Capital gains tax on mutual funds in India FY 2025-26: STCG, LTCG, and what changed after Budget 2024

For informational purposes only. Ek Crore does not recommend specific investments or tax strategies. Tax rules change frequently — verify current rules at incometax.gov.in before acting. Consult a practising CA for advice tailored to your situation.

Budget 2024 (the Finance (No. 2) Act, 2024) changed capital gains tax on mutual funds in ways that affect every investor in India. The short-term capital gains rate on equity funds went from 15% to 20%. The long-term capital gains rate went from 10% to 12.5%. The indexation benefit for debt funds held before April 2023 was removed. These changes apply to sales made on or after 23 July 2024.

If you sold any mutual fund units in FY 2025-26, you owe tax at the new rates. This guide explains how to calculate that tax for each type of fund.

The two categories that determine your tax rate

Every mutual fund in India falls into one of two tax categories based on the proportion of its portfolio invested in equity:

Equity-oriented funds: 65% or more of assets in domestic equity. This includes large-cap, mid-cap, small-cap, flexi-cap, ELSS, and most hybrid equity funds.

Other funds (debt-oriented and hybrid): Less than 65% in equity. This includes pure debt funds, money market funds, liquid funds, and hybrid conservative funds. From 1 April 2023, a further threshold applies within this category:

• Funds with equity ≤35%: taxed at slab rate (the "debt fund rule")
• Funds with equity between 35% and 65%: a separate rule applies (see below)

Tax on equity-oriented funds: STCG and LTCG rates for FY 2025-26

For mutual funds with 65%+ equity allocation:

Exemption: The first ₹1.25 lakh of LTCG on equity-oriented instruments in a financial year is exempt from tax (increased from ₹1 lakh in Budget 2024). STCG has no exemption.

Section 87A rebate does NOT apply to STCG: Under both regimes, Section 87A provides a tax rebate. For FY 2025-26 under the new regime, the rebate is up to ₹25,000 for total income under ₹12 lakh. However, the Supreme Court has held that this rebate does not apply to STCG under Section 111A (special rate tax on equity). If your income is ₹10 lakh and you have ₹1L in equity STCG, you owe 20.8% on that ₹1L even if your other tax is offset by the 87A rebate.

Source: Capital gains, Income Tax Department · LTCG tax guide, ClearTax

Tax on debt-oriented funds: all at slab rate from April 2023

For mutual funds with equity allocation of 35% or less (pure debt, liquid, money market funds):

All gains are taxed at your income tax slab rate, regardless of how long you held the units. There is no LTCG treatment, no separate lower rate, and no indexation benefit for new purchases.

Key distinction based on purchase date:

The practical consequence: if you bought a debt fund in 2018 and sold it in August 2024, you pay 12.5% without indexation on the gains (not 20% with indexation as older rules allowed, and not slab rate as the 2023 rule applied only to new purchases).

Arbitrage funds are different: Arbitrage funds are classified as equity-oriented (they meet the 65% equity test) even though they use hedging to reduce market risk. They are taxed as equity funds.

Source: Debt fund taxation, Bajaj Finserv · Tax reckoner FY 2025-26, Mirae Asset MF

Funds between 35% and 65% equity: the middle category

Funds with equity allocation strictly between 35% and 65% (some balanced hybrid and aggressive hybrid funds) follow a different rule: gains are taxed at your slab rate if held for 24 months or less (STCG), and at 20% without indexation if held for more than 24 months (LTCG). The Budget 2024 changes to the 12.5% rate do not apply to this middle category in the same way.

This is a technical area where the applicable treatment depends on the specific fund's declared allocation. Check with the fund house or a CA for certainty.

Worked examples: tax calculated at five scenarios

All examples assume a salaried investor in the 30% tax slab, and gains realised in FY 2025-26 (after 23 July 2024 where the Budget 2024 rates apply).

Example 1: Equity fund, short-term gain

• Invested ₹2,00,000 in a large-cap fund, sold after 8 months for ₹2,50,000
• STCG = ₹50,000
• Tax = ₹50,000 × 20% = ₹10,000
• Cess (4%) = ₹400
• Total tax: ₹10,400

Example 2: Equity fund, long-term gain within exemption

• Invested ₹2,00,000 in an equity fund, sold after 18 months for ₹3,00,000
• LTCG = ₹1,00,000
• Exempt (below ₹1.25L annual LTCG exemption): ₹0
• Total tax: ₹0

Example 3: Equity fund, long-term gain above exemption

• Invested ₹5,00,000 in a flexi-cap fund, sold after 2 years for ₹8,00,000
• LTCG = ₹3,00,000
• After ₹1.25L exemption: ₹1,75,000 taxable
• Tax = ₹1,75,000 × 12.5% = ₹21,875
• Cess (4%) = ₹875
• Total tax: ₹22,750

Example 4: Debt fund (bought July 2023), any holding period

• Invested ₹3,00,000 in a debt fund in July 2023, sold in March 2026 for ₹4,00,000
• Gain = ₹1,00,000
• Taxed at slab rate: ₹1,00,000 × 30% = ₹30,000
• Cess (4%) = ₹1,200
• Total tax: ₹31,200 (same whether held 1 year or 5 years)

Example 5: Debt fund (bought 2019, sold August 2024)

• Invested ₹2,00,000 in a debt fund in January 2019, sold in August 2024 for ₹3,50,000
• Gain = ₹1,50,000 (pre-April 2023 purchase, sold after 23 July 2024)
• Rate: 12.5% without indexation
• Tax = ₹1,50,000 × 12.5% = ₹18,750
• Cess (4%) = ₹750
• Total tax: ₹19,500 (note: previously this might have been taxed at 20% with indexation, potentially less tax if inflation was high)

Note: All examples are illustrations. The actual tax depends on your total income, applicable surcharges, and the specific fund's classification. Verify with a CA before filing.

The SIP holding period: each installment has its own clock

⚠ Common mistake: Believing that a SIP "becomes LTCG" after the first installment turns 12 months old. It does not. Each individual SIP installment has its own 12-month holding period clock, measured from the date that installment was invested.

Example: You invest ₹10,000/month via SIP for 24 months (January 2024 to December 2025). You redeem everything on 1 January 2026.

In this case, 12 months of SIP are LTCG and 12 months are STCG. The SIP ran for 2 years, but only the first year's installments qualify for LTCG treatment at redemption.

FIFO order applies: The income tax department uses first-in, first-out (FIFO) — the units purchased earliest are considered sold first. This is the default order for capital gains calculation unless you specify otherwise (which is not possible for mutual funds).

The practical implication: If you plan to redeem an SIP portfolio and want maximum LTCG treatment, hold it for at least (months of SIP + 12 months) before redeeming. A 24-month SIP fully qualifies for LTCG only if redeemed from month 37 onwards.

How to report mutual fund capital gains in your ITR

Capital gains from mutual funds go in Schedule CG of your ITR.

• STCG from equity-oriented funds: Section 111A, flat 20% rate
• LTCG from equity-oriented funds: Section 112A, flat 12.5% rate (after ₹1.25L exemption)
• Debt fund gains: included in "other income" at slab rate

Where to find your transaction data: Your broker or fund house (AMC) issues a Consolidated Account Statement (CAS) from CAMS or Kfintech showing all transactions and gains. The AIS on the income tax portal also shows MF redemption proceeds (the gross amount, not just the gain — you must calculate the gain separately).

LTCG and STCG amounts should already appear in your AIS under the "Securities/units of mutual fund" category. But verify against your CAS — the AIS shows proceeds, and you need to subtract your purchase cost (cost of acquisition) to get the taxable gain.

Source: Capital gains tax guide, ClearTax

Bottom line

• Equity funds STCG (under 12 months): 20% + 4% cess = 20.8% (increased from 15% effective July 23, 2024)
• Equity funds LTCG (over 12 months): 12.5% + 4% cess = 13% after the ₹1.25L annual exemption (increased from 10% effective July 23, 2024)
• Debt funds (bought after March 31, 2023): All gains at slab rate, any holding period, no indexation
• Debt funds (bought before April 1, 2023, sold after July 23, 2024): 12.5% without indexation
• SIP installments each have their own 12-month clock: the last 12 months of a 24-month SIP are still STCG at the point of redemption
• Section 87A rebate does not apply to equity STCG under Section 111A

Frequently asked questions

Q: I have ₹1.25 lakh of LTCG and ₹50,000 of STCG on equity funds in FY 2025-26. How much tax do I owe?

A: LTCG of ₹1.25L is fully exempt (exactly at the annual limit). STCG of ₹50,000 is taxed at 20%: ₹10,000 plus 4% cess = ₹10,400. You owe ₹10,400.

Q: Do I owe tax if I switch between funds in the same AMC?

A: Yes. A switch (from a liquid fund to an equity fund within the same AMC, for example) is treated as a redemption from the first fund and a purchase of the second. Capital gains tax applies on the switch out, based on the holding period in the original fund and the applicable rate.

Q: Are ELSS fund gains taxed the same as other equity funds?

A: Yes. ELSS (Equity Linked Savings Scheme) funds have a mandatory 3-year lock-in, so all ELSS redemptions are LTCG by definition. LTCG on ELSS above ₹1.25L is taxed at 12.5%. Note that the 80C deduction for ELSS investments is available only under the old tax regime.

Q: What is the grandfathering rule for equity funds?

A: Equity LTCG tax was reintroduced in Budget 2018. For units acquired before 1 February 2018, the cost of acquisition is the higher of the actual purchase price or the "fair market value" as of 31 January 2018 (the closing NAV on that date). This protects pre-2018 gains from tax. For units bought after February 1, 2018, the actual purchase price is the cost.

Q: My SIP ran for 3 years. Can I redeem it tax-free if all installments are LTCG?

A: You can redeem tax-free only if total LTCG (from all equity-oriented investments, not just mutual funds) is within ₹1.25 lakh for the financial year. If your LTCG exceeds that, the excess is taxed at 12.5%. The 3-year SIP does mean all installments are LTCG — but a large SIP can generate LTCG well above the exemption limit.

Sources: Capital gains, Income Tax Department · LTCG guide, ClearTax · Capital gains guide, ClearTax · Tax reckoner FY 2025-26, Mirae Asset MF

Last verified: May 2026, FY 2025-26. Tax rules change — confirm current rules at incometax.gov.in before acting.