem ₹1,00,000 and ₹30,000 is gain, only ₹30,000 is taxable. The rest is the return of your invested amount.

Tax rates by fund type

Mutual fund capital gains, resident individuals, as of 26 Oct 2026. Rules checked 26 Oct 2026.

Fund type	Held short term	Held long term
Equity oriented (65% or more in Indian listed equity)	12 months or less: 20%	More than 12 months: 12.5% on gains above ₹1.25 lakh a year, no indexation
Debt funds bought on or after 1 Apr 2023 (Specified Mutual Funds)	Always short term, taxed at your slab	No long term category
Debt funds bought before 1 Apr 2023	Slab (listed: 12 months or less; unlisted: 24 months or less)	12.5% without indexation (listed: more than 12 months; unlisted: more than 24 months)
Hybrid, 35% to 65% Indian equity (Other Funds)	Slab (listed: 12 months or less; unlisted: 24 months or less)	12.5% without indexation
International equity and international fund of funds (Other Funds)	Slab (listed: 12 months or less; unlisted: 24 months or less)	12.5% without indexation

Domestic equity fund of funds that meet the equity test follow the equity row. Tax rules for resident individuals as of 26 Oct 2026 (Tax Year 2026 to 27), drawn from the Income-tax Act 2025 as amended by the Finance Act 2026; equity long term gains per incometaxindia.gov.in (section 112A); loss set off per the Income Tax Department guide; no TDS on mutual fund capital gains for residents per CBDT press release of 4 Feb 2020. Add surcharge and 4% cess where they apply. Estimates for planning, not tax advice.

A worked example in rupees

Asha sells equity fund units held for three years with a ₹2,25,000 gain. The first ₹1,25,000 of long term equity gains in the year is exempt; ₹1,00,000 is taxed at 12.5%, which is ₹12,500 before cess. With 4% cess, about ₹13,000.

Dividends (IDCW) and SWP

IDCW is taxed at your slab rate. An SWP taxes only the gain in each withdrawal.

Using the ₹1.25 lakh exemption each year

Long term equity gains up to the annual exemption may be realised without tax, subject to your full-year gains and other rules. Use the exemption only when it fits your investment plan.

Switching funds and losses

A switch is a redemption and can create taxable gains. Short term losses can be set off against short term and long term gains; long term losses only against long term gains. Eligible losses can be carried forward for eight years if the return is filed on time.

Common mistakes

Treating the full redemption as income.
Forgetting each SIP instalment has its own purchase date.
Switching from regular to direct without checking tax.
Assuming old debt indexation still applies.

FAQ

Is long term capital gain on mutual funds exempt up to ₹1.25 lakh?+

For resident individuals, long term gains from equity oriented funds are exempt up to ₹1.25 lakh in a year; gains above it are taxed at 12.5%, before applicable surcharge and cess.

How are debt mutual funds taxed now?+

Debt funds bought on or after 1 Apr 2023 are taxed at your slab rate, regardless of holding period.

Is SIP taxed every month?+

No. Tax generally arises on redemption, and each SIP instalment has its own holding period.

Is TDS deducted on mutual fund redemption for residents?+

No TDS is deducted on mutual fund capital gains for resident investors under the stated rules; tax may still be payable when you file.