LTCG Tax on Mutual Funds in 2026: Rates, Rules and Calculation

LTCG tax on mutual funds applies when gains from redeemed or transferred units qualify as long-term capital gains under the tax rules for that fund category. For qualifying equity-oriented mutual funds, units held for more than 12 months are treated as long term, and aggregate eligible LTCG above ₹1.25 lakh is taxed at 12.5%.

The rules differ across equity, debt, hybrid, gold, silver and fund of funds (FoFs). For an individual investment, LTCG tax on a mutual fund depends on its tax classification, holding period and, in some cases, the acquisition date. The tax on LTCG from mutual funds can therefore vary even when two investments have been held for the same period.

What is long-term capital gains (LTCG) tax on mutual funds?

LTCG tax may apply when mutual fund units are sold, redeemed or otherwise transferred after meeting the holding period required for them to qualify as long-term capital assets.

The applicable holding period depends on the fund’s tax classification. Equity-oriented funds, specified mutual funds and other listed or unlisted mutual fund units can therefore follow different rules.

Capital gains tax generally arises on a transfer or redemption. An increase in the NAV while the units remain invested does not by itself create a capital gains tax liability.

Mutual fund tax rates and holding periods at a glance

The tax on LTCG from mutual funds depends on the tax classification of the scheme:

Fund type	Short-term treatment	Long-term treatment
Equity-oriented mutual funds	12 months or less; qualifying STCG taxed at 20%	More than 12 months; 12.5% on aggregate qualifying LTCG above ₹1.25 lakh
Specified mutual funds acquired on or after April 1, 2023	Treated as STCG irrespective of holding period; taxed at the applicable rate	Not applicable
Other listed mutual fund units	12 months or less; generally taxed at the applicable rate	More than 12 months; generally 12.5% without indexation
Other unlisted mutual fund units	24 months or less; generally taxed at the applicable rate	More than 24 months; generally 12.5% without indexation

The ₹1.25 lakh threshold applies to aggregate qualifying long-term gains from equity shares, equity-oriented mutual fund units and business-trust units covered by the relevant provision. It does not apply to every category of mutual fund LTCG.

Applicable surcharge and cess may be additional.

LTCG tax rules for equity mutual funds in 2026

For tax purposes, an equity-oriented mutual fund generally needs to invest at least 65% of its total proceeds in equity shares of domestic companies listed on a recognised stock exchange. Separate conditions apply to certain fund of funds structures.

For qualifying equity-oriented mutual fund units held for more than 12 months:

• aggregate eligible LTCG up to ₹1.25 lakh does not attract the 12.5% tax
• aggregate eligible LTCG above ₹1.25 lakh is taxed at 12.5%
• qualifying short-term capital gains are taxed at 20%

The ₹1.25 lakh threshold applies collectively to qualifying gains covered by the provision during the tax year. It is not available separately for each mutual fund scheme.

LTCG on Equity-Linked Savings Scheme (ELSS)

ELSS is an equity-oriented mutual fund category that invests at least 80% of its corpus in equity and equity-related instruments and has a mandatory three-year lock-in period.

Since the lock-in exceeds the 12-month holding period for equity-oriented funds, ELSS units redeemed after completing the lock-in would ordinarily qualify as long-term capital assets. Eligible gains follow the 12.5% LTCG rate on aggregate qualifying gains above ₹1.25 lakh.

An eligible ELSS investment may also qualify for the deduction available for specified investments, subject to a combined limit of ₹1.5 lakh and the applicable conditions. This deduction is generally not available under the new tax regime. The deduction at the time of investment and capital gains taxation at redemption are separate.

How debt and hybrid funds are taxed in 2026

Debt fund taxation depends on the acquisition date and whether the scheme falls within the definition of a specified mutual fund.

From April 1, 2026, a specified mutual fund broadly refers to a fund that invests more than 65% of its total proceeds in debt and money market instruments, or a fund that invests at least 65% in units of such a fund. Units covered by this provision and acquired on or after April 1, 2023 are treated as short-term capital assets irrespective of the holding period.

Debt mutual fund units that are not subject to this deemed short-term treatment can qualify for LTCG according to the applicable holding-period rules. For ordinary unlisted units, the current long-term threshold is generally more than 24 months, with eligible LTCG taxed at 12.5% without indexation.

Hybrid fund taxation depends on the scheme’s asset mix. A hybrid scheme that qualifies as an equity-oriented fund follows equity taxation, while one that qualifies as a specified mutual fund follows the specified mutual fund rules. Other hybrid funds generally follow the holding-period rules applicable to other listed or unlisted mutual fund units.

LTCG taxation on gold and silver ETFs and fund of funds

Gold and silver ETFs are listed units and generally qualify as long-term capital assets when held for more than 12 months. Eligible LTCG is generally taxed at 12.5% without indexation. The ₹1.25 lakh equity LTCG threshold does not apply to ordinary gold or silver ETF gains.

Gold, silver and international FoFs that do not qualify as equity-oriented or specified mutual funds generally follow the rules applicable to other mutual fund units. Where the units are unlisted, the long-term holding period is generally more than 24 months.

How mutual fund taxation rules have changed in recent years

Three changes have shaped the current framework:

• April 1, 2023: The special rule for specified mutual fund units acquired on or after this date treats gains from covered units as short term irrespective of the holding period.
• July 23, 2024: Qualifying equity LTCG moved to 12.5%, the annual threshold became ₹1.25 lakh, qualifying equity STCG moved to 20%, holding periods were simplified and indexation was removed for most long-term capital assets.
• April 1, 2026: The definition of a specified mutual fund was narrowed to funds with more than 65% in debt and money market instruments and certain FoFs investing in such funds.

How to calculate LTCG tax on mutual funds

Capital gain is broadly calculated as:

Redemption value – cost of acquisition – eligible transfer related expenses = capital gain

Suppose Roshan invests ₹4 lakh in qualifying equity-oriented mutual fund units and redeems them for ₹6 lakh after holding them for more than 12 months.

His LTCG is ₹2 lakh. Assuming he has no other qualifying gains covered by the ₹1.25 lakh threshold during the tax year:

• 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, if any, would be additional.

The figures shown are for illustrative purpose only

How are SIP investments taxed?

Each SIP instalment is treated as a separate investment because units are acquired on different dates. The holding period is therefore determined separately for each set of units rather than from the date the SIP began.

When units have been acquired in multiple lots, the First-In-First-Out (FIFO) method is generally used for determining which units are treated as redeemed first. As a result, the same redemption can include both short-term and long-term units.

How can you reduce LTCG tax on mutual funds?

Tax considerations can be factored into redemption decisions without allowing tax alone to determine the investment strategy:

• Use the available equity LTCG threshold: Qualifying equity LTCG is taxed at 12.5% only on aggregate eligible gains above ₹1.25 lakh during the tax year.
• Check the holding period: Where long-term treatment is available, the redemption date can affect whether STCG or LTCG rules apply.
• Consider the timing of redemptions: Where a redemption already fits your financial plan, its timing can affect the use of the annual equity LTCG threshold.
• Use eligible capital losses: Short-term capital losses can generally be set off against short-term or long-term capital gains, while long-term capital losses can be set off only against long-term capital gains. Eligible unadjusted capital losses can generally be carried forward for up to eight tax years, subject to the applicable conditions.

How to report mutual fund LTCG in your ITR

For AY 2026-27, mutual fund capital gains are reported under the capital gains schedules of the applicable Income Tax Return. Schedule 112A is used for qualifying gains from equity shares, equity-oriented mutual funds and units of business trusts where the prescribed conditions are met.

The correct ITR form depends on the taxpayer’s complete income profile, so investors should use the form and schedules applicable to their circumstances.

Conclusion

LTCG tax on mutual funds in 2026 depends on the fund’s tax classification, acquisition date and holding period. Qualifying equity-oriented funds use a 12-month long-term threshold, with aggregate eligible LTCG above ₹1.25 lakh taxed at 12.5%. Debt, hybrid, gold, silver and FoF investments can follow different rules.

Checking the tax classification and holding period before redeeming units can help investors understand the tax consequences of the transaction.

FAQs

What is the LTCG tax rate on equity mutual funds in 2026?

Qualifying equity-oriented mutual fund LTCG is taxed at 12.5% on aggregate eligible long-term gains exceeding ₹1.25 lakh during the tax year. The units generally need to be held for more than 12 months to qualify as long-term capital assets.

Are debt mutual funds eligible for indexation benefits?

No. Indexation is generally not available for debt mutual fund LTCG under the current rules. Specified mutual fund units acquired on or after April 1, 2023 are treated as short-term capital assets regardless of the holding period.

Has LTCG tax changed in Budget 2026?

For qualifying equity-oriented mutual funds, the rates currently in force remain 12.5% on aggregate eligible LTCG above ₹1.25 lakh and 20% for qualifying STCG. The Income-tax Act, 2025 applies from April 1, 2026 and uses new section numbering for these provisions.

Is the ₹1.25 lakh LTCG threshold available for each mutual fund separately?

No. The ₹1.25 lakh threshold applies to aggregate qualifying long-term capital gains covered by the equity-oriented provision during the tax year, not separately to each scheme or investment.

Is switching from one mutual fund to another taxable?

Yes. A switch-out is treated as a redemption from the source scheme, while the switch-in is treated as a purchase in the destination scheme. The redemption can therefore result in a capital gain or loss, depending on the units and their applicable tax treatment.

Does the old or new tax regime change the LTCG rate on equity mutual funds?

The special 12.5% LTCG rate on qualifying equity-oriented mutual fund gains above ₹1.25 lakh applies under the capital gains provisions rather than normal slab rates. The choice of tax regime can, however, affect other deductions and parts of the taxpayer’s overall tax computation.

Do I pay LTCG tax if my mutual fund NAV rises but I do not redeem?

No. An increase in NAV does not by itself create a capital gains tax liability. Capital gains generally arise when mutual fund units are sold, redeemed or otherwise transferred.

Can capital losses be used against LTCG from mutual funds?

Yes. A long-term capital loss can generally be set off against long-term capital gains, while a short-term capital loss can be set off against either short-term or long-term capital gains. Eligible unadjusted losses can generally be carried forward for up to eight tax years, subject to the applicable conditions.

What is tax harvesting in mutual funds?

Tax harvesting is a planning approach in which eligible capital gains or losses are realised to make use of available tax thresholds or loss set-offs. It is not a separate tax exemption, and factors such as the investment objective, holding period, exit load and transaction impact should also be considered.