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Taxation of Mutual Funds in India — Capital Gains Guide

How the law taxes mutual fund gains in FY 2026-27: fund category, holding period, rates, the ₹1.25 lakh equity exemption, IDCW and TDS — explained for education, without jargon.

1. How mutual fund taxation works

The tax on a mutual fund gain depends on what the scheme holds, not what it is called. The law sorts every scheme into one of three buckets based on its portfolio allocation, and each bucket has its own holding period and rate. The framework in force was rewritten by the Finance (No. 2) Act, 2024 (effective 23 July 2024) and continues unchanged for FY 2026-27 under the Income-tax Act, 2025 (which replaced the 1961 Act from 1 April 2026, renumbering sections without changing these rates); the Finance Act, 2026 made no change to capital gains rates, holding periods or thresholds.

  • Equity-oriented funds — at least 65% in listed domestic equity shares.
  • Specified mutual funds — more than 65% in debt and money-market instruments (definition amended with effect from 1 April 2026; earlier defined as funds with not more than 35% in domestic equity).
  • Other funds — everything in between (many hybrids, and most gold and international funds).

2. Equity-oriented funds

Gain typeHolding periodRate (residents; excl. surcharge & 4% cess)Provision
Short-term (STCG) 12 months or less 20% Section 111A of the 1961 Act; now section 196, Income-tax Act 2025
Long-term (LTCG) More than 12 months 12.5% on gains exceeding ₹1.25 lakh per financial year; no indexation Section 112A of the 1961 Act; now section 198, Income-tax Act 2025

The ₹1.25 lakh exemption is a combined annual threshold across all section 112A-type assets (equity-oriented fund units and listed equity shares together). Resident individuals and HUFs may set an unexhausted basic exemption limit against these gains; non-residents may not.

3. Debt and other funds — including "specified mutual funds"

  • Specified mutual funds (section 50AA of the 1961 Act, carried into the Income-tax Act, 2025): for units acquired on or after 1 April 2023, the entire gain is deemed short-term regardless of holding period and taxed at your applicable slab rate. From 1 April 2026 a scheme is "specified" if it invests more than 65% in debt and money-market instruments (measured on the annual average of daily closing figures), or is a fund of funds investing 65% or more in such funds.
  • Units of debt funds acquired before 1 April 2023: outside section 50AA — long-term if held more than 24 months, taxed at 12.5% without indexation; short-term gains at slab rate.
  • Other non-equity funds that are not "specified": short-term (24 months or less) at slab rate; long-term (more than 24 months) at 12.5% without indexation (section 112 of the 1961 Act; now section 197, Income-tax Act 2025).
  • Indexation: the indexation benefit was withdrawn for mutual fund units by the Finance (No. 2) Act, 2024 — LTCG on units is now computed on the simple difference between sale and purchase price.

4. Category mapping — where does your fund fall?

Portfolio allocationTypical categoriesLong-term afterSTCGLTCG
≥65% domestic equity Equity funds, aggressive hybrid, arbitrage, equity index funds/ETFs 12 months 20% 12.5% above ₹1.25 lakh
35–65% equity (not >65% debt) Balanced hybrid, some dynamic asset-allocation funds 24 months Slab rate 12.5%, no indexation
>65% debt & money market Debt funds, liquid/overnight funds, conservative hybrid (units acquired on/after 1 Apr 2023) Never — always deemed short-term Slab rate Not applicable
Neither bucket Gold funds/ETFs, international funds, multi-asset funds (below the 65% debt line) 24 months Slab rate 12.5%, no indexation

The classification depends on each scheme's actual portfolio — the scheme information document and the fund house's annual tax reckoner state the category applicable to a given scheme.

5. IDCW (dividend) taxation and TDS

  • IDCW payouts are taxed at your slab rate — Income Distribution cum Capital Withdrawal amounts are added to your total income in the year of receipt.
  • TDS for residents (section 194K of the 1961 Act): the fund deducts 10% TDS on IDCW where the payout exceeds ₹10,000 in a financial year (threshold raised from ₹5,000 by the Finance Act, 2025). Eligible investors with income below the basic exemption limit may submit Form 15G/15H.
  • No TDS on capital gains for residents — see the next section.

6. Residents vs NRIs — the withholding difference

Resident investorsNRI investors
Capital gains on redemption No TDS — you compute the tax yourself, pay advance tax / self-assessment tax and report it in your return. TDS deducted at source on every redemption (20% equity STCG, 12.5% LTCG, 30% other short-term gains, plus surcharge and cess).
IDCW payouts 10% TDS above ₹10,000 per year (section 194K) 20% TDS from the first rupee (section 196A of the 1961 Act), or the lower treaty rate with a valid TRC
Final liability In both cases the actual tax is settled through the income-tax return; excess TDS is refundable.

NRI taxation has several additional dimensions — residency tests, DTAA relief, repatriation and re-KYC — covered in detail in our NRI Corner.

7. Set-off and carry-forward basics

  • Short-term capital losses can be set off against both short-term and long-term capital gains.
  • Long-term capital losses can be set off only against long-term capital gains.
  • Unabsorbed capital losses can be carried forward for 8 years and set off against capital gains in those years — provided the return for the loss year is filed by the due date.
  • Capital losses cannot be set off against salary or other heads of income.

Disclaimer, currency and sources

Last updated: 25 August 2026  |  Based on: the Income-tax Act, 2025 (in force from 1 April 2026), read with the Finance (No. 2) Act, 2024, the Finance Act, 2025 and the Finance Act, 2026.

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