What Is LTCG Tax on Mutual Funds? Rates and Rules for 2026

LTCG tax on mutual funds applies to profits from selling units that qualify as long-term investments. For qualifying equity-oriented mutual funds held for more than 12 months, the rate is 12.5% on eligible long-term gains above ₹1.25 lakh in a financial year.

Other mutual funds can follow different rules. To understand your tax, check the fund’s tax category, the purchase date and how long you held the units.

This guide explains the rules for resident individuals holding mutual fund units as investments, focusing on FY 2026–27.

What does LTCG mean, and when does tax apply?

The LTCG full form is long-term capital gains. A capital gain is the profit you make when you sell an investment, after accounting for its purchase cost and eligible expenses.

For mutual funds, redemption means selling your units back to the fund. Capital gains on mutual funds generally arise when units are sold, redeemed or otherwise transferred. A rise in NAV while you continue holding the units does not, by itself, trigger capital gains tax.

If you make a partial withdrawal, calculate the gain only on the mutual fund units sold. The remaining units continue to stay invested.

Sources: Income Tax Department, Capital gain; Income-tax Act, 2025, capital gains provisions.

The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

What are the mutual fund tax rates in 2026?

The LTCG tax rate depends on the fund category. Here is how STCG and LTCG tax on mutual funds compare for resident individual investors:

Slab rates are the income-tax rates that apply to your taxable income under your chosen tax regime.

Applicable surcharge and 4% Health and Education Cess are additional. Cess is calculated on income tax plus surcharge.

The special equity rates of 20% for STCG and 12.5% for LTCG apply to qualifying transfers on or after 23 July 2024 and remain applicable under the current rules.

Sources: Income Tax Department, Determination of tax in certain special cases and capital gains guidance; Income-tax Act, 2025, sections 2(101), 76 and 197; official cess guidance.

How does the ₹1.25 lakh equity LTCG exemption work?

The LTCG exemption limit of ₹1.25 lakh applies collectively to qualifying long-term gains from equity-oriented mutual funds, equity shares and business-trust units during the financial year.

It is not a separate allowance for each scheme, AMC, investment platform or redemption. It applies to gains, rather than the amount you withdraw.

For tax purposes, equity mutual funds generally need at least 65% exposure to equity shares of domestic companies listed on a recognised stock exchange, measured under the prescribed rules. Certain fund-of-funds structures have separate conditions.

The special equity rates also require the applicable Securities Transaction Tax (STT) conditions to be met. Ordinary qualifying equity-fund redemptions generally meet this condition.

Source: Income Tax Department, Income-tax Act, 2025, section 198.

How do you calculate LTCG tax on mutual funds?

To calculate tax on LTCG from mutual funds, first separate your purchase cost from the profit:

Capital gain = Sale or redemption value − Cost of the units sold − Eligible transfer expenses

For a partial redemption, deduct the cost of the units actually sold, rather than the cost of your entire holding. STT, where charged, cannot be deducted when calculating capital gains.

Consider a hypothetical example. Roshan, a shop manager, buys qualifying equity mutual fund units for ₹4 lakh and redeems them for ₹6 lakh after more than 12 months.

Assume he has no other qualifying equity-related gains or capital losses that year, his other income already uses his basic exemption limit, and no surcharge applies. Ignoring transaction expenses:

• Long-term capital gain: ₹6,00,000 − ₹4,00,000 = ₹2,00,000.
• Gain above the annual allowance: ₹2,00,000 − ₹1,25,000 = ₹75,000.
• Tax at 12.5%: ₹9,375.
• Cess at 4%: ₹375.
• Total tax on this gain: ₹9,750.

Roshan’s tax is calculated on the eligible gain above the allowance, not on his full ₹6 lakh withdrawal.

Sources: Income Tax Department, capital gains computation, special tax rates and cess guidance.

The figures shown are for illustrative purpose only

How are debt and hybrid mutual funds taxed?

When does the specified mutual fund rule apply?

For debt mutual fund taxation, check both the fund’s tax classification and when you bought its units. A specified mutual fund broadly means either:

• A fund investing more than 65% of its proceeds in debt and money market instruments.
• A fund investing 65% or more of its proceeds in units of such a fund.

These percentages are measured using the prescribed annual-average method. If you bought covered units on or after 1 April 2023, their gains are treated as short term even after several years. For resident individuals, these gains are taxed at applicable slab rates.

Debt mutual fund units bought before that date are outside this particular rule. Ordinary unlisted units can qualify for LTCG after more than 24 months, generally at 12.5% without indexation.

The narrower specified-fund definition applies from AY 2026–27, covering FY 2025–26, and continues under the current framework.

How are hybrid funds classified for tax?

A hybrid fund combines asset classes, but its name alone does not establish its tax treatment.

A scheme qualifying as equity oriented follows equity taxation. One qualifying as a specified mutual fund follows the rule above. Other hybrid schemes follow the relevant listed or unlisted holding-period rules.

Check the scheme’s tax classification rather than assuming every hybrid fund receives equity taxation.

What does “without indexation” mean?

Indexation adjusts an investment’s purchase cost for inflation when calculating taxable gains. Under the current mutual fund LTCG rules, this adjustment is unavailable. You cannot increase the purchase cost simply because prices have risen since you invested.

Sources: Income-tax Act, 2025, sections 76 and 197; Income Tax Department, specified mutual fund definitions and indexation guidance.

How are gold, silver and international funds taxed?

For gold and silver ETFs, listing matters. These exchange-traded units generally qualify for LTCG after more than 12 months, provided they are outside the specified-fund rule.

Ordinary unlisted gold, silver and international fund of funds generally require more than 24 months for LTCG treatment, where they are neither equity-oriented nor specified mutual funds.

Eligible LTCG is generally taxed at 12.5% without indexation. The ₹1.25 lakh equity LTCG allowance does not apply to ordinary gold or silver fund gains.

Sources: Income-tax Act, 2025, sections 2(101), 76, 197 and 198.

How are SIP investments and regular withdrawals taxed?

A Systematic Investment Plan (SIP) is a way to invest regularly. It does not have a separate capital gains tax rate.

Each instalment buys units on its own date. SIP capital gains tax therefore depends on the fund category and the holding period of each purchase.

Redemptions generally follow First-In, First-Out (FIFO) within the relevant folio. This means the earliest units bought are treated as redeemed first. For a hypothetical equity-fund example, assume a folio contains only:

• 100 units held for 14 months.
• 100 units held for 11 months.

If you redeem 150 units, FIFO treats the first 100 as long-term holdings and the next 50 as short-term holdings. Calculate the gain on each group separately and apply the relevant tax treatment.

A Systematic Withdrawal Plan (SWP) also involves redeeming units. Each payment can contain both invested money and gains. Tax applies to the gain calculated on the units redeemed, rather than automatically to the whole payment.

Sources: AMFI-hosted scheme documentation, FIFO and systematic transaction provisions; Income-tax Act, 2025, holding-period rules.

How can you manage LTCG tax on mutual funds?

Before making a planned redemption, review these points:

• Your total eligible gains: Include qualifying equity-related gains across investments before calculating the remaining ₹1.25 lakh allowance.
• The purchase dates: Where LTCG treatment is available, the redemption date can affect the tax rate.
• The financial year: Timing planned redemptions across different years may change how the annual equity allowance is used.
• Eligible capital losses: Short-term capital losses can generally offset short-term or long-term capital gains; long-term capital losses can offset only long-term capital gains.
• Costs and investment needs: Exit loads, transaction costs and market movements can affect whether a tax-planning transaction makes sense.

Realising eligible gains or losses for tax planning is often called tax harvesting. It does not create an additional exemption.

Eligible unused capital losses can generally be carried forward for up to eight years, subject to the filing requirements. Ordinarily, the loss return must be filed by the applicable due date. Capital losses cannot be deducted from salary income.

Sources: Income-tax Act, 2025, sections 198 and 111; Income Tax Department, set-off and carry-forward guidance.

How and when should you pay and report the tax?

For resident investors, mutual fund capital gains generally do not attract TDS. However, the absence of a deduction does not mean that no tax is payable.

Advance tax means paying tax during the year in which you earn the income. It can apply where your estimated tax payable after TDS is ₹10,000 or more. Resident individuals aged 60 or above without business or professional income are generally exempt from advance tax.

A redemption may therefore create a payment obligation before you file your return. For reporting:

1. Obtain your capital gains statement from your AMC, registrar or investment platform.
2. Check purchase costs and dates, including any units transferred between platforms.
3. Compare transactions with your Annual Information Statement (AIS) and resolve discrepancies.
4. Use the appropriate return and schedules for the relevant period, including any eligible losses.

AY 2026–27 covers income earned during FY 2025–26. FY 2026–27 runs from 1 April 2026 to 31 March 2027 and falls under the Income-tax Act, 2025.

For AY 2026–27, qualifying equity gains are reported under section 112A of the earlier Act. Its current counterpart is section 198. The correct return form depends on your complete income profile; not every investor with mutual fund gains uses the same form.

Sources: Income-tax Act, 2025, sections 393 and 403–405; Income Tax Department, AY 2026–27 return guidance, AIS FAQs and tax-payment guidance.

FAQs

Is switching between mutual funds taxable?

An ordinary voluntary switch involves redeeming units from one scheme or plan and purchasing units in another. The redemption can create a capital gain or loss, including when switching between regular and direct plans. The newly purchased units start a fresh holding period.

Are ELSS withdrawals tax-free after three years?

No. For ELSS taxation, the three-year lock-in determines when you can withdraw; it does not make the gains tax-free. Eligible gains follow equity-fund LTCG rules. Each ELSS SIP instalment has its own three-year lock-in.

Does choosing the new tax regime make equity LTCG tax-free?

No. The special equity LTCG rate applies under both regimes, and the new regime’s ₹12 lakh rebate does not cover this tax. A resident individual may, however, use any unused basic exemption limit against eligible gains. The basic exemption and rebate are different provisions.

Is IDCW taxed at the LTCG rate?

No. Income Distribution cum Capital Withdrawal (IDCW) is generally added to a resident individual’s taxable income and taxed at applicable slab rates. It does not receive the ₹1.25 lakh equity LTCG allowance.

What if you bought equity mutual fund units before February 2018?

Eligible units acquired before 1 February 2018 have special grandfathering rules. These can use an adjusted purchase cost based on their 31 January 2018 value when calculating gains. Check the adjusted cost in your capital gains statement rather than assuming all growth since purchase is taxable.

Do the same TDS rules apply to non-resident investors?

No. Non-resident investors have separate withholding provisions, and tax may be deducted on redemption gains. The amount withheld and the final tax liability can differ, depending on the applicable provisions and treaty eligibility.

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