Mutual fund gains are taxed by what the fund holds and when you bought the units. Equity funds pay 20% on gains from units held 12 months or less and 12.5% above ₹1.25 lakh after that; debt fund units bought from 1 April 2023 are taxed at your slab however long you hold them. Most other funds pay your slab within 24 months and 12.5% after. The table below puts all five types side by side, and Bhavna's ₹6 lakh redemption works two of them.

Which rate applies to which fund type?

Rates for FY 2026-27, unchanged since 23 July 2024; add 4% cess, and a surcharge above ₹50 lakh of income.

Fund type Short-term gain Long-term gain
Equity funds (at least 65% in Indian shares, including Indian index funds, ELSS and aggressive hybrid funds) Held 12 months or less: 20% Held over 12 months: 12.5% above ₹1.25 lakh a year
Debt funds (more than 65% in debt), units bought from 1 April 2023 Your slab, at any holding period None: always your slab
Debt fund units bought before 1 April 2023 Held 24 months or less: your slab Held over 24 months: 12.5%, no indexation
Hybrid funds under 65% equity and not over 65% in debt Held 24 months or less: your slab Held over 24 months: 12.5%
International and gold funds of funds Held 24 months or less: your slab Held over 24 months: 12.5%

For equity funds, STCG falls under section 111A of the 1961 Act (section 196 of the 2025 Act) and LTCG on mutual funds under section 112A (section 198), with one ₹1.25 lakh exemption a year across all your listed shares, equity funds and equity ETFs.

For debt funds, the purchase date decides. Section 50AA of the 1961 Act taxes units bought from 1 April 2023 at your slab for good; older units are all past 24 months now, so they pay 12.5%. Hybrid fund tax follows the mix: a conservative hybrid with more than 65% in debt is taxed as a debt fund, and one in between sits in row four.

The last row changed in FY 2025-26. Until March 2025, these funds bought from April 2023 were taxed at your slab like new debt units; since 1 April 2025 that rule covers only funds over 65% in debt, or funds of funds putting 65% or more into them.

Go by what a fund holds, not its name: a multi-asset or balanced fund can land in row one, two or four, as its scheme documents state. Listed ETFs, gold and international ones included, turn long-term after 12 months, not 24; debt ETFs bought from April 2023 follow the second row.

What does Bhavna pay on a ₹6 lakh redemption?

Bhavna earns ₹30 lakh a year, which puts her in the new regime's 30% slab. In October 2026 she redeems ₹6,00,000 for a home down payment, with no other capital gains that year:

  • ₹4,00,000 from an equity fund held three years, with a gain of ₹1,80,000
  • ₹2,00,000 from a debt fund bought in June 2022 for ₹1,50,000, a gain of ₹50,000

Equity leg: ₹1,80,000 minus the ₹1,25,000 exemption leaves ₹55,000. At 12.5% that is ₹6,875, plus 4% cess, ₹7,150.

Debt leg: bought before April 2023 and held over 24 months, the ₹50,000 is long-term, at 12.5%: ₹6,250, plus cess, ₹6,500.

Total: ₹13,650 on ₹2,30,000 of gains, about 5.9%. Her 30% slab touches neither long-term gain.

What if her second fund was bought in 2024?

A debt fund bought in June 2024 falls under section 50AA, so the same ₹50,000 gain is taxed at her slab, 31.2% with cess: ₹15,600 instead of ₹6,500. A gold or international fund of funds bought then and held 28 months sits in row five at ₹6,500, though under the rule before April 2025 it too would have paid her slab.

Debt fund tax on newer units moves with salary. Under the new regime for FY 2026-27, the ₹50,000 gain costs ₹7,800 in the 15% slab (₹15 lakh of gross salary), ₹10,400 in the 20% slab (₹18 lakh), ₹13,000 in the 25% slab (₹22 lakh) and ₹15,600 in the 30% slab. The fund of funds and her 2022 units cost ₹6,500 at all four salaries, below the ₹50 lakh surcharge line.

Check the purchase dates on your statement before redeeming; within one scheme, the oldest units go first. Whether newer debt units still earn their place in the 30% slab is tested in are debt funds worth it in the 30% slab, and fund gains against FD interest in FD vs mutual funds after tax.

When do you pay the tax on a redemption?

No tax is deducted when a resident redeems; you pay it yourself. Advance tax is due when the year's tax left after TDS is ₹10,000 or more, and Bhavna's salary TDS does not cover her ₹13,650, so she pays it in the instalments left, 15 December and 15 March, as advance tax for salaried explains.

For a SIP, each instalment has its own holding period, as the SIP guide shows. A switch is a sale too, which is why switching regular to direct has a tax bill.

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Frequently asked questions

Yes, within limits. A short-term capital loss can be set off against short-term or long-term gains, but a long-term loss only against long-term gains. A loss you cannot use this year can be carried forward for eight years, provided you file your return by the due date.
Yes, on the part of the gain made before 1 February 2018. For units bought before that date, the cost is taken as the higher of what you paid and the 31 January 2018 NAV (for an ETF, its highest price that day), capped at the sale price, so the rise up to that date is not taxed (section 55(2)(ac) of the 1961 Act). The gain after it is taxed like any other long-term equity gain.
They are not capital gains: each IDCW (dividend) payout is added to your income and taxed at your slab in the year you receive it, whatever the fund type, and the ₹1.25 lakh exemption does not apply. Since April 2025, the fund house deducts 10% TDS once its payouts to you cross ₹10,000 in a financial year.

This is general information for salaried individuals in India, not personalised financial advice.