How are equity mutual funds taxed in India in 2026?

For equity mutual funds, short-term capital gains (units held for 12 months or less) are taxed at 20 percent, and long-term capital gains (held more than 12 months) are taxed at 12.5 percent, but only on gains above 1.25 lakh rupees in a financial year. The first 1.25 lakh of long-term equity gains each year is tax-free.

How are debt mutual funds taxed now?

For debt fund units bought on or after 1 April 2023, gains are taxed at your income-tax slab rate regardless of how long you hold them, with no special long-term rate or indexation. Units bought before 1 April 2023 and held for more than three years retain the older treatment. This article is informational, not tax advice.

What is the 1.25 lakh exemption on mutual funds?

It is an annual exemption on long-term capital gains from equity funds and listed shares. The first 1.25 lakh rupees of such gains you earn in a financial year is tax-free. The exemption is per investor per year and applies across all your equity funds and shares combined, not per fund.

When did the mutual fund tax rates change?

The current rates took effect on 23 July 2024, when equity STCG rose from 15 percent to 20 percent and equity LTCG rose from 10 percent to 12.5 percent, with the annual exemption raised from 1 lakh to 1.25 lakh rupees. Budget 2025 and Budget 2026 did not materially change these rates.

How Mutual Funds Are Taxed in India (2026): LTCG, STCG, and Debt Fund Rules, Explained

Mutual fund returns are only part of the story; what you keep after tax is what counts. Yet mutual fund taxation in India confuses many investors, especially after the rules changed in 2024. This guide lays out, in plain language, how equity and debt funds are taxed in 2026, the rates, the holding periods, and the exemptions that matter.

A quick note first: this is an educational explainer, not tax advice. For your specific situation, consult a qualified tax adviser.

The 60-second version

Equity funds, short-term (held 12 months or less): taxed at 20 percent.
Equity funds, long-term (held over 12 months): taxed at 12.5 percent, on gains above 1.25 lakh rupees a year.
The exemption: first 1.25 lakh of long-term equity gains a year is tax-free, per investor.
Debt funds (bought on/after 1 April 2023): taxed at your income-tax slab rate, any holding period.
When it changed: current rates apply from 23 July 2024.

Equity funds: the two rates that matter

An equity mutual fund is one that invests primarily in stocks (broadly, at least 65 percent in Indian equities). Its taxation hinges on how long you hold the units:

Short-Term Capital Gains (STCG): If you sell within 12 months, the gain is short-term and taxed at a flat 20 percent. There is no exemption threshold for STCG; the whole gain is taxable from the first rupee.
Long-Term Capital Gains (LTCG): If you hold for more than 12 months, the gain is long-term and taxed at 12.5 percent, but only on the portion above 1.25 lakh rupees in a financial year.

That 1.25 lakh exemption is valuable and often misunderstood. It is per investor, per financial year, and it covers your combined long-term gains across all equity funds and listed shares, not each fund separately. Surcharge and cess apply on top of these rates where relevant.

Debt funds: taxed at your slab rate

Debt funds, which invest mainly in bonds and other fixed-income instruments, were overhauled in 2023. The key rule now:

For units purchased on or after 1 April 2023, all gains are taxed at your income-tax slab rate, regardless of holding period. There is no special long-term rate and no indexation benefit.
For units purchased before 1 April 2023 and held for more than three years, the older treatment (long-term rate with indexation) continues to apply on redemption.

In practice, this means new money in debt funds is taxed much like interest income, at whatever slab you fall into.

Hybrid funds: it depends on the mix

Hybrid funds sit in between, and their taxation follows their equity allocation. A hybrid fund that qualifies as equity-oriented (generally 65 percent or more in equities) is taxed under the equity rules above. Others are taxed closer to the debt rules. Always check a fund's category and tax treatment before you invest.

What changed in 2024, and since

The current regime dates to 23 July 2024, when the government:

Raised equity STCG from 15 percent to 20 percent.
Raised equity LTCG from 10 percent to 12.5 percent.
Increased the annual LTCG exemption from 1 lakh to 1.25 lakh rupees.

Importantly, Budget 2025 and Budget 2026 did not materially change these rates, so the 2024 framework is what applies in 2026.

A simple way to think about it

Hold equity funds for more than a year to access the lower 12.5 percent rate and the annual exemption.
Remember that debt fund gains are taxed at your slab, so the timing of redemptions matters less for the rate but still matters for your total income.
Track your combined long-term equity gains across funds and shares so you use the 1.25 lakh exemption efficiently.

What to watch

Budget changes. Any future revision to capital gains rates or exemptions.
Fund categorisation. Whether a fund is equity-oriented, which sets its tax treatment.
Your holding periods. The 12-month line for equity is decisive.
Record-keeping. Accurate purchase dates and costs make filing far easier.

Taxes will not make or break a sensible long-term plan, but understanding them helps you keep more of your returns and avoid nasty surprises at filing time. Know your fund type, mind your holding period, and use your annual exemption.

This article is for information only and is not tax or investment advice. Tax rules can change and depend on your personal circumstances. Consult a qualified professional, and read all scheme related documents carefully. Mutual fund investments are subject to market risks.