Capital gains tax on mutual funds, explained simply

Last reviewed October 2026

The short answer

You pay capital gains tax on a mutual fund only when you sell (redeem or switch) units, and only on the profit. How much depends on two things: what kind of fund it is, and how long you held each unit.

For equity funds held more than a year, gains up to ₹1.25 lakh in a financial year are tax-free and the rest is taxed at 12.5%. Sell within a year and the whole gain is taxed at 20%. Most debt funds bought since April 2023 are simply added to your income and taxed at your slab rate, however long you hold them.

The rules, in one table

These are the rates for resident investors in 2026–27. Health and education cess of 4% (and surcharge, at higher incomes) is added on top. The Budget in February 2026 left these rates unchanged.

A few points that catch people out:

• Nothing is taxed while you stay invested. A fund that grows from ₹10 lakh to ₹20 lakh owes no tax until you sell.
• Every SIP instalment has its own clock. Units are treated as sold in the order you bought them, first in, first out. If you have run an SIP for 18 months and redeem everything, the last six instalments are still short term.
• A switch is a sale. Moving from one fund to another, even within the same fund house, counts as redeeming the first fund. Switching from a regular plan to a direct plan of the same fund is also a sale.
• The ₹1.25 lakh is shared. It is one limit per person per year, covering equity funds and listed shares together, not ₹1.25 lakh per fund.
• Old equity holdings are protected. For units bought before 1 February 2018, the gain is counted only from their value on 31 January 2018 (or your actual cost, if higher).

What this looks like in rupees

Say Lakshmi invested ₹10 lakh in an equity fund in 2023. It is now worth ₹14 lakh, and she redeems all of it to help with her daughter’s wedding.

• Her gain is ₹4 lakh. Since she held the units for more than a year, the first ₹1.25 lakh is tax-free.
• The remaining ₹2.75 lakh is taxed at 12.5%: about ₹34,375, plus cess. That is under 9% of her total gain.
• Had she sold the same units within 12 months, the full ₹4 lakh would be taxed at 20%: ₹80,000, plus cess.

Now take her brother Suresh, in the 30% slab, who made ₹1 lakh of gains on a debt fund he bought in 2024. That ₹1 lakh is added to his income and taxed at 30%, so about ₹30,000 plus cess, whether he held it for three months or three years. The same gain in the hands of his retired father, in a lower slab, would cost far less.

So for debt funds, the question is no longer “how long have I held it?” but “whose name is it in, and what is their slab?”

What we’d usually suggest

• Let the money decide, not the tax. Choose a fund for what the money is meant to do, then manage the tax. A good fund held for the wrong reason costs more than any tax saved.
• Try to hold equity for more than a year. The gap between 20% and 12.5%, plus the ₹1.25 lakh exemption, is meaningful. If you need money soon, check which units have crossed 12 months before redeeming.
• Spread large withdrawals across financial years. Taking ₹4 lakh of gains in March and the next ₹4 lakh in April uses two years’ exemptions instead of one.
• Think before switching. Every switch can trigger tax. A fund that has had a dull year is not always a reason to move, and when a move is right, it is worth timing it with the tax in mind.
• Keep your capital gains statement. Fund houses and registrars provide a yearly statement that does the first-in, first-out working for you. It makes filing your return far simpler.

If you are drawing a regular income from your investments, our calculators, including the SWP calculator, help you see how withdrawals and growth play out over time. A withdrawal plan from an equity fund is taxed the same way: each withdrawal is part capital and part gain, and only the gain is taxed.

When it’s different

• NRIs. The rates are broadly the same, but tax is deducted at source when you redeem, and treaty rules in your country of residence may apply. This deserves its own careful look.
• Dividends (IDCW). These are not capital gains. They are added to your income and taxed at your slab rate, with 10% deducted at source once a fund’s payouts to you cross ₹10,000 in a year.
• Losses. Capital losses can be set off against capital gains, and unused losses can usually be carried forward for up to eight years if you file your return on time. Short-term losses are more flexible than long-term ones.
• Hybrid and fund-of-fund schemes. Their tax treatment depends on how much they hold in Indian equity and debt, so two funds with similar names can be taxed differently. Check the scheme documents.

CurateMyMoney is an AMFI-registered mutual fund distributor (ARN-184811). Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. Tax rules mentioned are as applicable at the time of writing and may change; please check the current rules or consult a tax professional before acting.