Capital Gains Tax on Mutual Funds in India 2026: Equity, Debt, SIP & Hybrid Explained
Mutual fund returns are taxed differently depending on what type of fund you hold, how long you hold it, and whether you receive returns as capital gains or dividends. The rules changed significantly in 2023 (debt funds) and again in 2024 (LTCG rates), and Budget 2026 introduced further updates.
How Mutual Fund Returns Are Taxed: Two Components
Capital Gains vs Dividend: Different Tax Treatment
- Capital Gains: when you redeem (sell) units at a price higher than you bought them
- Dividends: periodic payouts from the fund’s profits (IDCW – Income Distribution cum Capital Withdrawal)
“Start investing with confidence! Explore the best
mutual funds
and grow your wealth.”
When Each Type of Tax Kicks In
Capital gains tax applies only when you sell or redeem mutual fund units. Simply holding units – even if the NAV has grown significantly – does not trigger tax. Dividends are taxed when declared and credited to your account.
Tax on Equity Mutual Funds
STCG at 20% (Under 12 Months)
If you redeem equity fund units within 12 months of purchase, the gain is Short-Term Capital Gain (STCG). Tax rate: 20% flat. No exemption applies.
Example: Invested Rs.50,000 in January 2026, redeemed in July 2026 for Rs.56,000. STCG = Rs.6,000. Tax = 20% x Rs.6,000 = Rs.1,200.
LTCG at 12.5% With Rs.1.25 Lakh Exemption (Over 12 Months)
Units held for more than 12 months qualify for LTCG treatment. Tax rate: 12.5% on gains exceeding Rs.1.25 lakh in the financial year.
Example: Invested Rs.1 lakh in April 2024, redeemed in May 2026 for Rs.1.6 lakh. LTCG = Rs.60,000. Since Rs.60,000 < Rs.1,25,000 exemption: Tax = Rs.0.
The Rs.1.25 lakh exemption is a combined annual limit across all equity investments – direct stocks and equity mutual funds together.
Tax on Debt Mutual Funds (Post-April 2023)
Why Long-Term Benefits No Longer Apply
From April 1, 2023, all gains from debt mutual funds – regardless of holding period – are treated as short-term and taxed at your income tax slab rate. There is no separate LTCG treatment. A debt fund held for 5 years now generates gains taxed exactly like interest from a bank FD.
Taxed at Slab Rate – How This Hurts High-Income Investors
For someone in the 30% tax slab, a gain of Rs.1 lakh from a debt fund redemption is taxed at 30%. This eliminated the advantage debt funds had over bank FDs.
Alternatives to Debt Funds for Tax Efficiency
- Arbitrage funds (equity-classified, taxed like equity funds)
- Balanced advantage funds with >=65% equity – equity LTCG rules
- Direct fixed deposits (same slab tax, simpler)
Tax on Hybrid Mutual Funds – The 35%/65% Equity Rule
Aggressive Hybrid Funds (>=65% Equity): Equity Tax Rules
Aggressive hybrid funds – which typically hold 65–80% equity – are taxed exactly like pure equity funds: under 12 months = STCG at 20%, over 12 months = LTCG at 12.5% above Rs.1.25 lakh.
Conservative Hybrid Funds (<35% Equity): Debt Tax Rules
Conservative hybrid funds with less than 35% equity are classified as debt funds. All gains are taxed at slab rate, regardless of holding period.
Balanced Advantage Funds: The 24-Month Holding Twist
Balanced advantage funds (35%–65% equity): held < 24 months = STCG at slab rate; held >= 24 months = LTCG at 12.5% (no indexation). Check your specific fund’s equity allocation in its factsheet.
Tax When You Invest Through SIPs
Each SIP Instalment Has Its Own Holding Period
Each monthly instalment is treated as a separate purchase with its own holding period. When you redeem, the oldest units are redeemed first (FIFO – First In, First Out principle).
FIFO Principle: First In, First Out on Redemption
If you start an equity fund SIP in January 2024, by January 2026 your first 12 instalments have crossed the 12-month mark (LTCG eligible), but the most recent 12 instalments have not.
Worked Example: SIP Redemption Tax Calculation
Monthly SIP: Rs.5,000 per month from April 2024. Redeemed entirely in October 2026.
- Units bought April 2024 – September 2025 (18+ months): LTCG eligible
- Units bought October 2025 – September 2026 (0–12 months): STCG applicable
Dividend Taxation on Mutual Funds (Updated 2026)
Taxed as Income From Other Sources at Slab Rate
Since FY 2020-21, dividends from mutual funds are taxed in the investor’s hands as Income from Other Sources at their applicable slab rate. If you are in the 30% slab, a Rs.50,000 mutual fund dividend results in Rs.15,000 tax.
TDS Deduction Before Payout (10% Above Rs.5,000)
The fund house deducts TDS at 10% before paying dividends if the dividend amount from a single fund exceeds Rs.5,000 in a financial year. You can claim credit for this TDS in your ITR.
New IT Act 2025 Change: Interest Deduction Removed
The new Income Tax Act 2025, effective April 1, 2026, removes the previous provision allowing deduction of up to 20% of dividend income as interest expense. Dividend income is now taxed on the full gross amount with no deduction.
STT on Mutual Fund Redemptions
Only on Equity-Oriented Funds
| Fund Type | STT on Redemption |
|---|---|
| Equity / Equity-Oriented Hybrid | 0.001% |
| Debt / Debt-Oriented Hybrid | Nil |
How to Get Your Capital Gains Statement from Lemonn
Step-by-Step: Download Report for ITR Filing
- Open Lemonn app → tap Profile
- Go to Reports → Capital Gains Report
- Select FY April 1, 2025 to March 31, 2026
- Download – separates STCG and LTCG, equity vs debt fund gains
Understanding Realised CG vs Unrealised CG in the Report
The capital gains statement shows only realised gains – units you actually sold in the year. Unrealised gains on units you still hold are not taxable until you redeem.
Smart Tax Strategies for Mutual Fund Investors
Book Rs.1.25 Lakh LTCG Every Year Tax-Free (Equity Funds)
Book up to Rs.1.25 lakh in long-term gains every financial year. You pay zero tax (within the exemption), redeploy the proceeds back into the same fund at the current NAV (resetting your cost basis), and shield future gains from the 12.5% rate.
Switch from Dividend to Growth Plans for Tax Efficiency
Dividend plans distribute income regularly – taxed at your slab rate. Growth plans accumulate NAV – taxed only at 12.5% (LTCG) when you redeem, after the 12-month holding period. Growth plans are almost always more tax-efficient for equity funds.
Use ELSS to Offset Tax Liability Under Section 80C
Investing in ELSS mutual funds gives a deduction of up to Rs.1.5 lakh under Section 80C (old tax regime). This saves up to Rs.46,800 per year – offsetting capital gains tax from other mutual fund redemptions.
Avoid Debt Funds if You Are in the 30% Tax Slab
Post-April 2023, debt funds offer no tax advantage over bank FDs for high-income investors. Consider arbitrage funds or direct bond investments instead.
Disclaimer
The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Lemonn (Formerly known as NU Investors Technologies Pvt. Ltd) do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
Related Posts
Download Lemonn
Download my mutual fund app - your mutual funds, stock, invest in ipo, mf, trade invest hub with demat account features.
