Summary of this article
Equity mutual funds taxed at 12.5 per cent long-term, 20 per cent short-term
Non-equity mutual funds taxed at slab rates or 12.5 per cent
Specified mutual funds, always taxed as short-term gains
Mutual fund investors planning for FY 2026-27 need to pay close attention to tax rules, as capital gains tax on mutual funds differs widely across equity, debt and specified schemes. From equity mutual funds taxed at 12.5 per cent on long-term capital gains above Rs 1.25 lakh to non-equity and specified mutual fund schemes where gains are taxed at applicable income-tax slab rates, how your mutual fund investments are taxed depends on the scheme type, holding period and residential status of the investor.
The rates are applicable for the tax year 2026–27, subject to the enactment of the Finance Bill, 2026.
For taxation purposes, mutual funds are defined on the basis of the scheme's portfolio allocation to equities and the holding period of investors. So, suppose you are looking for taxation of a debt scheme, a gold fund or a hybrid fund, you will need to understand the portfolio allocation of that scheme. You can check the scheme’s equity allocation to understand the category which would fall under for taxation purposes.
How are Equity-Oriented Mutual Funds Taxed?
Definition: Equity-oriented mutual fund schemes are those that invest at least 65 per cent of their assets in listed equity shares of domestic companies. Gains from these schemes are classified based on a 12-month holding period.
Taxation: Long-term capital gains (LTCG), arising when units are held for more than 12 months, are taxed at 12.5 per cent, and the gains exceed Rs 1.25 lakh in a financial year. Short-term capital gains (STCG), where units are held for 12 months or less, are taxed at 20 per cent .
How are Non-Equity Mutual Funds Taxed?
Definition: Non-equity mutual funds include all schemes that invest less than 65 per cent of their assets in listed equities. And to qualify for long-term capital gains (LTCG), they should have a holding period of more than 24 months.
Taxation: Long-term gains from such schemes are taxed at 12.5 per cent, without indexation benefit.
Short-term capital gains (STCG) from non-equity mutual funds, where the holding period is 24 months or less, are taxed at applicable income-tax slab rates of the investor .
Specified Mutual Funds
Definition: A specified mutual fund is defined as one that invests more than 65 per cent of its assets in debt and money market instruments, or in units of other such specified funds.
Taxation: Capital gains from “specified mutual fund schemes” acquired on or after April 1, 2023, are treated as short-term capital gains (STCG), regardless of the holding period.
Such gains are taxed at the applicable slab rates of the investor.
Tax Deduction at Source (TDS): Resident vs NRI Investors
For resident investors, tax deducted at source (TDS) on income from mutual fund units is 10 per cent. However, no tax is deducted only if the income from mutual fund units exceeds Rs 10,000 in a financial year.
For NRI investors, tax at the rate of 20 per cent is deducted at source. In the case of capital gains, tax is deducted at the time of redemption at applicable rates, along with surcharge and health and education cess.
