How Mutual Funds Are Taxed in India for AY 2026-27

Key Takeaways

• Equity mutual fund LTCG above Rs 1.25 lakh per year is taxed at 12.5% (Section 112A). Equity STCG is taxed at 20% (Section 111A). Both rates apply to transfers on or after 23 July 2024.
• Debt mutual funds (more than 65% in debt and money market instruments) bought on or after 1 April 2023 have no long-term benefit. All gains are deemed short-term under Section 50AA and taxed at your slab rate, regardless of holding period.
• From 1 April 2025, gold funds, international funds and other funds that are neither equity-oriented nor debt-oriented are no longer caught by Section 50AA. They get LTCG at 12.5% after 12 months (listed ETFs) or 24 months (other units).
• SIP redemptions follow the FIFO method: the oldest units are deemed sold first. Each monthly installment is a separate lot with its own holding period and cost.
• MF dividends are taxed at your slab rate. The fund house deducts TDS at 10% under Section 194K if your dividend exceeds Rs 10,000 in a financial year.

How are mutual fund gains taxed in India for AY 2026-27? Equity-oriented mutual funds (more than 65% in domestic equity) attract LTCG tax of 12.5% on gains above Rs 1.25 lakh per year (Section 112A) and STCG tax of 20% (Section 111A), effective for transfers on or after 23 July 2024 (Finance (No. 2) Act 2024). Debt funds bought on or after 1 April 2023 are taxed entirely at your income tax slab rate under Section 50AA, with no long-term holding benefit. Gold, international and other non-equity, non-debt funds get 12.5% LTCG after 12 or 24 months.

India had over 21 crore active SIP accounts as of March 2026. If you redeemed, switched, or received dividends from any mutual fund during FY 2025-26, you need to report the gains correctly in your ITR for AY 2026-27. This is the first full assessment year where the Finance Act 2024 capital gains overhaul applies from start to finish, with higher equity rates and no indexation for most asset classes.

This guide covers every category of mutual fund, the exact tax rates, SIP-specific computation using the FIFO method, and how to fill Schedule CG in your ITR.

Mutual Fund Tax Rates at a Glance

For redemptions in FY 2025-26 (AY 2026-27):

Classification uses the fund's investment percentages computed on the annual average of daily closing figures, as disclosed by the fund house.

Equity Mutual Funds: LTCG and STCG

An equity-oriented mutual fund is one where more than 65% of total proceeds are invested in equity shares of domestic companies. Most large-cap, mid-cap, small-cap, multi-cap, flexi-cap, ELSS, and aggressive hybrid funds fall in this category.

Long-term capital gains (held more than 12 months): Taxed at 12.5% on gains exceeding Rs 1.25 lakh per financial year under Section 112A (Finance (No. 2) Act 2024, effective 23 July 2024). The Rs 1.25 lakh exemption is an aggregate annual limit across all equity LTCG transactions, not per fund or per scheme.

Short-term capital gains (held 12 months or less): Taxed at a flat 20% under Section 111A (Finance (No. 2) Act 2024).

Before 23 July 2024, the rates were 10% LTCG and 15% STCG. The applicable rate depends on the date of transfer (redemption or switch), not the date of purchase.

The January 31, 2018 Grandfathering Rule

When Section 112A was introduced in 2018, CBDT provided a grandfathering provision so that gains accrued before 31 January 2018 are not taxed. This rule still applies for AY 2026-27 (Section 55(2)(ac) of the Income Tax Act 1961).

For equity MF units acquired on or before 31 January 2018, the cost of acquisition for LTCG purposes is the higher of:

• Actual purchase cost, or
• The lower of (a) the Net Asset Value (NAV) on 31 January 2018 and (b) the sale/redemption NAV

Worked example: You bought 1,000 units of an equity fund at Rs 100 per unit (cost: Rs 1,00,000) in 2016. The NAV on 31 January 2018 was Rs 150. You redeem in November 2025 at Rs 250 per unit (Rs 2,50,000).

• FMV on 31 Jan 2018 = Rs 150, Sale NAV = Rs 250. Lower of the two = Rs 150.
• Cost of acquisition = higher of (Rs 100 actual, Rs 150 FMV) = Rs 150 per unit
• LTCG = Rs 2,50,000 minus Rs 1,50,000 = Rs 1,00,000
• This is below the Rs 1.25 lakh exemption. Tax payable: nil.

The gains that accrued between your purchase date and 31 January 2018 (Rs 50,000 in this example) are effectively untaxed.

For a comprehensive overview of capital gains taxation across all asset classes (stocks, property, bonds, crypto), see our Complete Guide to Capital Gains Tax Rates for AY 2026-27.

Debt Mutual Funds: Section 50AA (Post-April 2023 Units)

The Finance Act 2023 inserted Section 50AA from 1 April 2023. Gains on units of a specified mutual fund bought on or after that date are deemed short-term capital gains, whatever the holding period, and taxed at your slab rate. No indexation, no long-term rate.

Who counts as a specified mutual fund (FY 2025-26 onwards): the Finance (No. 2) Act 2024 rewrote the definition with effect from 1 April 2025. A specified mutual fund is now:

• a fund that invests more than 65% of its total proceeds in debt and money market instruments, or
• a fund that invests 65% or more of its total proceeds in units of such a debt fund (a debt fund of funds).

Until 31 March 2025 the test was different: any fund with 35% or less in domestic equity was a specified mutual fund, which swept in gold funds and international funds. That is why those funds now have their own section below.

Funds caught by Section 50AA: liquid, overnight, money market, ultra-short, low, short, medium and long duration, gilt, corporate bond, banking and PSU, credit risk, dynamic bond, floater funds, FMPs, debt index funds and target maturity funds (including debt ETFs), and conservative hybrid funds, which hold 75% or more in debt.

Units Bought Before 1 April 2023

Section 50AA does not reach units bought before 1 April 2023. For those units, sold in FY 2025-26:

Before 23 July 2024 these units needed 36 months to be long-term and were taxed at 20% with indexation. The Finance (No. 2) Act 2024 cut the holding period to 24 months and removed indexation for all transfers from that date, so an old debt fund unit sold in FY 2025-26 gets 12.5% flat, not 20% indexed.

What the old regime was worth. Rs 1,00,000 invested in FY 2018-19 (CII 280) and redeemed for Rs 1,50,000 in FY 2022-23 (CII 331):

Cess at 4% applies on top in both cases.

Same Gain, Different Purchase Date

Rs 10 lakh invested, redeemed for Rs 15 lakh in FY 2025-26, held over 24 months, investor in the 30% slab (cess and surcharge ignored):

The Rs 1.25 lakh exemption does not apply here: it is only for equity gains under Section 112A. Your CAMS or KFintech capital gains statement shows the purchase date of each lot, so check it before you redeem.

Debt Funds vs Fixed Deposits Now

Post-April 2023 debt fund gains and FD interest are both taxed at slab rate. Debt funds still have two differences:

• Timing: FD interest is taxed every year as it accrues. A debt fund (growth option) is taxed only in the year you redeem, which can be a year when your income is lower.
• No TDS on redemption for residents. Banks deduct 10% TDS under Section 194A when FD interest exceeds Rs 50,000 a year (Rs 1 lakh for senior citizens).

Because debt fund gains are taxed at normal slab rates, not a special rate, the Section 87A rebate under the new regime can cover them if your total income is within Rs 12 lakh. It cannot cover equity STCG or LTCG under 111A or 112A.

Arbitrage funds hold hedged equity and qualify as equity-oriented, so they get 20% STCG and 12.5% LTCG above Rs 1.25 lakh instead of slab rate. For an investor in the 30% slab they are often compared with liquid and short-duration funds. Their returns and risks differ from debt funds, and Budget 2026 raised STT on futures from FY 2026-27, which slightly increases their cost.

Gold ETFs, International Funds, and Fund of Funds

From 1 April 2025, these funds are outside Section 50AA unless they invest more than 65% in debt, so the purchase date no longer matters for them. What matters is whether the units are listed.

Gold ETFs and Gold Mutual Funds

• Gold ETFs (listed): long-term after 12 months, LTCG at 12.5% without indexation (Section 112). Short-term gains at slab rate.
• Gold mutual funds / gold fund of funds (unlisted units): long-term after 24 months, LTCG at 12.5% without indexation. Short-term gains at slab rate.

Gold ETF or gold fund units sold between 1 April 2023 and 31 March 2025 that had been bought on or after 1 April 2023 were taxed at slab rate under the old Section 50AA definition. That applies to earlier years, not to AY 2026-27.

Physical gold and Sovereign Gold Bonds (SGBs) have different rules. Physical gold gets LTCG at 12.5% after 24 months. SGB redemption with the RBI on maturity is exempt for individuals. This guide covers only gold held through mutual fund units.

International / Global Funds

International equity funds and global funds of funds invest in foreign shares, so they are not equity-oriented funds for Section 112A. They are not debt funds either.

• Listed international ETFs: LTCG at 12.5% after 12 months; STCG at slab rate.
• International funds and FoFs (unlisted units): LTCG at 12.5% after 24 months; STCG at slab rate.

Domestic Fund of Funds (FoFs)

• A FoF that puts 65% or more into debt funds is itself a specified mutual fund, so Section 50AA applies to units bought on or after 1 April 2023.
• A FoF that invests in equity funds is usually not equity-oriented, because it holds fund units rather than shares. Section 112A treats it as equity-oriented only if it invests at least 90% in listed equity ETFs which in turn invest at least 90% in listed domestic equity. Otherwise it is taxed like the "other funds" category: 12.5% LTCG after 24 months.

Always check the fund's scheme information document or factsheet for the actual allocation.

Hybrid Mutual Funds: Which Category Do They Fall In?

The tax treatment of a hybrid fund depends on its actual allocation, not its SEBI category name:

Check the fund's factsheet or the fund house's tax disclosure for the equity-debt split.

SIP Capital Gains: The FIFO Method

When you invest through a Systematic Investment Plan (SIP), each monthly installment purchases units at a different NAV on a different date. When you redeem, the Income Tax Department requires the First In First Out (FIFO) method to identify which units are sold.

FIFO means the oldest units in your account are deemed sold first. This affects two things:

1. Holding period: The oldest units are most likely to have crossed the 12-month threshold (for equity) and qualify as long-term.
2. Cost of acquisition: Each lot has a different purchase NAV, so the gain per unit varies.

Worked Example: SIP Redemption

You started a monthly SIP of Rs 10,000 in an equity fund from January 2024. You redeem Rs 3,00,000 worth of units on 15 March 2026.

Under FIFO, the January 2024 units are sold first. All units purchased before 15 March 2025 are long-term (held >12 months). Units purchased from April 2025 onwards are short-term.

Your fund house or registrar (CAMS, KFintech) provides a capital gains statement that applies FIFO automatically. Download this before filing your ITR.

Worked Example: Hybrid Fund + Switch (Shows 24-Month Threshold)

You bought 500 units of a hybrid fund (60% equity, 40% debt) on 1 June 2024 at Rs 100 per unit (Rs. 50,000). On 15 January 2026, you switch 500 units to a pure equity fund at Rs 115 per unit (Rs. 57,500).

Tax impact of the switch:

• Holding period: 19 months (< 24 months, so NOT long-term for hybrid)
• Fund classification: 60% equity and 40% debt, so neither equity-oriented (needs more than 65% equity) nor a specified MF (needs more than 65% debt) → requires 24 months for LTCG
• Switch triggers redemption: 15 January 2026 is the transfer date
• Result: STCG at slab rate applies (not LTCG, because holding < 24 months)
• Gain: Rs. 7,500
• Tax (assuming 30% slab): Rs. 7,500 × 30% = Rs. 2,250

Key learning: For hybrid funds that are neither equity-oriented nor more than 65% debt, you need 24 months holding (not 12 months like pure equity). A switch at 19 months triggers STCG, not LTCG. Wait 5 more months (until June 2026) and the same switch would be taxed at LTCG 12.5%.

Mutual Fund Dividends

Since 1 April 2020 (Finance Act 2020), mutual fund dividends are taxed in the hands of the investor at the applicable slab rate. The Dividend Distribution Tax (DDT) regime was abolished.

• Dividends are added to your total income under "Income from Other Sources."
• The fund house deducts TDS at 10% under Section 194K if your total mutual fund dividend in a financial year exceeds Rs 10,000. This threshold is per fund house, not per scheme.
• You can claim the TDS credit when filing your ITR.
• If your total income is below the taxable limit, submit Form 15G (or Form 15H if you are a senior citizen) to the fund house to avoid TDS deduction.

Switching between growth and IDCW (dividend) options within the same scheme triggers a redemption of the old option and a fresh purchase of the new one. This is a taxable transfer event.

Planning tip: If you want dividend income but are concerned about TDS, consider keeping investments below the fund house's total dividend threshold. Alternatively, use tax-efficient investment strategies like Section 80C Deductions for Mutual Funds (ELSS, Index Funds) to reduce your overall tax burden.

How to Report Mutual Fund Gains in Your ITR

If you have mutual fund capital gains, you must file ITR 2 (salaried with capital gains) or ITR 3 (if you have business income). ITR 1 allows only Section 112A equity LTCG of up to Rs 1.25 lakh, with no short-term gains and no losses to carry forward; any other mutual fund gain needs ITR 2 or ITR 3.

Schedule CG (Capital Gains)

• Equity STCG (Section 111A): short-term gains on equity-oriented funds, at 20%.
• Debt fund gains under Section 50AA: reported as short-term capital gains from other assets, taxed at slab rate, whatever the holding period.
• Long-term gains on debt units bought before 1 April 2023, and on gold, international and other funds: reported as long-term gains under Section 112, at 12.5% without indexation.
• Equity LTCG: carried in from Schedule 112A.

Schedule 112A (for equity LTCG)

For each equity-oriented MF sold during the year, report:

• Name of the mutual fund scheme
• ISIN code
• Number of units sold
• Sale price per unit
• Cost of acquisition per unit (including grandfathering adjustment for pre-31 Jan 2018 units)
• Total capital gain

Your fund house provides the capital gains statement with ISIN, FIFO-applied costs, and grandfathered amounts pre-computed. The AIS (Annual Information Statement) on the e-filing portal also shows your MF transactions.

Need help filing ITR 2 with Schedule CG? See our Step-by-Step ITR 2 Filing Guide with Schedule CG Walkthrough to ensure your mutual fund gains are reported correctly.

Common Mistakes to Avoid

1. Treating debt fund gains as long-term. For units acquired on or after 1 April 2023, debt fund gains are always short-term under Section 50AA, even if you held for 5 or 10 years. The old "hold for 3 years and get indexation" rule is gone for new purchases.

2. Ignoring SIP lot-level computation. Each SIP installment is a separate lot. A partial redemption may include some long-term and some short-term units. Do not compute capital gains on the average cost of all units.

3. Forgetting the Rs 1.25 lakh exemption is annual, not per scheme. If you have LTCG from three different equity funds totalling Rs 2 lakh, only Rs 1.25 lakh is exempt. The remaining Rs 75,000 is taxed at 12.5%.

4. Missing the switch-is-a-transfer rule. Switching from one scheme to another (even within the same fund house) is a redemption followed by a purchase. It triggers capital gains tax on the redeemed units.

5. Applying the old Section 50AA test to gold and international funds. Until FY 2024-25 these were taxed at slab rate if bought on or after 1 April 2023. For redemptions from 1 April 2025 they get 12.5% LTCG after 12 months (listed ETFs) or 24 months (other units).

6. Not using the capital gains statement. Fund houses and RTAs (CAMS, KFintech) provide consolidated capital gains statements with FIFO, grandfathering, and lot-level details already computed. Use this directly instead of computing gains manually from transaction statements.

Tax Garden Handles Your Mutual Fund ITR

If you have gains across equity funds, debt funds, SIPs, and dividends, computing lot-level capital gains with FIFO and grandfathering adjustments is time-consuming and error-prone. Tax Garden imports your capital gains statements from CAMS and KFintech, applies the correct tax rate for each fund category, fills Schedule CG and Schedule 112A in your ITR 2 or ITR 3, and files it. File your ITR with mutual fund gains correctly.