How are equity mutual funds taxed?

For equity-oriented funds (at least 65% in Indian equities), gains on units sold within 12 months are short-term and taxed at 20%. Gains on units held longer than 12 months are long-term: the first ₹1.25 lakh of long-term gains in a financial year is exempt and the rest is taxed at 12.5%.

How are debt mutual funds taxed?

For debt funds bought on or after 1 April 2023, the gains are added to your income and taxed at your slab rate, whatever the holding period. There is no indexation and no separate long-term rate.

Yes. IDCW payouts are added to your income and taxed at your slab rate, and TDS may be deducted by the fund house above a threshold.

Are the tax rules likely to change?

They change often, usually in the Union Budget. The information here was checked on 2 October 2026 against sources describing FY 2026-27. Always confirm on the Income Tax Department's website or with a tax professional before acting.

Mutual fund taxation in India: capital gains on equity and debt funds

Written and reviewed by Omm · Last reviewed 2 October 2026 · General information, not investment advice

Last reviewed 2 October 2026. Tax law changes, usually at each Union Budget. This is general information, not tax advice. Confirm the current rules with the Income Tax Department or a tax professional.

Tax is charged on the gain when you sell (redeem) units, or on payouts such as IDCW. Which rules apply depends on the type of fund and how long you held the units. Switching between funds counts as a sale.

Equity-oriented funds

A fund is equity-oriented if it keeps at least 65% of its assets in Indian equity shares. This includes most equity funds, ELSS, index funds on Indian equity indices, and equity-oriented hybrid funds such as aggressive hybrid and arbitrage funds.

Holding period	Type	Tax
Up to 12 months	Short-term gain	20%
More than 12 months	Long-term gain	12.5% on gains above ₹1.25 lakh in the financial year; the first ₹1.25 lakh is exempt

The ₹1.25 lakh exemption applies to the total long-term equity gains in the year across all your funds and shares, and does not carry forward.

Debt funds

For debt funds bought on or after 1 April 2023, all gains are taxed at your income tax slab rate, whether you hold for a week or ten years, with no indexation. Funds that invest mostly in debt and money-market instruments fall into this group. Debt funds bought earlier and held for more than 24 months can follow a different long-term rule.

Other funds

Funds that are neither equity-oriented nor mostly debt, such as hybrid funds with 35% to 65% equity, gold and silver funds, and international funds, have their own holding period and rate rules, and the long-term rate is 12.5% without indexation after the required holding period. The holding period differs by fund type, so check the rule for your specific fund.

IDCW

Payouts under the IDCW option are treated as income and taxed at your slab rate, whichever type of fund pays them. The fund house may deduct TDS above a yearly threshold.

How gains are worked out

The gain is the redemption value minus the cost of the units sold. Units are sold in first-in, first-out order, so with a SIP the oldest instalments are redeemed first, and each instalment has its own holding period.

Worked example

You invest ₹5,00,000 in an equity fund and redeem after 18 months for ₹6,00,000, a gain of ₹1,00,000. It is a long-term gain and below the ₹1.25 lakh exemption, so no tax is due on it. If your total long-term equity gain in that year were ₹2,00,000, tax at 12.5% would apply to ₹75,000, which is ₹9,375.

Other costs

Exit load, if any, is deducted from the redemption and is separate from tax. Securities transaction tax is applied on redeeming equity fund units. See expense ratio and exit load.