Tax on Mutual Funds

Mutual fund taxation in India doesn't hinge only on how long you hold your units — it depends heavily on what kind of fund you're holding. Two investors who redeem after an identical holding period can face completely different tax bills if one holds an equity fund and the other holds a debt fund.

A fund investing at least 65% of its assets in domestic equity is classified as equity-oriented and taxed exactly like direct stock holdings.

• Held 12 months or less: STCG at 20%

• Held more than 12 months: LTCG at 12.5% on gains above ₹1.25 lakh per financial year, with no indexation benefit

For units of debt and other specified mutual funds purchased on or after 1 April 2023, gains are taxed entirely at your income tax slab rate, irrespective of how long you hold the units. The long-term concept and any indexation benefit that previously applied to debt funds have been removed for these units.

From FY 2025–26 onward, gold funds, international funds, and other non-equity categories generally follow the 12.5% LTCG rate once the applicable long-term holding threshold is crossed — but crucially, without the ₹1.25 lakh exemption reserved for equity-oriented funds.

A hybrid fund's tax treatment isn't fixed by its name — it depends on its real equity exposure. Funds maintaining at least 65% equity allocation are taxed like equity funds; those below that threshold generally follow debt-fund rules. This makes checking a hybrid fund's actual portfolio composition, not just its category label, essential before assuming its tax treatment.

Two funds that look similar on the surface — both labelled "balanced" or "multi-asset," for instance — can carry meaningfully different tax outcomes purely because of their underlying equity allocation. This is stated clearly in every fund's Scheme Information Document, and it's worth reading before committing, not after redeeming.

Tax efficiency shouldn't override your actual asset allocation needs — a debt fund taxed at slab rate can still be the right choice for a short-term goal. Powered by Mahir Research, investors can weigh a fund's category, historical performance, and expense ratio together, treating taxation as one important factor among several rather than the sole basis for a fund selection decision.