Taxation of Mutual Funds in India

(Fully Updated for FY 2024–25 & FY 2025–26)

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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 matters
For 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 matters
On 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 111A
Long-term: >12 months → 12.5% tax under Section 112A, only on cumulative EOMF LTCG over ₹1.25 lakh/financial year
Surcharge 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 rates
    This 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 2025–26
FY 2024–25: Funds with <35% equity, gains from units acquired after April 1, 2023 treated as short-term under Section 50AA (taxed at slab rates).
FY 2025–26: Only debt-oriented MFs & FOFs. Gold/international funds now go back to “other MF” grid (“mutual fund tax rules India 2025”).

Dividends/IDCW from mutual funds
Since Budget 2020, dividends (now IDCW: Income Distribution & Capital Withdrawal) are taxable per individual slab rates. Resident investors: TDS under Section 194K at 10% above ₹5,000 per AMC. Non-resident: Section 196A, TDS @20% (may reduce under DTAA), IDCW is taxable regardless of where received (“dividend tax mutual funds,” “TDS mutual funds India”).

ELSS (Tax-saving equity funds)
ELSS remains eligible for Section 80C tax-saving deduction (up to ₹1.5 lakh), three-year lock-in applies. Post-lock-in, treated as equity-oriented for capital gains and exemption.

Special mechanics and edge cases

• • Corporate actions, mergers, segregated portfolios per Section 47: tax-neutral, cost and holding period continue.

• • Dividend and bonus stripping (Section 94(7), 94(8)) prohibits claiming losses in certain misuse cases.

• • Gifting mutual fund units: tax-exempt for relatives, taxable for others above ₹50,000 (Section 56(2)(x)).

• • Loss harvesting (“mutual fund loss harvesting India,” “capital loss carry forward mutual funds”)

• • Section 87A rebate doesn’t apply to LTCG (Section 112A), so even those under income threshold may pay equity LTCG tax.

• • Stamp duty: Applies since July 2020 on all purchases/transfers (0.005%).

Non-resident investors (NRIs): what differs

• • Dividends/IDCW: TDS @20% u/s 196A.

• • Capital gains TDS: STCG (111A) @20%, LTCG (112A) @12.5% above ₹1.25 lakh, other fund LTCG @12.5%, SMF gains per slab. (“NRI mutual fund taxation,” “NRI capital gains India,” “DTAA mutual funds”)

Examples—how it works in practice
Example A — Equity SIP with partial exemption: Meera invests in an Indian Nifty 50 index fund (equity-oriented via SIP). In FY 2025–26, she redeems with ₹2.10 lakh LTCG: ₹1.25 lakh is exempt, ₹85,000 taxed at 12.5%. STCG of ₹40,000 taxed at 20%.
Example B — Gold ETF sold in September 2024: Arun buys gold ETF, sells after holding >12 months, LTCG @12.5%.
Example C — International FoF unit acquired in Feb 2024, sold Aug 2025: Taxed as short-term under Section 50AA if acquired in the SMF window.
Example D — IDCW receipt and Form 15G: Resident investor files Form 15G to avoid TDS; IDCW remains taxable at slab rate.
Example E — Section 54F after equity LTCG: Kiran uses equity LTCG to buy a residential house, eligible for exemption under Section 54F.

Administrative tips

• • Capital gains from mutual fund redemptions/switches shown in ITR capital gains schedule, with statements from CAMS/KFintech.

• • Dividends/IDCW listed under “Income from Other Sources,” appear in Form 26AS/AIS if TDS deducted.

• • Choice between old and new tax regime doesn’t affect special capital gains sections (111A/112A/12.5%), but does change SMF and debt rules.

• • Surcharge and cess always apply.

Where this guide is anchored
Government of India post-Budget 2024 FAQs, AMFI classification notes, Section 194K/196A for TDS on dividends, anti-avoidance stripping (Sections 94), and AMC scheme merger rules (Section 47).

One last checklist—Indian mutual funds

• • Identify fund type: equity-oriented, “other MF” (debt/gold/international), or SMF

• • Map transfer/sale date: before/after July 23, 2024

• • Confirm holding period, gain type (STCG/LTCG), apply correct section

• • Use equity LTCG exemption, loss harvesting, Section 54F for property purchases, TDS hygiene (expect TDS on IDCW for residents, for NRIs; STT is a separate transaction levy)

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