When you redeem mutual fund units for more than you paid, the profit is called a capital gain and may be taxable. Capital gains are classified as short term or long term – the distinction depends on how long the units were held.
Long-term and short-term gains are usually taxed differently. Tax rules also differ across equity, debt and hybrid mutual funds and have changed in recent years.
Since mutual funds are often used for long-term goals such as retirement or wealth creation, understanding how LTCG tax on mutual funds works may help investors assess post-tax returns and plan their investment journey. This article explains how long-term capital gains (LTCG) tax on mutual funds works in 2026, the rates that apply and the key changes investors should know.
What is long-term capital gains (LTCG) tax on mutual funds?
Long-term capital gains tax, or LTCG tax, refers to the tax payable on gains arising from the sale or redemption of a capital asset after holding it beyond a specified period. In mutual funds, the required holding period differs across categories. For example, equity-oriented mutual funds are generally classified as long-term capital assets when held for more than 12 months.
LTCG tax on mutual funds becomes applicable when investors redeem mutual fund units after completing the applicable long-term holding period. The taxation framework depends on the category of the scheme, such as equity mutual funds debt mutual funds or hybrid mutual funds.
Capital gains may also arise when investors switch from one mutual fund scheme to another. A systematic transfer plan, or STP, similarly involves the redemption of units from one scheme and an investment into another scheme.
Read also: Difference between short-term and long-term capital gains tax
Mutual fund tax rates and holding periods at a glance
Depending on the fund category and the portfolio, mutual funds may have different STCG and LTCG holding periods and different tax rates. The table below details this:
| Fund category | Short-term holding period | STCG tax | Long-term holding period | LTCG tax |
| Equity funds | 12 months or less | 20% | More than 12 months | 12.5% on aggregate eligible gains exceeding ₹1.25 lakh |
| Debt funds – units bought before April 1, 2023 | 24 months or less | Applicable slab rate | More than 24 months | 12.5% |
| Debt funds – units bought on or after April 1, 2023 | Gains are always treated as short term | Applicable slab rate | Not applicable | Not applicable |
| Hybrid funds (≥65% but ≤35% equity) | 24 months or less | Applicable slab rate | More than 24 months | 12.5% |
| Commodity funds of funds (e.g. gold, silver FoFs) | 24 months or less | Applicable slab rate | More than 24 months | 12.5% |
| Commodity ETFs | 12 months or less | Applicable slab rate | More than 12 months | 12.5% |
| International FoFs | 24 months or less | Applicable slab rate | More than 24 months | 12.5% |
| Domestic equity ETF FoF (investing >90% in domestic equity ETFs) | 12 months or less | 20% | More than 12 months | 12.5% on aggregate eligible Section 112A gains exceeding ₹1.25 lakh |
| Debt FoF (investing >65% in a debt-oriented fund) – units bought before April 1, 2023 | 24 months or less | Applicable slab rate | More than 24 months | 12.5% |
| FoF – units bought on or after April 1, 2023 | All gains deemed STCG regardless of holding period | Applicable slab rate | Not applicable | Not applicable |
LTCG tax rules for equity mutual funds in 2026
According to prevailing taxation rules, equity-oriented mutual funds are those that invest at least 65% of their total proceeds in equity shares of domestic companies. Units held for more than 12 months are treated as long-term capital assets.
As of 2026, long-term capital gains of up to ₹1.25 lakh in a financial year are tax-exempt. Thereon, gains are taxed at 12.5%, plus applicable surcharge and cess. The ₹1.25 lakh exemption limit applies collectively to eligible long-term capital gains covered under Section 112A, including eligible equity mutual funds and listed equity shares.
Short-term capital gains from eligible equity mutual funds are taxed at 20%, plus applicable surcharge and cess.
Read also: Short-term capital gains tax on mutual funds
The STCG tax rate was also raised, from 15% to 20% (plus applicable surcharge and cess).
How debt and hybrid funds are taxed in 2026
Debt mutual funds underwent an overhaul in taxation structure on April 1, 2023. For all investments made that date onwards, the distinction between LTCG and STCG no longer applies – all gains are deemed to be STCG, regardless of the holding period, and are taxed as per the investor’s applicable slab rate.
Debt mutual fund investments made before April 1, 2023, qualify for long-term taxation after a holding period of more than 24 months. These gains are taxed at 12.5%. So, for units purchased before April 1, 2023, this rate applies even if you redeem units in FY 2026–27, subject to prevailing tax rules.
Hybrid mutual fund taxation depends on the scheme’s equity allocation. Hybrid schemes with equity exposure exceeding 65% are taxed similarly to equity mutual funds. For hybrid funds with less than 65% but more than 35% equity, LTCG tax applies if units are held for more than 24 months and the tax rate is 12.5%, with no exemption. STCG tax is as per the slab rates.
Note: The rates above are base rates and exclude applicable surcharge and cess.
LTCG taxation on gold and silver ETFs and fund of funds
Commodity ETFs, including gold ETFs and silver ETFs, are treated as long term when held when held for more than 12 months and are taxed at 12.5%. The short-term capital gains tax is as per slab rates. The ₹1.25 lakh annual threshold does not apply here.
Fund of funds (FoFs) are also taxed based on the type of fund in which they invest. An FoF is taxed as an equity-oriented fund if it has more than 90% exposure to domestic equities. An FoF investing at least 65% in debt and money market instruments is covered by the debt fund rules. Commodity FoFs (such as gold mutual funds) and international FoFs become long-term capital assets when held for more than 24 months. Their short-term gains are taxed at the applicable slab rate, while long-term gains are taxed at 12.5% without indexation, plus applicable surcharge and cess.
How mutual fund taxation rules have changed recent years
Mutual fund tax rules have seen some major changes in recent years. First, in the 2023 Union Budget, it was announced that gains from all debt-oriented mutual fund units purchased on or April 1, 2023, would be treated as short-term capital gains, regardless of how long they are held, and would be taxed at the investor’s applicable slab rates. The 20% indexation benefit given to long term capital gains on debt mutual funds (for units held for more than three years) was also scrapped.
Then, from July 23, 2024, the tax rules for eligible equity mutual funds and listed equity shares were revised. The tax for LTCG was increased from 10% to 12.5% and the threshold for tax-exempt gains was raised from ₹1 lakh to ₹1.25 lakh. The short-term capital gains tax rate for these investments also increased from 15% to 20%, plus applicable surcharge and cess.
Most recently, from Assessment Year 2026–27, the meaning of a specified mutual fund has been narrowed. It now covers funds investing more than 65% in debt and money market instruments, and FoFs investing at least 65% in such funds. Earlier, specified mutual funds were defined as those investing less than or equal to 35% in domestic equities.
As a result, gold funds, international funds and some other non-equity schemes are no longer automatically taxed like debt funds merely because they have 35% or less exposure to Indian equities.
How to calculate LTCG tax on mutual funds
Capital gain is broadly calculated as follows:
Redemption value – cost of acquisition – eligible transfer-related expenses = capital gain
For example, suppose Kavi, an investor, purchases units of an equity mutual fund for ₹4 lakh and redeems them for ₹6 lakh after holding them for a little over three years. The LTCG is ₹2 lakh.
Assuming the investor has no other eligible LTCG covered by the ₹1.25 lakh annual threshold:
- Total LTCG: ₹2,00,000
- Less annual threshold: ₹1,25,000
- Taxable LTCG: ₹75,000
- Tax at 12.5%: ₹9,375
Applicable surcharge and cess would be added to this amount.
Now, let’s assume Kavi also invests ₹4 lakh in a debt mutual fund covered by the specified mutual fund rules. After three years, the investment value rises to ₹4.90 lakh, representing an annualised return of approximately 7%. The capital gain is ₹90,000.
- Redemption value: ₹4,90,000
- Less cost of acquisition: ₹4,00,000
- Capital gain: ₹90,000
Tax: As per Kavi’s applicable income-tax slab rate
Even though Kavi held the units for three years, the gain is treated as a short-term capital gain because the units were purchased on or after April 1, 2023. If Kavi’s applicable slab rate is 20%, the base tax would be ₹18,000. Applicable surcharge and cess would be added to this amount.
Figures shown are for illustration purpose only
How are SIP investments taxed?
For taxation purposes, each SIP instalment is treated as a separate investment because units are purchased on different dates. So, starting an SIP three years ago does not mean that every unit in the account has been held for three years. Depending on the redemption value and holding period, there may be cases where some units may qualify as long term, while those purchased more recently may still be short term.
When only part of the investment is redeemed, the First In, First Out (FIFO) method is used. This means the units purchased first are treated as the units redeemed first.
How can you reduce LTCG tax on mutual funds?
Tax planning should not be the only reason to redeem an investment. The decision should also reflect the investor’s financial goals, asset allocation and need for money. However, there are some ways in which investors can reduce or optimise their tax outgo:
- Use the ₹1.25 lakh threshold: Eligible LTCG for equity-oriented funds and other eligible investments under Section 112A of the Income Tax Act, 1961, are taxed only when their combined amount exceeds ₹1.25 lakh in a financial year.
- Check the holding period: Waiting until mutual fund units qualify as long term may result in a lower tax rate, depending on the fund category.
- Plan redemptions across financial years: Where suitable, investors may spread redemptions over more than one financial year instead of realising a large gain at once.
- Set off eligible capital losses: Capital losses from other investments may sometimes be adjusted against capital gains, subject to the applicable tax rules.
Read also: Tax Efficient Withdrawal Strategies for Systematic Investment Plan (SIP)
Key things investors must know about LTCG tax in 2026
- Each SIP instalment is treated as a separate investment with its own purchase date and holding period. As a result, one redemption transaction may include both short-term and long-term units.
- For eligible equity mutual funds, long-term capital gains above ₹1.25 lakh are taxed at 12.5%, while short-term capital gains on equity mutual funds and listed equity shares are taxed at 20%, subject to applicable surcharge and cess.
- Debt mutual fund taxation depends heavily on whether units were purchased before or after April 1, 2023.
- Indexation benefits are no longer available in debt mutual funds under the revised taxation framework.
- Some investors also evaluate tax-harvesting strategies to utilise the annual exemption limit more efficiently. However, such strategies require careful consideration of taxation, exit loads and investment objectives.
How to report mutual fund LTCG in your ITR
Mutual fund capital gains are generally reported under the capital-gains schedule of the applicable income-tax return. Eligible equity LTCG may also require details under Schedule 112A, depending on the ITR form used.
For AY 2026–27, an eligible resident individual with total income of up to ₹50 lakh may use ITR-1 when the person has only eligible LTCG under Section 112A of up to ₹1.25 lakh and meets the other conditions. ITR-1 cannot be used for short-term capital gains.
ITR-2 generally applies to individuals and HUFs with capital gains but no business or professional income. ITR-3 generally applies where the taxpayer also earns business or professional income. ITR-4 may apply in eligible presumptive-income cases, subject to the form’s conditions.
Read also: How to File Income Tax Returns (ITR) for Mutual Fund
Common mistakes investors should avoid
Here are some potential pitfalls that investors should be aware of when determining their post-tax income:
- One common mistake is assuming that all mutual fund categories follow the same LTCG tax structure. Taxation differs across equity, debt and hybrid mutual funds.
- Another common oversight involves ignoring SIP-wise holding periods. Investors may also redeem investments near the end of the financial year without reviewing their total realised capital gains.
- Debt mutual fund investors should pay particular attention to the purchase date of units because taxation rules vary significantly depending on when the investment was made.
- Switches and systematic transfers may also create taxable capital gains, even when the money is not withdrawn into the investor’s bank account.
- Investors may incorrectly apply the ₹1.25 lakh annual equity LTCG threshold to debt funds, gold funds, international funds or other non-equity schemes.
Conclusion
LTCG tax on mutual funds in 2026 depends on several factors, including mutual fund category, purchase date, holding period, redemption amount and applicable tax slab. Investors who track these aspects carefully may evaluate redemptions with greater clarity and better tax awareness. Since taxation rules may change over time and individual circumstances vary, investors may consider consulting a qualified tax professional or financial advisor before making investment decisions.
FAQs
What is the LTCG tax rate on equity mutual funds in 2026?
For equity mutual funds held for more than 12 months, long-term capital gains above ₹1.25 lakh in a financial year are taxed at 12.5%, along with applicable surcharge and cess.
Are debt mutual funds eligible for indexation benefits?
Indexation benefits are no longer available for debt funds. Debt fund investments made on or after April 1, 2023, are taxed according to the investor’s income-tax slab rate, irrespective of holding period.
How are SIP investments taxed?
Each SIP instalment is treated as a separate investment. The holding period for taxation purposes is calculated from the date of each instalment. Therefore, one redemption may include both short-term and long-term capital gains.
Has LTCG tax changed in Budget 2026?
As of 2026, the overall LTCG taxation framework for equity mutual funds remains broadly unchanged from the structure introduced after July 2024.So, long-term capital gains are taxed at 12.5% after an exemption on gains of up to ₹1.25 lakh and short-term capital gains are taxed at 20%. Applicable surcharge and cess are also levied.
What is tax harvesting in mutual funds?
Tax harvesting refers to redeeming and reinvesting investments in a planned manner to utilise the annual LTCG exemption limit more efficiently. Investors may need to monitor gains, holding periods and applicable exit loads carefully while using such strategies.
The tax information in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
