Capital Gains Tax on Mutual Funds: Equity vs Debt 2026-27

Capital gains tax on mutual funds depends on the type of fund and how long you hold it. Equity funds held for over 12 months pay 12.5% on gains above ₹1.25 lakh a year, and sales within 12 months pay 20%. Debt funds bought on or after 1 April 2023 are taxed at your income slab rate regardless of holding period. Here is the full breakdown for FY 2026-27, with worked examples.

What the Income-tax Act, 2025 changed

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. The rates did not change, but the familiar sections were renumbered:

Redemptions in FY 2025-26 are reported under the old numbers. Redemptions from 1 April 2026 onward fall under the new Act.

How mutual funds are classified for tax

Tax treatment depends on the fund's portfolio, not its name:

• Equity-oriented fund: more than 65% in equity shares of domestic listed companies. Examples are most large-cap, mid-cap, flexi-cap and index funds, ELSS, and arbitrage funds.
• Specified mutual fund (debt): more than 65% in debt and money-market instruments, or a fund of funds that puts 65% or more into such funds. Examples are liquid, gilt, corporate bond and most debt funds. This definition has applied since FY 2025-26.
• Other funds: anything in between, such as some hybrid funds with 35–65% equity, gold funds and international funds of funds. These follow the general capital-gains rules.

Your fund house's factsheet or the AMFI category tells you which bucket a scheme falls in.

Equity mutual funds

Key points:

• The ₹1.25 lakh exemption is shared. It covers all your long-term gains from listed shares, equity funds and business trust units in a year.
• No indexation applies to equity LTCG.
• Grandfathering: For units bought before 1 February 2018, the cost can be taken as the higher of actual cost and the NAV on 31 January 2018 (capped at the sale value).
• Surcharge on these gains is capped at 15%, and 4% cess applies on top.
• Rebate: The new-regime rebate under Section 156 (old 87A) does not cover tax on these special-rate gains.

Debt mutual funds: the 1 April 2023 cut-off

Since the Finance Act, 2023, the date you bought the units matters more than how long you held them.

For units bought after 1 April 2023, there is no long-term category at all. A liquid fund held for five days and a gilt fund held for five years are taxed the same way: the gain is added to your income. In the 30% slab, that means 31.2% with cess.

Older units lost indexation for sales on or after 23 July 2024. Before then they were taxed at 20% with indexation. Now they pay a flat 12.5% after 24 months.

Hybrid, gold and international funds

Funds that are neither equity-oriented nor specified debt funds follow the general rules. Units held for more than 24 months give LTCG at 12.5% without indexation. Shorter holdings are taxed at the slab rate. Exchange-listed units such as ETFs count as listed securities, so their long-term threshold is 12 months. Because the specified-fund definition was narrowed from FY 2025-26, check a fund's current classification before assuming slab-rate treatment.

Worked example 1: equity fund

Rahul invested ₹5,00,000 in a flexi-cap fund and redeemed it after three years for ₹7,50,000. He has no other equity gains that year.

• Gain: ₹7,50,000 − ₹5,00,000 = ₹2,50,000 (long-term, held over 12 months)
• Exempt: ₹1,25,000
• Taxable LTCG: ₹1,25,000 × 12.5% = ₹15,625
• Plus 4% cess (₹625) = ₹16,250

His CAGR was (7.5 ÷ 5)^(1/3) − 1 ≈ 14.5% a year. After tax, he keeps ₹2,33,750 of the ₹2,50,000 gain. You can measure any fund's annualised return with the CAGR calculator.

Had Rahul sold within 12 months with the same ₹2,50,000 gain, he would have paid 20% on the full amount: ₹50,000 + cess = ₹52,000.

Worked example 2: debt fund before and after April 2023

Meera is in the 30% slab. She has a ₹1,00,000 gain from each of two corporate bond fund holdings, both held for three years:

Same fund type, same gain, same holding period. Buying three months later costs ₹18,200 more in tax. That is why many investors keep pre-April 2023 debt units rather than switching schemes.

Practical tips

• SIPs are taxed instalment by instalment. Redemptions use first-in, first-out, so the oldest units are sold first.
• Harvest equity gains each year. Booking up to ₹1.25 lakh of long-term equity gains and reinvesting resets your cost. It does not reduce future tax rates, but it uses an exemption that otherwise lapses.
• Set off losses. Short-term capital losses can be set off against both short- and long-term gains. Long-term losses can be set off only against long-term gains. Unused losses can be carried forward for eight years if you file your return on time.
• Switches count as sales. Moving between schemes, or from regular to direct plans of the same scheme, is a redemption and can trigger tax. See direct vs regular mutual funds.
• Dividends (IDCW) are taxed at your slab rate, and the fund house may deduct TDS. For most investors the growth option is more tax-efficient.

For how capital gains interact with your other income, see income tax slabs for FY 2026-27.

Key takeaways

• Equity funds: 20% STCG within 12 months, and 12.5% LTCG above ₹1.25 lakh a year after 12 months. These are now Sections 196 and 198 of the Income-tax Act, 2025 (old 111A and 112A).
• Debt funds bought on or after 1 April 2023 are taxed at your slab rate, whatever the holding period, with no indexation.
• Debt units bought before 1 April 2023 and held over 24 months pay 12.5% without indexation.
• Hybrid, gold and international funds that are neither equity nor specified debt funds get 12.5% LTCG after 24 months.
• Add 4% cess to all of these. The ₹12 lakh new-regime rebate does not cover tax on special-rate equity gains.