Mutual Fund Taxation FY 2026-27: Equity, Debt, Hybrid, ELSS, SIP, Dividends and NRI Rules

Mutual fund gains are taxed when you redeem, and the rate depends on the fund type and the holding period. Equity funds pay 20% within 12 months and 12.5% above Rs 1.25 lakh a year after that, while debt funds follow your slab rate.

Below: each fund type with a worked example, SIPs, ELSS, dividends, NRIs, loss set-off and ways to cut the tax.

Mutual Fund Tax Rates at a Glance

Mutual fund tax is capital gains tax on units you sell, plus income tax on dividends you receive. The table shows the rate by fund type for sales after 23 July 2024.

Indexation is gone for every mutual fund. Cess of 4% is added to each tax figure, and surcharge on equity gains is capped at 15%.

Equity Mutual Fund Taxation

An equity-oriented fund holds at least 65% in domestic equity shares. Gains on units sold within 12 months are taxed at 20%, and gains on units held longer are taxed at 12.5% above Rs 1.25 lakh a year.

The second row taxes only Rs 75,000, which is the gain of Rs 2,00,000 less the Rs 1,25,000 exemption. In the third row the exemption is shared, so the taxable gain is Rs 45,000.

Units bought before 1 February 2018 use a grandfathered cost, which is the higher of the actual cost and the lower of the 31 January 2018 value and the sale value. Units costing Rs 2,00,000, worth Rs 3,00,000 on that date and sold for Rs 5,00,000 have a cost of Rs 3,00,000 and the same Rs 9,750 tax.

Debt Mutual Fund Taxation

Gains on a specified mutual fund are treated as short term whatever the holding period, and taxed at your slab rate. A specified fund holds more than 65% in debt and money market instruments, a test that applies from 1 April 2025.

Until 31 March 2025 the test was a fund with 35% or less in domestic equity, so funds with 35% to 65% equity were treated as debt. They now sit outside the rule.

The first row pays Rs 18,000 at 30% plus Rs 720 of cess. Check the fund's allocation in its factsheet on amfiindia.com before you assume which rule applies.

Hybrid, Gold and International Funds

A hybrid fund is taxed by its equity share, so one with 65% or more equity is taxed as equity. One with 35% to 65% equity is taxed like other non-equity funds, and one with more than 65% debt is a specified fund.

The Rs 1.25 lakh exemption is only for equity shares and equity-oriented funds. A listed gold ETF held 14 months with a gain of Rs 80,000 pays Rs 10,000 plus Rs 400 of cess.

ELSS Tax Benefit and Taxation

ELSS is an equity fund with a 3 year lock-in, and it carries a deduction of up to Rs 1.5 lakh under Section 80C in the old regime only. Gains after the lock-in are long term and taxed as equity gains.

Each SIP instalment in an ELSS has its own 3 year lock-in. The ELSS Calculator shows the corpus and the tax saved, and the regime guide explains why the deduction matters only in the old regime.

SIP Taxation and the FIFO Rule

Each SIP instalment is a separate purchase, and redemptions use first in, first out, so the oldest units are sold first. Each unit therefore has its own holding period and its own rate.

Three instalments are long term and twelve are short term, even though the SIP is over a year old. The SIP Calculator projects the value before tax.

IDCW and Dividend Tax

IDCW and dividends are added to your income and taxed at your slab rate, since the fund no longer pays a distribution tax. A payout of Rs 25,000 at the 30% slab costs Rs 7,500 plus Rs 300 of cess.

The TDS is only an advance credit, and the full payout is taxed at your slab. The Dividend Tax Calculator works out the tax on a payout, and the TDS rate chart lists the other sections.

NRI Mutual Fund Taxation

NRIs pay the same capital gains rates, but the fund deducts TDS at redemption under Section 195. Secondary sources report 20% on equity fund short term gains, 12.5% on long term gains and about 30% on debt funds, plus surcharge and cess.

A lower deduction certificate under Section 197 can cut the TDS, and a tax treaty can reduce the final tax. File an Indian return to claim any excess back.

Losses, Reporting and Ways to Pay Less Tax

A short term loss can be set off against short term and long term gains, and a long term loss only against long term gains. Unused losses carry forward for 8 years if the return is filed on time.

A gain of Rs 60,000 with a short term loss of Rs 20,000 is taxed on Rs 40,000, which is Rs 8,320 with cess. Report each sale in the capital gains schedule, using your AMC statement and the AIS.

Five habits keep the tax on mutual funds low.

The Capital Gains Calculator and the ITR due date guide cover the rest of the filing.

Common Mutual Fund Tax Mistakes

The most common mistake is assuming every fund called debt is taxed the same way. The rule turns on the fund's actual allocation and on when the units were bought.

Frequently Asked Questions: Mutual Fund Taxation