How are mutual funds taxed in India?

By the India Law Simplified editorial team · Verified against the bare Acts & official portals · Updated 2026-08-18 · ~8 min read

⚡ Quick answer

It depends on the type of fund and how long you hold it. For equity mutual funds (65%+ in Indian equities), gains within 12 months are short-term, taxed at 20%; beyond 12 months they are long-term, taxed at 12.5% on the amount above a ₹1.25 lakh annual exemption. Debt mutual funds bought on or after 1 April 2023 are taxed entirely at your slab rate, regardless of holding period — the old long-term indexation benefit no longer applies to them.

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Mutual funds are how most Indians invest today — but their tax treatment changed significantly in 2023 and again in 2024, and many investors are unsure what they'll owe when they redeem. The rules differ sharply between equity and debt funds. This guide explains exactly how each is taxed, how SIPs work for the holding-period test, and the ₹1.25 lakh exemption, with worked examples.

1Equity funds — the favourable treatment

Equity mutual funds (those investing 65% or more in Indian equities, including most equity-oriented hybrid funds) get concessional rates:

Held under 12 months → short-term capital gain (STCG), taxed at 20% (Section 111A)
Held over 12 months → long-term capital gain (LTCG), taxed at 12.5% on gains above ₹1.25 lakh per financial year (Section 112A)

💡 ExampleYou redeem an equity fund after 3 years with a ₹3 lakh gain. The first ₹1.25 lakh is exempt; the remaining ₹1.75 lakh is taxed at 12.5% = ₹21,875 (plus cess). If you'd redeemed within 12 months, the whole ₹3 lakh would be STCG taxed at 20% = ₹60,000.

2Debt funds — taxed at your slab

The big change: debt mutual funds bought on or after 1 April 2023 are taxed entirely at your slab rate, with no long-term concession and no indexation, no matter how long you hold them. Effectively all gains are treated like short-term income.

⚠️ ImportantUnits of debt funds bought before 1 April 2023 may still follow the older long-term rules for the period up to a cutoff — check the purchase date, as transitional rules can apply.

3How SIPs are taxed

A SIP isn't one investment — it's many. Each monthly instalment is treated as a separate purchase, and redemptions follow FIFO (first-in, first-out):

When you redeem, the oldest units are sold first
Each unit's holding period is counted from its own purchase date
So in one redemption, some units may qualify as long-term and others as short-term

💡 ExampleYou ran a 24-month SIP and redeem everything. The units from the first 12 instalments are over a year old (LTCG), while the last 12 are under a year (STCG) — so your single redemption is split into long-term and short-term portions, each taxed at its own rate.

4Other fund types

A few categories have their own treatment:

Gold funds and international/overseas funds: generally long-term after 24 months at 12.5% (check current rules, which have shifted)
Hybrid funds: taxed as equity if they hold 65%+ in Indian equities, otherwise as debt
ELSS (tax-saving) funds: taxed as equity funds, but with a 3-year lock-in; the investment also qualifies for 80C

✅ TipHold equity funds for at least 12 months to get the 12.5% long-term rate instead of 20% short-term — and use the ₹1.25 lakh annual exemption by spreading large redemptions across financial years.

5What changed on 23 July 2024

The rates on equity funds moved in the middle of a financial year, so gains realised before and after that date in the same year are taxed differently. A great deal of published guidance still quotes the old figures.

Short-term gains on equity funds rose from 15% to 20%. Long-term gains rose from 10% to 12.5%, and the annual exemption on long-term equity gains rose from ₹1 lakh to ₹1.25 lakh.

Indexation was removed across asset classes at the same time, which matters for the fund types that were still eligible for it.

⚠️ ImportantThe holding period thresholds were also standardised: 12 months for listed securities including equity funds, and 24 months for most other assets.

6The three-way split created by the 2023 and 2024 changes

Debt fund taxation is no longer one rule but three, and which applies depends on when the units were bought and what the fund holds.

Units of a specified mutual fund — one investing more than 65% in debt — purchased on or after 1 April 2023: gains are always short-term and taxed at slab, with no long-term treatment however long you hold
Units purchased before 1 April 2023: the earlier rules apply to that holding, so the acquisition date matters and old folios should not be assumed to follow the new rule
Funds holding between 35% and 65% in debt, such as many hybrid and balanced-advantage funds: taxed as long-term at 12.5% after 24 months

✅ TipCheck the actual debt allocation rather than the fund's marketing category. The tax follows the portfolio composition, not the name.

7Growth and IDCW are taxed quite differently

The same fund taxed under the growth option and under the income distribution cum capital withdrawal option produces very different outcomes, and the choice is frequently made without regard to it.

Under growth, nothing is taxed until you redeem, and the gain is then a capital gain at capital-gains rates. Under IDCW, every distribution is added to your income and taxed at your slab rate in the year received, with 10% TDS once distributions cross the threshold.

For anyone in the 30% bracket, growth is almost always the better option — the tax is deferred until redemption and is then charged at 12.5% or 20% rather than at slab.

8Losses, and how to carry them forward

Losses on redemption are not wasted, but the rules on what they can offset are asymmetric and easy to get wrong.

A short-term capital loss can be set off against either short-term or long-term capital gains. A long-term capital loss can only be set off against long-term capital gains. Whatever remains unabsorbed can be carried forward for eight assessment years.

The carry-forward is conditional on filing the return by the due date under section 139(1). A belated return preserves nothing, which is the single most common way investors lose a loss they were entitled to.

✅ TipLosses have to be reported to be carried forward, so a year with only losses is still a year worth filing on time.

Key takeaways

Equity funds: 20% STCG (<12 months); 12.5% LTCG above ₹1.25 lakh (>12 months).
Debt funds bought on/after 1 April 2023: taxed at your slab rate, no LTCG benefit.
SIP units are taxed per-instalment using FIFO — one redemption can be part LTCG, part STCG.
ELSS is taxed as equity but has a 3-year lock-in and qualifies for 80C.
Hold equity funds over 12 months and use the ₹1.25 lakh exemption to cut tax.

Frequently asked questions

Are SIP investments taxed differently?

Each SIP instalment is treated as a separate purchase for the holding-period test, and redemptions follow FIFO. So when you redeem, units held over 12 months (equity) qualify for LTCG and the rest are short-term — taxed accordingly.

How are debt mutual funds taxed now?

Debt funds bought on or after 1 April 2023 are taxed at your slab rate, regardless of holding period, with no long-term capital gains concession or indexation. Older units may follow transitional rules.

What is the tax-free limit on equity mutual fund gains?

Long-term capital gains on equity funds are exempt up to ₹1.25 lakh per financial year. Gains above that are taxed at 12.5% (plus cess).

Is ELSS taxed like other equity funds?

Yes — ELSS gains are taxed as equity (20% STCG / 12.5% LTCG above ₹1.25 lakh), but ELSS has a 3-year lock-in and the investment qualifies for the 80C deduction.

What are the equity fund rates after 23 July 2024?

Short-term gains, on units held twelve months or less, are taxed at 20% — up from 15%. Long-term gains are taxed at 12.5%, up from 10%, with the annual exemption raised from ₹1 lakh to ₹1.25 lakh. Gains realised earlier in the same financial year follow the old rates, so a year straddling that date has two sets.

Growth or IDCW — which is better for tax?

Growth, for almost anyone in a higher bracket. Under growth nothing is taxed until you redeem and the gain is then charged at capital-gains rates of 12.5% or 20%. Under IDCW every distribution is added to income at your slab rate in the year received, with TDS once distributions cross the threshold.

Are hybrid and balanced-advantage funds taxed as equity or debt?

It depends on the actual debt allocation rather than the marketing label. A fund holding more than 65% in debt is a specified mutual fund taxed at slab. One holding between 35% and 65% in debt is taxed as long-term at 12.5% after 24 months. Check the portfolio, not the category name.

Do I pay tax when I switch between two schemes?

Yes. A switch is a redemption of one scheme and a fresh purchase of another, so the gain up to the switch date is taxable even though no money reached your bank account. The same applies to a switch between the growth and IDCW options of the same fund, and to systematic transfer plans, where each transfer is a redemption.

Do I pay tax on gains I have not redeemed?

No. Under the growth option nothing is taxed until units are actually redeemed or switched, however much the net asset value has risen. That deferral is the main tax advantage of growth over IDCW, where every distribution is taxed at slab rates in the year it is received whether or not you need the money.