Mutual Fund Tax India AY 2026-27: LTCG, STCG, Debt, SIP

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 (acquired 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.
• Gold ETFs, international fund of funds, and any MF with 35% or less domestic equity are classified as "Specified Mutual Funds" under Section 50AA (for units acquired on/after 1 April 2023).
• 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 and other non-equity funds acquired on or after 1 April 2023 are taxed entirely at your income tax slab rate under Section 50AA, with no long-term holding benefit.

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

The classification of a fund as "equity-oriented" or "specified" depends on the percentage of its total proceeds invested in equity shares of domestic companies, computed using the annual average of daily closing figures.

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 introduced Section 50AA, which fundamentally changed how debt mutual funds are taxed. A "Specified Mutual Fund" is one where not more than 35% of its total proceeds is invested in equity shares of domestic companies.

For units acquired on or after 1 April 2023: All capital gains are deemed short-term regardless of how long you hold the units. They are added to your total income and taxed at your slab rate. There is no indexation benefit and no long-term holding advantage.

This applies to:

• Pure debt funds (liquid, ultra-short, short-term, medium-term, long-term, gilt, credit risk, dynamic bond, banking and PSU)
• Corporate bond funds
• Money market funds
• Fixed maturity plans (FMPs)
• Fund of Funds (FoFs) that invest in specified mutual funds
• Any fund where domestic equity allocation is 35% or below

For units acquired before 1 April 2023: The old rules continue to apply for those specific units. If you held them for more than 36 months, they were classified as long-term. For transfers on or after 23 July 2024, the LTCG rate is 12.5% without indexation (Section 112, as amended by Finance (No. 2) Act 2024). For transfers before 23 July 2024, the rate was 20% with indexation.

Practical impact: If you invested Rs 10 lakh in a debt fund in June 2023 and redeem in August 2026, the entire gain is taxed at your slab rate (say 30% for income above Rs 24 lakh). Under the old pre-2023 rules, the same gain would have been taxed at 20% with indexation (effectively 10-15% after indexation). This is a significant increase in tax burden on debt fund investors.

Gold ETFs, International Funds, and Fund of Funds

Gold ETFs and Gold Mutual Funds

Gold ETFs and gold mutual funds invest in physical gold or gold-related instruments, with zero or near-zero allocation to domestic equity. They qualify as Specified Mutual Funds under Section 50AA.

• Units acquired on or after 1 April 2023: All gains are short-term, taxed at slab rate (Section 50AA). No long-term benefit regardless of holding period.
• Units acquired before 1 April 2023: LTCG at 12.5% after 24 months (Section 112, post-23 July 2024 transfers). STCG at slab rate.

Note that physical gold and Sovereign Gold Bonds (SGBs) have different tax rules. Physical gold gets LTCG at 12.5% after 24 months. SGB redemption at maturity is fully exempt. This guide covers only gold held through mutual fund units.

International / Global Funds

International equity funds and global fund of funds invest in foreign equities, not domestic equity shares. They fall under the "specified mutual fund" definition (≤35% domestic equity).

• Units acquired on or after 1 April 2023: Section 50AA applies. All gains are short-term and taxed at your slab rate.
• Units acquired before 1 April 2023: LTCG at 12.5% after 24 months (Section 112). STCG at slab rate.

Domestic Fund of Funds (FoFs)

If the underlying fund is a specified mutual fund (≤35% domestic equity), the FoF itself is treated as a specified mutual fund, and Section 50AA applies for units acquired on or after 1 April 2023.

If the FoF invests in equity-oriented funds (>65% domestic equity), it does not get equity-oriented treatment itself. The classification depends on the FoF's own domestic equity allocation, not the underlying fund's equity allocation. Most domestic equity FoFs have been restructured, but always check the fund's scheme information document for the actual equity percentage.

Hybrid Mutual Funds: Which Category Do They Fall In?

The tax treatment of hybrid funds depends entirely on their domestic equity allocation:

Aggressive hybrid funds typically maintain 65-80% equity and qualify as equity-oriented. Conservative hybrid funds typically maintain 10-25% equity and fall under Section 50AA. Balanced advantage / dynamic asset allocation funds may shift between categories depending on their actual equity allocation in a given year. Check the fund's monthly factsheet 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 (₹50,000). On 15 January 2026, you switch 500 units to a pure equity fund at Rs 115 per unit (₹57,500).

Tax impact of the switch:

• Holding period: 19 months (< 24 months, so NOT long-term for hybrid)
• Fund classification: Hybrid fund is 60% equity (35-65% category) → 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: ₹7,500
• Tax (assuming 30% slab): ₹7,500 × 30% = ₹2,250

Key learning: For hybrid funds in the 35-65% equity range, 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 cannot be used if you have capital gains.

Schedule CG (Capital Gains)

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. 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.

FAQ

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.