Taxation on Mutual Funds in India

Taxation of Mutual Funds in India (Fully Updated for FY 2024–25 & FY 2025–26) Last updated for rules in force on and after July 23, 2024 (the mid-year capital-gains overhaul), and subsequent clarifications published by the Government of India. All dates below are in the Indian financial year (April–March). Mutual-fund tax in India is best understood in three layers: (1) what kind of fund/units you hold, (2) what kind of money you receive (redemption gains vs. dividends/IDCW), and (3) when the “transfer” happens (because rules changed materially on July 23, 2024). This article weaves those layers together—carefully, and without shortcuts—so you can read it straight through and come away with a complete, accurate picture. Where the law is newly changed, I’ve anchored the details in primary or sector-level references and used examples to make the effects concrete. How funds are classified for tax—what actually mattersFor tax, mutual fund scheme types (large cap, sectoral/thematic, flexi-cap, hybrid, gold, international, debt) don’t drive the rate. Instead, the Income-tax Act looks at what the scheme primarily invests in and, for “equity-oriented” status, whether the scheme truly crosses statutory equity thresholds. Key mutual fund categories include equity mutual funds, debt mutual funds, hybrid mutual funds, gold ETFs, international mutual funds, ELSS, and FOFs (funds of funds). Equity-oriented mutual funds (EOMFs) are schemes investing ≥65% of their assets in equity shares of domestic companies. Verified via SEBI/AMFI methodology, these include diversified equity funds, sector/thematic funds, and domestic equity index funds/ETFs. Tax on these is under Sections 111A (short-term capital gains/STCG) and 112A (long-term capital gains/LTCG). “Other mutual funds” (non-equity-oriented) is the umbrella for schemes not qualifying as equity-oriented: such as gold funds/ETFs, international equity funds/ETFs/FoFs, hybrid allocations below 65% equity, and debt funds. Post-July 23, 2024, these follow a new, simplified capital-gains grid explained below. Specified Mutual Funds (SMFs), as per the Finance Act 2023, are schemes holding less than 35% in domestic equity. For FY2024–25, gains from such schemes acquired after April 1, 2023 are always short-term, taxed at income tax slab rates (“taxation of specified mutual funds in India,” “debt mutual fund taxation,” “STCG on gold funds,” “section 50AA”). From FY2025–26, SMFs apply to debt-oriented MFs and FOFs predominately in debt/money-market instruments, so gold/international funds no longer fall under the penalty box. These fund-type definitions, not just product labels, determine whether your gains are covered by equity rules (111A/112A), the general capital-gains grid, or the SMF deeming fiction. AMFI’s consolidated explainer aligns with Budget 2024 changes. Fund Type Equity / Debt Allocation Holding Period STCG (If purchased Before 31 Mar 2023) LTCG (If purchased Before 31 Mar 2023) STCG (If purchased After 31 Mar 2023) LTCG (If purchased After 31 Mar 2023) Equity Mutual Funds / Arbitrage Funds / Other Equity-Oriented Funds At least 65% in Equity 12 months 20% 12.5% 20% 12.5% Debt Mutual Funds / Floating Rate Funds Debt securities / ≥65% in floating instruments 24 months As per Income Slab 12.5% As per Income Slab As per Income Slab Conservative Hybrid Funds / Other funds (≤35% equity) Equity: 10–25% Debt: 75–90% 24 months Slab Rate 12.5% Slab Rate Slab Rate Hybrid Funds (Equity 35–65%) More than 35% but less than 65% in Equity 24 months Slab Rate 12.5% Slab Rate 12.5% Balanced Hybrid Funds Equity: 40–60% Debt: 60–40% 24 months Slab Rate 12.5% Slab Rate 12.5% Aggressive Hybrid Funds Equity: 65–80% Debt: 20–35% 12 months 20% 12.5% 20% 12.5% What changed on July 23, 2024—and why your sale date mattersOn July 23, 2024, the central government introduced major reforms to capital gains tax on mutual funds (“mutual fund capital gains FY 2024-25,” “new LTCG rules mutual funds,” “income tax slab rates for SIPs”). Equity units: STCG @20%, LTCG @12.5% over ₹1.25 lakh per taxpayer (previously, STCG @15%, LTCG exemption @₹1 lakh). Non-equity mutual funds follow harmonized LTCG @12.5% (no indexation), new holding period tests: listed units become long-term if held >12 months, unlisted units if >24 months (“holding period for capital gains India,” “LTCG vs STCG mutual funds”).Redemption or transfer date defines which rules apply. E.g., redemptions before July 23 taxed under old rates, redemptions after taxed as per updated grid. The ₹1.25 lakh equity LTCG exemption is consolidated annually, not split. Capital gains on equity-oriented mutual funds (most Indian equity funds & domestic equity ETFs)Holding period, rates & exemption (current law):Short-term: ≤12 months → 20% tax under Section 111ALong-term: >12 months → 12.5% tax under Section 112A, only on cumulative EOMF LTCG over ₹1.25 lakh/financial yearSurcharge and 4% health & education cess apply as usual.STT & transaction levies: Securities Transaction Tax (STT) applies (generally 0.001% on redemption by AMC; also levied on equity ETF transactions). STT is not a deduction for income tax purposes.Grandfathering (2018): Equity units purchased on/before Jan 31, 2018 get LTCG cost “grandfathered” to higher of actual cost or value as of that date; capped by sale price. FIFO is used for SIP gain calculation (“FIFO SIP,” “capital gains calculation for SIP India,” “mutual fund gains in ITR form”).Switches between schemes/plans, SWPs, and mergers are all taxable events (except AMC-initiated mergers which are generally tax-neutral under Section 47). Set-off & carry-forward: Short-term capital losses (STCL) can offset both STCG/LTCG, long-term capital losses offset only LTCG. Losses carried forward for up to 8 years if ITR is filed on time. Capital gains on non-equity mutual funds (“other” funds) after the 2024 overhaul Long-term: If held >12 months (listed) or >24 months (unlisted), LTCG @12.5% (no indexation) Short-term: Taxed at income tax slab ratesThis applies to transfers after July 23, 2024. Before that, most funds needed >36 months for LTCG and used 20% with indexation.Common fund types: gold funds/ETFs, international equity funds/ETFs/FoFs (“gold mutual fund taxation India,” “international fund capital gains India”). SEBI/AMFI portfolio allocation may impact your fund’s classification—check factsheets. Specified Mutual Fund (SMF) deeming rule—what it did, and how it narrows from FY 2025–26FY 2024–25: Funds with <35% equity, gains from units acquired after April 1, 2023 treated as short-term under Section 50AA (taxed at slab