How are equity mutual funds taxed in India?

Equity mutual funds held over 12 months are taxed as long-term capital gains (LTCG) — gains above ₹1.25 lakh per year are taxed at 12.5%. If sold within 12 months, gains are short-term (STCG) and taxed at 20%. Always confirm current rates, as they are revised in union budgets.

What is the difference between LTCG and STCG?

LTCG (long-term capital gains) applies when you hold an investment beyond the qualifying period and is taxed at a lower rate. STCG (short-term capital gains) applies to shorter holding and is taxed higher. Holding longer almost always lowers your tax.

How can I legally reduce tax on mutual funds?

Hold equity funds beyond 12 months for the lower LTCG rate, use the annual LTCG exemption by harvesting gains within the limit, invest via ELSS for Section 80C benefit, and avoid frequent switching which triggers taxable events. Consult a professional for your specific situation.

How Are Mutual Funds Taxed in India? (2026 Guide)

By Bhrugu Thakkar · Real Value (ARN 24454) · June 2026 · 6 min read

Short answer: Tax depends on fund type (equity vs debt) and how long you held it. Equity funds held over 12 months get the lower long-term rate; sold sooner, the higher short-term rate applies. Holding longer almost always means paying less tax.

Tax confusion makes people either panic-sell or never sell. Here's the clear version — but always confirm current rates, since budgets revise them.

The two things that decide your tax

1. What kind of fund? Equity funds (65%+ in stocks) and debt funds are taxed differently. 2. How long did you hold it? Longer holding = "long-term" = lower rate.

Equity mutual funds

Holding period	Type	Tax
Up to 12 months	STCG (short-term)	20%
Over 12 months	LTCG (long-term)	12.5% on gains above ₹1.25 lakh/year

That ₹1.25 lakh annual LTCG exemption is a gift most people never use. Gains up to that limit each year are tax-free.

Debt mutual funds

For most debt funds bought in recent years, gains are added to your income and taxed at your slab rate, regardless of holding period. This removed the old long-term advantage debt funds once had — worth knowing before you assume debt funds are tax-efficient.

What about SIPs?

Each SIP instalment is treated as a separate purchase with its own holding period. So when you redeem, the units are counted oldest-first (FIFO) — your earliest instalments may qualify for LTCG while recent ones don't.

Legal ways to pay less

Hold equity funds beyond 12 months for the lower LTCG rate
Use the ₹1.25 lakh annual exemption — "harvest" gains within the limit each year
Invest in ELSS for a Section 80C deduction (with a 3-year lock-in)
Avoid frequent switching — every switch is a taxable sale

Important: tax rules and rates change in union budgets, and your situation is unique. Use this as a map, not final advice — confirm specifics with a professional before acting.

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Mutual fund investments are subject to market risks. Read all scheme related documents carefully. Tax rules change and vary by individual — this is educational content, not tax or investment advice. Real Value — AMFI Registered Mutual Fund Distributor, ARN 24454.