How Mutual Fund Tax Works in India

Summary

Indian mutual fund gains are taxed differently depending on the fund type (equity, debt, hybrid), holding period, and the amount of gain. Equity fund long-term gains above Rs 1.25 lakh are taxed at 12.5%, while short-term gains are at 20%. Debt fund gains are taxed at your income tax slab rate regardless of holding period (from FY 2023-24 onwards).

How it works

Equity mutual funds (65%+ equity allocation)

Debt mutual funds (less than 65% equity)

From FY 2023-24, all debt fund gains are taxed at your income tax slab rate, regardless of holding period. The earlier distinction between short-term and long-term (with indexation benefit) no longer applies.

Hybrid funds

Key change from July 2024

The Union Budget 2024 changed LTCG tax on equity from 10% to 12.5%, but increased the exemption limit from Rs 1 lakh to Rs 1.25 lakh per year. STCG rate increased from 15% to 20%.

Worked example

Equity ELSS: Invested Rs 5,00,000, Redeemed at Rs 8,50,000 after 3 years

1. Total gain: Rs 8,50,000 - Rs 5,00,000 = Rs 3,50,000
2. LTCG (>12 months): Rs 3,50,000
3. Exemption: Rs 1,25,000
4. Taxable LTCG: Rs 3,50,000 - Rs 1,25,000 = Rs 2,25,000
5. Tax: Rs 2,25,000 x 12.5% = Rs 28,125
6. Plus cess: Rs 1,125
7. Total tax: Rs 29,250

Debt fund: Invested Rs 10,00,000, Redeemed at Rs 12,00,000 after 2 years, 30% bracket

1. Gain: Rs 2,00,000
2. No indexation benefit (post FY 2023-24)
3. Tax at slab rate: Rs 2,00,000 x 30% = Rs 60,000
4. Plus cess: Rs 2,400
5. Total tax: Rs 62,400

Inputs explained

• Fund type — equity, debt, or hybrid
• Purchase amount and date — for holding period calculation
• Redemption amount — current or expected value
• Other LTCG in the year — to track the Rs 1.25 lakh exemption usage
• Income tax slab — for debt fund taxation

Outputs explained

• Capital gain — total profit on the investment
• Tax category — STCG or LTCG based on holding period
• Tax payable — computed at the applicable rate
• Post-tax return — your actual return after tax
• XIRR — annualized return accounting for tax impact

Assumptions & limitations

• The Rs 1.25 lakh LTCG exemption is per financial year across all equity disposals, not per fund.
• SIP investments are treated as individual purchases — each instalment has its own holding period and cost basis.
• ELSS has a mandatory 3-year lock-in but is taxed as equity LTCG on redemption.
• Dividend income from mutual funds is taxed at your slab rate (not as capital gains).
• The calculator does not model grandfathering provisions for pre-February 2018 equity gains.