Gilt Mutual Fund Taxation in 2026: Rates, Rules and Indexation

Gilt Mutual Fund Taxation in 2026 mainly depends on when the units were purchased. Two people can redeem units from the same gilt fund on the same day and still pay tax differently. Units bought before 1 April 2023 follow different rules from those bought on or after that date. Understanding this distinction can help you estimate the tax before redeeming.

Understanding gilt mutual funds

Gilt mutual funds are debt schemes that invest mainly in government securities, also known as G-Secs. These securities are issued by the Central Government or State Governments to borrow money for different periods.

A gilt fund must invest at least 80% of its assets in government securities across maturities. There is also a separate category called a gilt fund with 10-year constant duration. It maintains a Macaulay duration of 10 years, which means its portfolio is structured to remain sensitive to longer-term interest-rate movements.

The government securities forming the core portfolio carry sovereign credit risk. However, their market prices can change as interest rates move. As a result, the NAV of a gilt fund is not fixed, even though the underlying securities are issued by governments.

Key features of gilt mutual funds

These features explain how gilt funds work and why their returns can change:

• Government-security portfolio: Gilt funds invest mainly in Central and State Government securities.
• Relatively low credit risk: Government securities carry sovereign credit risk. Any permitted non-government holdings need to be assessed separately.
• Interest-rate sensitivity: Bond prices generally rise when market interest rates fall and decline when rates rise.
• Different maturities: A gilt fund may hold short-, medium- and long-term government securities.
• Market-linked returns: Returns are not fixed or assured.
• Open-ended structure: Units can ordinarily be purchased or redeemed on a business day at the applicable NAV, subject to the scheme’s terms.
• Professional management: The fund manager selects securities and manages the portfolio within the scheme’s investment rules.
• Portfolio diversification: Gilt funds can add government-security exposure to a portfolio containing equity or other debt investments.

Source: SEBI mutual fund categorisation framework.

Taxation of capital gains from gilt mutual funds

The purchase date is the first detail to check while working out gilt mutual fund taxation:

When the units were acquired	Holding period at redemption	Classification	Tax treatment
Before 1 April 2023	Up to 24 months	Short-term capital gain	Taxed at the investor’s applicable rate
Before 1 April 2023	More than 24 months	Long-term capital gain	Generally taxed at 12.5% without indexation
On or after 1 April 2023	Any holding period	Treated as short-term capital gain	Taxed at the investor’s applicable rate without indexation

Applicable surcharge and health and education cess are charged separately.

Units bought before 1 April 2023

The tax treatment of these older units depends on how long they are held:

• Units held for up to 24 months are treated as short-term assets. The gains are added to taxable income and taxed at the investor’s applicable rate.
• Units held for more than 24 months are treated as long-term assets. The gains are generally taxed at 12.5% without indexation.

The earlier rule of a 36-month holding period followed by 20% tax with indexation does not apply to redemptions under the current rules.

Units bought on or after 1 April 2023

The rule for newer investments is easier to follow:

• Gains are treated as short-term capital gains regardless of the holding period.
• The gains are added to taxable income and taxed at the rate applicable to the investor.
• The lower long-term capital-gains rate is not available.
• Indexation cannot be claimed.

Holding the units for longer may still suit an investment goal, but it will not change their tax treatment.

What changed from 1 April 2026?

The Income-tax Act, 2025 came into effect on 1 April 2026 and replaced the Income-tax Act, 1961. However, it did not remove the purchase-date distinction used for gilt fund taxation.

Under Section 72, units of a specified mutual fund bought on or after 1 April 2023 are treated as short-term assets. A specified mutual fund mainly covers:

• A fund that invests more than 65% of its money in debt and money-market instruments; or
• A fund that invests at least 65% of its money in units of such a fund.

Gilt funds mainly invest in government debt securities and ordinarily fall within this definition.

Source: Income-tax Act, 2025, as amended by the Finance Act, 2026.

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 happened to indexation in gilt fund taxation?

Indexation was a way to adjust the purchase cost of an investment for inflation. This reduced the amount treated as taxable long-term gain. Under the current rules:

• Indexation is not available for units bought on or after 1 April 2023 because gains from these units are treated as short-term.
• Units bought before 1 April 2023 can qualify as long-term assets after 24 months. However, their gains are generally taxed at 12.5% without indexation.

Older units can therefore still receive long-term treatment, but indexation is not available when they are redeemed under the current rules.

Tax treatment of Income Distribution cum Capital Withdrawal

Income Distribution cum Capital Withdrawal, or IDCW, is an amount distributed from a mutual fund scheme’s available surplus. The amount and timing are not assured. The scheme’s NAV generally falls by the amount distributed and any applicable statutory levy.

The tax treatment is as follows:

• IDCW is added to the investor’s taxable income and taxed at the applicable rate.
• The tax does not depend on how long the units were held.
• For a resident investor, TDS is generally deducted at 10% if the total IDCW paid or credited by the payer exceeds ₹10,000 during the tax year, subject to the applicable rules.
• TDS is tax collected in advance. The final tax payable may be higher or lower depending on the investor’s total income and available TDS credit.

An IDCW payout should not be seen as an extra return. Investors can compare the Growth and IDCW options based on their need for periodic cash flow and their tax position.

Tax considerations for SIPs, redemptions and switches

A single folio can contain units bought on different dates. Each transaction must therefore be considered separately:

• Every SIP instalment is a separate purchase: Each instalment has its own purchase date, cost and holding period.
• Different tax rules can apply within one folio: Units bought before and on or after 1 April 2023 may be held together.
• Redemptions generally follow FIFO: FIFO means “first in, first out”. The units bought first are ordinarily treated as the units redeemed first.
• A switch can create a taxable gain: Moving money from one scheme, plan or option to another is generally treated as a redemption followed by a new purchase.
• Short-term capital losses: These can generally be adjusted against short-term or long-term capital gains.
• Long-term capital losses: These can generally be adjusted only against long-term capital gains.
• Unused losses may be carried forward: Eligible capital losses may ordinarily be carried forward for eight tax years if the income-tax return is filed within the prescribed time.
• Records matter: Account statements and capital-gains reports can help identify purchase dates, costs and the units redeemed.

An SIP spreads investments across different dates, but it does not change the tax treatment of gilt fund units acquired on or after 1 April 2023.

An SIP spreads purchases across different dates, but it does not change the tax treatment of units bought on or after 1 April 2023.

What to consider before investing in gilt mutual funds

The government backing of the underlying securities does not mean a gilt fund’s value will remain steady. Consider the following before investing:

• Investment horizon: Think about when the money will be needed and how much short-term movement you can accept.
• Portfolio duration: Funds holding longer-term securities usually react more sharply to changes in interest rates.
• Interest-rate movements: Gilt fund NAVs may rise when bond yields fall and decline when yields rise.
• Credit profile: Government securities carry relatively low credit risk, but the fund remains exposed to market risk.
• Tax treatment: Units bought on or after 1 April 2023 do not qualify for long-term capital-gains treatment.
• Role in the portfolio: Gilt funds provide government-security exposure but may behave differently from other debt funds.
• Scheme information: Check the Riskometer, Potential Risk Class, portfolio duration, expense ratio and exit load.

Trying to predict every interest-rate change is rarely practical. A more useful approach is to check whether the fund’s expected behaviour fits the goal and the time available.

What does Bajaj AMC offer?

The more useful question is not whether government securities are safe, but how their price movements may fit into your portfolio. The Bajaj Finserv Gilt Fund is an open-ended debt scheme that invests in government securities across maturities. Its mandate permits:

• 80% to 100% in Central Government securities, State Government securities, treasury bills and cash-management bills; and
• Up to 20% in other debt securities and money-market instruments.

This allows investors to access government securities without selecting and buying individual bonds. The government securities carry sovereign credit risk, but the fund’s NAV can still move as interest rates and bond yields change.

Before investing, check the latest portfolio maturity, duration, Riskometer, costs and scheme documents. These details can help explain how the fund may respond to changing interest rates.

Source: Bajaj Finserv Gilt Fund official scheme page.

Conclusion

The purchase date is the most important detail in gilt fund taxation. Units bought before 1 April 2023 can qualify for long-term treatment after 24 months. Gains from units bought on or after that date are taxed at the investor’s applicable rate, regardless of the holding period.

Tax is only one part of the decision. Gilt funds carry relatively low credit risk but remain sensitive to interest-rate movements. The fund’s duration, investment horizon and role in the wider portfolio also need to be considered.

FAQs

What is the tax rate on gilt fund returns in 2026?

Gains from units bought on or after 1 April 2023 are taxed at the investor’s applicable rate, regardless of the holding period. Units bought before that date may qualify for 12.5% long-term capital-gains tax after 24 months.

Are gilt mutual funds tax-free?

No. Gains made when gilt fund units are redeemed are taxable. IDCW received from a gilt fund is also added to the investor’s taxable income.

Are gilt funds eligible for a tax deduction?

No specific tax deduction is available merely for investing in a gilt mutual fund. Gilt funds should not be confused with ELSS, which may qualify for a deduction under Section 80C under the old tax regime.

Where do gilt mutual funds invest?

Gilt funds invest at least 80% of their assets in government securities across maturities. These can include Central Government securities, State Government securities and treasury bills.

Are gilt mutual funds high-risk?

Gilt funds carry relatively low credit risk because they invest mainly in government securities. However, their NAVs can move significantly when interest rates change, particularly if the portfolio holds longer-term securities.

How long should I stay invested in a gilt mutual fund?

There is no single holding period that suits every gilt fund. Consider the scheme’s portfolio duration, sensitivity to interest rates and the time available for your goal.

What kind of returns can gilt funds generate?

Returns come from the interest earned on government securities and changes in their market prices. Bond prices generally rise when yields fall and decline when yields rise, although the fund’s actual return also depends on its portfolio and costs.

What happened to indexation benefits in gilt fund taxation?

Indexation is not available on gilt fund redemptions under the current rules. Older units bought before 1 April 2023 may qualify for 12.5% long-term capital-gains tax after 24 months, but without indexation.

How is IDCW taxed on gilt funds?

IDCW is added to the investor’s taxable income and taxed at the applicable rate. For resident investors, TDS is generally deducted at 10% if aggregate IDCW paid or credited by the payer exceeds ₹10,000 during the tax year, subject to applicable rules.

Can NRIs invest in gilt mutual funds?

NRIs can invest subject to FEMA requirements and the scheme’s eligibility rules. Tax and TDS can depend on the purchase date, residential status, applicable Indian tax rules and any available tax-treaty benefit.

Is a gilt fund better than a fixed deposit?

Neither option is suitable in every situation. A fixed deposit offers a stated rate of interest for its tenure. A gilt fund is market-linked, so its NAV can rise or fall as bond yields change. The choice depends on the required liquidity, investment horizon, tax position and comfort with market movements.

Returns on fixed deposits/savings accounts are fixed, however, returns on mutual funds are subject to market risks.