Mutual Fund Taxation FY 2025-26
Mutual fund taxation depends on the fund type (equity vs debt) and holding period. The Budget 2024 made significant changes to capital gains tax rates.
Tax Rates by Fund Type
| Fund Type | LTCG Period | LTCG Tax | STCG Tax | Exemption |
|---|---|---|---|---|
| Equity Fund >65% equity |
>12 months | 12.5% | 20% | ₹1.25L/yr |
| Hybrid (Equity-Oriented) 35-65% equity |
>24 months | 12.5% | Slab Rate | None |
| Debt Fund <35% equity (post Apr 2023) |
N/A | Slab Rate (always) | None | |
| International Fund | N/A | Slab Rate (always) | None | |
| Gold/Commodity Fund | >24 months | 12.5% | Slab Rate | None |
Key Changes in Budget 2024
- LTCG Rate: Increased from 10% to 12.5% for equity and specified funds
- STCG Rate: Increased from 15% to 20% for equity funds
- Exemption: Increased from ₹1 lakh to ₹1.25 lakh for equity LTCG
- Indexation: Removed for all assets (only 12.5% flat rate now)
- Debt Funds: Post April 2023 purchases taxed at slab rate always
SIP and Capital Gains
Each SIP installment is treated as a separate purchase with its own holding period:
- When you redeem, FIFO (First In First Out) method is applied
- Oldest units are sold first
- Early SIP installments may qualify for LTCG while recent ones attract STCG
- Use XIRR calculator for accurate SIP returns
Frequently Asked Questions (FAQs)
How is ELSS taxed?
ELSS (Equity Linked Savings Scheme) is an equity fund with >65% equity. After 3-year lock-in: LTCG at 12.5% above ₹1.25 lakh exemption. The investment qualifies for 80C deduction up to ₹1.5 lakh.
Are dividends from mutual funds taxable?
Yes, mutual fund dividends are taxed as "Income from Other Sources" at your slab rate. 10% TDS is deducted if dividend exceeds ₹5,000 in a year from a fund house. Growth option is generally more tax-efficient.
How to calculate tax on SWP?
Each SWP redemption is taxed as capital gains. Part of the withdrawal is return of capital (not taxed), and the gain portion is taxed based on fund type and holding period. Use capital gains statement from AMC for accurate calculation.
What is the tax on switching between funds?
Switching is treated as redemption from one fund and purchase in another. Capital gains tax applies on the switch-out based on holding period. The switch-in starts a fresh holding period.
How to save tax on mutual fund gains?
1) Hold equity funds >12 months for LTCG (12.5%) vs STCG (20%), 2) Utilize ₹1.25 lakh exemption each year, 3) Book losses to set off against gains, 4) Spread redemptions across financial years, 5) Consider SWP for regular income with tax efficiency.