How Mutual Fund Returns Are Taxed in FY 2025–26

Mutual fund taxation has become more uniform post Budget 2024. While returns still depend on market performance, the post-tax outcome now varies sharply depending on the category of fund and the holding period. Investors who ignore this may end up with unpleasant surprises at the time of redemption, as the financial year 2025-26 draws to a close in a few months.

Equity Mutual Funds: Equity mutual funds, including equity-oriented exchange traded funds (ETFs), remain the most tax-efficient option. If units in equity funds are held for more than 12 months, gains qualify as long-term capital gains (LTCG) and are taxed at 12.50 per cent. Short-term capital gains (STCG), for units sold within a year, are taxed at a flat rate of 20 per cent. 

Gold ETFs: Gold ETFs are also treated favourably on the long-term side. Units held for more than 12 months attract LTCG tax at 12.50 per cent. However, short-term gains are taxed at the investor’s slab rate, which can be significantly higher for those in the top tax bracket. This makes holding periods especially important for gold investments through ETFs.

Debt Funds: Debt mutual funds have seen the biggest tax overhaul. For funds bought after April 1, 2023, there is no concept of long-term capital gains (LTCG). All gains, irrespective of holding period, are taxed at slab rates. For debt funds bought before that date, if units were held for over 24 months, the gains would be treated as LTCG and gains would be taxed at 12.50 per cent without indexation. This has reduced the appeal of debt funds as a tax-saving instrument, especially for high-income investors.

Hybrid Funds: The Finance Act, 2024, for the purpose of taxation, introduced a new category called hybrid funds apart from existing equity and debt. If the equity allocation falls between 35 per cent and below 65 per cent, the scheme is treated as a hybrid fund for tax purposes, as introduced in the Finance Act, 2024. 

Hybrid funds are taxed based on the holding period. If held for more than 24 months, the gains are treated as LTCG and taxed at 12.50 per cent. If the investment is held for 24 months or less, the gains are considered short-term and taxed according to the investor’s applicable income tax slab.

Gold Funds: Gold mutual funds, physical gold funds, overseas mutual funds and fund-of-funds (FoFs) follow a similar taxation structure. They require a holding period of more than 24 months to qualify as long-term, after which gains are taxed at 12.50 per cent. Short-term gains are taxed at slab rates. This places these categories closer to debt funds from a tax perspective, despite very different underlying assets

Reits, InVIT: Capital gains on real estate investment trusts (Reits) and infrastructure investment trusts (InVITs) are taxed like equity.  LTCG is taxed at 12.50 per cent after 12 months and STCG at 20 per cent.

To sum up, equity-oriented mutual funds continue to enjoy the most favourable tax treatment, particularly for investors willing to stay invested beyond one year. On the other hand, debt, gold, and overseas funds now offer limited tax efficiency and must be evaluated more for their role in asset allocation than for tax benefits.

For investors, understanding taxation is no longer optional. The same return on paper can look very different after tax, and fund selection without considering this can quietly erode long-term wealth.