Introduction
Income tax on mutual funds in India depends on the fund type, holding period, and gains realized, with updates from Budget 2024 affecting FY 2025-26. Equity funds face LTCG tax at 12.5% above ₹1.25 lakh after 12 months, while debt funds are taxed per slab rates. This guide breaks down taxation rules, ELSS benefits, and strategies to minimize your tax liability while investing.
Taxation on Equity-Oriented Mutual Funds
Equity funds (≥65% in stocks) classify gains as short-term (STCG) or long-term (LTCG) based on holding period.
- STCG (≤12 months): Taxed at 20% flat rate for sales after July 23, 2024.
- LTCG (>12 months): 12.5% on gains exceeding ₹1.25 lakh annually, without indexation.
- Dividends: Added to income and taxed per slab; TDS applies if exceeding ₹5,000 yearly.
Example: Sell equity fund after 13 months with ₹2 lakh gain; pay 12.5% on ₹75,000 (₹1.25 lakh exempt).
Taxation on Debt and Other Mutual Funds
Debt funds (post-April 1, 2023 investments) lost indexation; gains are now short-term.
- STCG/LTCG: Taxed as per income slab (up to 30% + cess); pre-2023 investments get 12.5% LTCG >₹1.25 lakh without indexation if held >24 months.
- Hybrid Funds: Equity-oriented (>65% equity) follow equity rules; others follow debt.
- Liquid/Overnight Funds: Slab rates apply regardless of holding.
Example: ₹75,000 gain on ₹5 lakh debt investment (post-2023) at 30% slab adds ₹22,500 tax.
ELSS Funds: Tax-Saving Powerhouse
ELSS offers deductions under Section 80C up to ₹1.5 lakh, with 3-year lock-in.
- Gains post-lock-in: Treated as equity LTCG (12.5% >₹1.25 lakh).
- Ideal for salaried investors combining growth and savings; tax-free if gains <₹1.25 lakh.
| Fund Type | Holding Period | Tax Rate | Exemption |
|---|---|---|---|
| Equity STCG | ≤12 months | 20% | None |
| Equity LTCG | >12 months | 12.5% | >₹1.25 lakh |
| Debt (post-2023) | Any | Slab rate | None |
| ELSS LTCG | >3 years | 12.5% | >₹1.25 lakh |
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