How LTCG Tax on Mutual Funds Works in India 2026

Mutual fund taxation in India distinguishes between equity funds and debt funds, and between short-term and long-term capital gains within each category. The holding period — how long the units were held before redemption — determines whether the gain is classified as short-term or long-term, which in turn determines the applicable tax rate. Understanding these rules is essential for calculating the actual post-tax return on any mutual fund investment and for planning redemptions to minimise the tax impact.

Equity mutual fund taxation: LTCG and STCG

For equity mutual funds — defined as funds that invest at least sixty-five percent of their assets in domestic equity and equity-related instruments — the capital gain tax structure is as follows.

Short Term Capital Gains — STCG — applies to gains on units held for twelve months or less. STCG on equity funds is taxed at fifteen percent. This is a flat rate regardless of the investor's income tax slab.

Long Term Capital Gains — LTCG — applies to gains on units held for more than twelve months. LTCG on equity funds is taxed at ten percent on the amount of gains exceeding one lakh rupees per financial year. Gains up to one lakh rupees per year are completely exempt from tax.

This structure means that equity mutual fund investors who redeem below one lakh rupees of gains in any financial year pay zero tax on those gains. For investors with larger gains, the ten percent LTCG rate applies only on the amount above the one lakh threshold — making it significantly more tax-efficient than FD interest for high-income investors.

The one lakh rupee LTCG exemption: how to use it

The one lakh rupee annual LTCG exemption resets at the start of each financial year — April first. Investors with large equity mutual fund holdings can plan annual partial redemptions to harvest gains below the one lakh threshold each year — effectively taking out up to one lakh rupees of gains annually tax-free and reinvesting the same amount in the fund. Over many years, this tax harvesting strategy can significantly reduce the cumulative tax liability on a large equity portfolio.

Hybrid fund taxation

For hybrid funds, the taxation depends on the equity allocation. Funds classified as equity-oriented — holding sixty-five percent or more in equity — are taxed as equity funds with LTCG at ten percent after one year. Funds with less than sixty-five percent equity allocation — such as conservative hybrid or debt-oriented funds — are taxed as debt funds.

Debt mutual fund taxation from April 2023

From April 2023, the Finance Act removed the indexation benefit and the concessional LTCG rate for debt mutual funds. Debt fund gains — regardless of holding period — are now taxed at the investor's applicable income tax slab rate. This change eliminated the historical tax advantage of debt funds over bank FDs for many investors, making the post-tax return comparison between debt funds and FDs closer than it previously was.

For investors in the thirty percent tax bracket, the post-tax return from a debt fund now closely approximates the post-tax return from an equivalent FD. Debt funds may still offer marginal advantages through daily compounding of NAV, higher short-term liquidity, and — for some fund types — potentially higher pre-tax returns than equivalent FD rates.

Tax on SIP redemptions: each instalment has its own holding period

For SIP investors, each monthly instalment is treated as a separate investment with its own acquisition date and holding period. When units are redeemed, the fund house uses a FIFO — First In First Out — method to determine which units are being sold. The oldest units are sold first — typically the ones held the longest — which in a long-running SIP usually means units held for more than twelve months, qualifying for LTCG treatment.

Filing ITR with mutual fund capital gains

All capital gains from mutual fund redemptions must be declared in the annual Income Tax Return — ITR. The mutual fund registrar — CAMS or KFintech — provides a consolidated capital gains statement that summarises LTCG, STCG, and the applicable tax for each redemption during the financial year. This statement is available on the registrar's website and simplifies ITR filing.

Mutual fund investments are subject to market risks. Past performance is not an indicator of future returns. Please read all scheme-related documents carefully before investing.