Mutual fund taxation decoded: short-term vs long-term capital gains

Mutual fund taxation in India changed twice in three years — the debt rules in April 2023, and the rates and holding periods in the July 2024 Budget. A great deal of what is written online predates one or both of those changes.

What follows is the position this site computes against. Rates are set by the annual Budget and you should verify them before acting on any number here — this is educational material, not tax advice, and it does not cover surcharge, cess, set-off of losses, or anything specific to your circumstances.

It depends on what the fund holds, not what it is called

There is no single “mutual fund tax rate”. There are three treatments, and a scheme falls into one of them based on its portfolio.

Equity-oriented funds

At least 65% in domestic equity. This covers most equity funds, ELSS, and aggressive hybrids that clear the threshold.

• Held under 12 months — short-term gains, taxed at a flat 20%.
• Held 12 months or more — long-term gains, taxed at 12.5%, and the first ₹1,25,000 of long-term gains in a financial year is exempt.

The exemption is per financial year across your equity-oriented holdings, which is why realising gains deliberately up to that limit each year is a common piece of housekeeping.

Debt funds

More than 65% in debt and money-market instruments — the “specified mutual fund” definition.

Every gain is added to your income and taxed at your slab rate, whatever the holding period. There is no long-term category, no concessional rate and no indexation. Holding a debt fund for ten years attracts the same treatment as holding it for ten months.

Everything in between

Fund-of-funds, gold and silver funds, international funds and balanced hybrids sit in neither box.

• Held past the long-term threshold — 12.5%, with no exemption and no indexation.
• Held below it — slab rate.

The threshold is 12 months for listed instruments and 24 months for unlisted ones, so it varies by scheme. This category was reclassified as recently as FY 2025-26, so older guidance about it is particularly likely to be wrong.

Which units you sold

You do not choose. Units are matched oldest first — FIFO — so a redemption comes out of your earliest purchases and inherits their purchase dates and costs.

For a SIP this matters more than it first appears. Every instalment is its own purchase with its own clock, so a redemption after three years of monthly investing will be part long-term and part short-term, and the split is determined by arithmetic rather than by preference.

ELSS and Section 80C

ELSS carries a three-year lock-in, and the lock-in applies per instalment — a SIP started in January locks each month’s units for three years from that month, not from the start of the SIP.

The 80C deduction that makes ELSS attractive is available only under the old tax regime. The new regime has been the default since AY 2024-25 and does not allow it. If you are on the new regime, ELSS is simply an equity fund with a lock-in and no compensating deduction, and the case for it largely disappears.

Which regime leaves you better off is its own calculation:

Note that the calculator covers slab income. Capital gains are taxed at the special rates above and the section 87A rebate is not available against them.

IDCW is not income

A payout under an IDCW option (what used to be called a dividend) is not extra money. The scheme’s NAV falls by the amount distributed, so you are being handed back part of your own investment.

Since April 2020 it is also taxed at your slab rate as income from other sources, with TDS deducted above the threshold. For most taxpayers this is strictly worse than holding the Growth option and redeeming when you actually need the money, because a redemption is taxed as a capital gain — often at 12.5% rather than 30%.

What this site does and does not compute

The portfolio tax view and the capital-gains estimator implement the three treatments above with FIFO lot matching and per-financial-year bucketing of the long-term exemption.

They deliberately leave out: surcharge and the 4% health and education cess, indexation, grandfathering of pre-2018 equity purchases, IDCW taxation, STT, and set-off or carry-forward of losses across years. Those depend on facts about your return and your other income that this app cannot observe, and approximating them would produce a confidently wrong number rather than a more accurate one.

Treat every figure here as an estimate for planning, and take an actual filing position from a professional. WealthTicker is not a SEBI-registered investment adviser and nothing on it is investment or tax advice.

Key takeaway

There is no single mutual fund tax rate — there are three treatments determined by what the scheme holds: equity-oriented, specified debt, and everything in between. Units are matched oldest first, the ₹1,25,000 annual long-term exemption is worth planning around, and every rate here changes with the Budget. Treat any figure as an estimate and take a filing position from a professional.