Mutual Fund Taxation: LTCG and STCG in India 2026
Rohan sold his funds for a tidy profit, then a chunk vanished to tax he didn't see coming. Here's exactly how equity and debt funds are taxed — with rupee examples.
Rohan finally sold the mutual funds he'd been holding for a couple of years. Nice profit. He mentally spent it before the money even hit his account — new phone, a trip, maybe both.
Then his CA friend asked one annoying question: "Equity fund or debt fund?" Rohan shrugged. That shrug, it turned out, was worth a few thousand rupees in tax he hadn't budgeted for.
The one question that decides your tax: equity or debt?
Mutual fund tax in India isn't one rule — it depends almost entirely on what the fund holds and how long you held it. Get those two facts straight and the rest is arithmetic.
A fund that keeps 65% or more in Indian equities is taxed as an EQUITY fund. Most other funds — including debt funds — follow different rules. Always know which bucket your fund sits in before you sell.
Equity funds: the 12-month line
For equity funds (and equity-oriented hybrids), the magic number is 12 months.
- Held 12 months or less → Short-Term Capital Gains (STCG): taxed at a flat 20%, with no minimum exemption — every rupee of gain is taxable.
- Held more than 12 months → Long-Term Capital Gains (LTCG): the first ₹1.25 lakh of gains in a financial year is tax-free; anything above that is taxed at 12.5%.
These rates were set by Budget 2024 (effective 23 July 2024) and continue to apply in 2026. A quick example: you hold an equity fund for two years and book a ₹1.75 lakh gain. The first ₹1.25 lakh is exempt; the remaining ₹50,000 is taxed at 12.5% = ₹6,250. Wait past a year and you unlock that ₹1.25 lakh free allowance — sell too early, and the whole gain gets hit at 20%.
Debt funds: the 2023 rule that changed everything
Here's where Rohan got stung. For debt fund units bought on or after 1 April 2023, the old long-term tax benefit is gone. It doesn't matter whether you held them for one month or five years:
All gains on debt fund units bought on or after 1 April 2023 are added to your income and taxed at your income-tax SLAB rate. No 12.5% long-term rate, no indexation. If you're in the 30% slab, your gain is effectively taxed at 30%.
So a ₹40,000 gain on a debt fund, for someone in the 30% slab, means roughly ₹12,000 in tax — regardless of holding period. That's a very different world from equity funds, and exactly the detail Rohan's shrug ignored.
Hybrid funds: it depends what's inside
Hybrid funds mix equity and debt, so their tax treatment follows their equity share. Broadly, if the fund keeps 65%+ in Indian equity, it's taxed like an equity fund; if it leans heavily toward debt, it's taxed under the debt rules. The label on the cover matters less than the ingredients inside — always check the scheme category.
A rupee example that ties it together
- Equity fund, held 8 months, ₹30,000 gain: STCG at 20% = ₹6,000.
- Equity fund, held 3 years, ₹1.5 lakh gain: first ₹1.25 lakh free, ₹25,000 taxed at 12.5% = ₹3,125.
- Debt fund (bought 2024), held 3 years, ₹30,000 gain, 30% slab: ₹9,000.
Two funds, the same profit on paper, wildly different tax bills. The market gives you the return — the fund type decides how much you keep.
What this means for you
Three practical moves. One: for equity funds, crossing the 12-month mark unlocks both the lower rate and the ₹1.25 lakh yearly exemption — so don't sell in month 11 without a reason. Two: you can harvest that ₹1.25 lakh exemption every financial year by booking small long-term gains deliberately. Three: if you invest to save tax in the first place, an ELSS fund gives you a Section 80C deduction going in — see our Section 80C guide for the full menu. Model your own numbers with the lumpsum calculator so you know the gain before you know the tax.
- Equity funds: held ≤12 months, gains are STCG taxed at 20%; held >12 months, LTCG above ₹1.25 lakh a year is taxed at 12.5%.
- The ₹1.25 lakh long-term exemption is per financial year and combines gains from stocks and equity funds.
- Debt fund units bought on/after 1 April 2023 are taxed at your slab rate with no long-term benefit or indexation.
- Hybrid funds are taxed based on their equity allocation — check whether the scheme is equity- or debt-oriented.
- Holding equity funds beyond a year unlocks both a lower rate and the yearly tax-free allowance.
The takeaway isn't to fear tax — it's to plan around it. Know your fund type, respect the 12-month line for equity, remember debt funds now follow your slab, and use the yearly ₹1.25 lakh exemption instead of forgetting it exists.
Over to you: did the debt-fund rule change catch you off guard, like it did Rohan? Tell us how you track your fund taxes. This is general information, not tax advice — check your specific situation with a qualified professional.
Frequently asked questions
How are equity mutual funds taxed in India in 2026?
If you hold equity fund units for 12 months or less, gains are short-term and taxed at a flat 20%. If you hold for more than 12 months, gains are long-term: the first ₹1.25 lakh in a financial year is tax-free and the rest is taxed at 12.5%. These rates were set by Budget 2024 and continue to apply in 2026.
How are debt mutual funds taxed after the 2023 change?
For debt fund units purchased on or after 1 April 2023, all capital gains are added to your income and taxed at your applicable income-tax slab rate, regardless of holding period. The earlier long-term rate and indexation benefit no longer apply to these units.
What is the ₹1.25 lakh exemption on mutual funds?
For long-term capital gains on equity funds and listed shares, the first ₹1.25 lakh of such gains in a financial year is exempt from tax. This is a combined annual limit across your equity funds and stocks, and it resets each financial year, so booking small long-term gains yearly can help you use it.
How are hybrid mutual funds taxed?
Hybrid funds are taxed based on their equity exposure. Funds that keep at least 65% in Indian equities are generally taxed like equity funds (20% STCG, 12.5% LTCG above ₹1.25 lakh), while debt-oriented hybrids follow debt-fund rules. Check the scheme category to know which applies.
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