Income Tax on Investments in India
Income tax in India is charged on what you earn in a tax year, but investment gains sit outside the slab system and follow their own rates. Equity mutual fund gains are taxed at 20% or 12.5% depending on how long you held them. Debt fund gains are taxed at your slab rate (the Income Tax Department publishes the current slabs and rates) whatever the holding period.
Two changes landed on 1 April 2026 that most tax pages have not caught up with. The Income-tax Act, 1961 was replaced, taking Section 80C with it. And the definition of a debt fund for tax purposes was rewritten, which moved several categories of fund into a better tax position. Both are covered below.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and SIF distributor (ARN-194216). We are not tax advisers. This page is general information, not a computation of your liability.
The Income-tax Act 2025 replaced the 1961 Act
The Income-tax Act, 2025 took effect on 1 April 2026, replacing the Income-tax Act, 1961 in full. Tax rates did not change. Section numbers did. The statute was cut from over 800 sections to 536, and the deductions everyone knows by number were renumbered. Section 80C is now Section 123.
The Act received Presidential assent on 21 August 2025 after being passed that month. Nothing about what you owe changed on the day it came into force; what changed is how the law is cited.
This matters in practice because every form, brochure, article and piece of tax software written before 2026 uses the old numbers, and many written since still do. If a document cites Section 80C, it is describing the right deduction under its former name.
The numbers an investor is most likely to meet:
Assessment Year is now Tax Year
The 2025 Act replaces the old pairing of previous year and assessment year with a single tax year. Income earned between 1 April 2026 and 31 March 2027 belongs to tax year 2026-27, and that is the only year you quote. Where older systems still show an assessment year, it is the tax year plus one.
Under the 1961 Act the same money carried two labels, and both appeared on every form: you earned it in the previous year and were assessed on it in the assessment year. Income of FY 2026-27 was assessed in AY 2027-28.
Portals, registrars and accounting software will show assessment years for some time yet. The conversion is simple, and nothing about the underlying period has moved. The tax year still runs 1 April to 31 March.
Form 121 Replaced Forms 15G and 15H
Form 121 replaced both Form 15G and Form 15H on 1 April 2026, under Section 393(6). It is the single declaration a resident individual or HUF files to stop TDS being deducted where their total tax for the year comes to nil. One form now covers every age group.
It applies to dividend income, mutual fund distributions and deposit interest alike. Two conditions govern it: your estimated total income for the year must be below the taxable threshold, and the declaration has to reach each payer separately, each tax year, before the income is credited. Filed afterwards, it does nothing. The TDS is already deducted and can only be recovered by filing a return.
Income tax slabs for FY 2026-27
Under the new regime for FY 2026-27, income up to ₹4 lakh is untaxed, and rates then run 5%, 10%, 15%, 20%, 25% and 30% across bands of ₹4 lakh each up to ₹24 lakh. The old regime keeps four bands, starting at ₹2.5 lakh and reaching 30% above ₹10 lakh.
Rates apply in bands. You never pay your highest rate on your whole income, only on the part that falls inside each band.
The new regime, which is the default:
The old regime, which you have to opt into:
Older taxpayers get a higher exemption under the old regime only: ₹3 lakh from age 60, ₹5 lakh from age 80. The new regime applies ₹4 lakh at every age, which makes it the stronger structure for most people between 60 and 80 who have no large deductions to claim.
The Section 156 rebate that makes ₹12 lakh tax-free
Section 156, formerly Section 87A, gives a rebate of up to ₹60,000 under the new regime. Tax on exactly ₹12 lakh of income comes to ₹60,000, so the rebate cancels it. With the ₹75,000 standard deduction, a salaried taxpayer pays nothing on gross salary up to ₹12.75 lakh.
The arithmetic is worth seeing, because it explains why the threshold sits where it does. On ₹12 lakh: nil on the first ₹4 lakh, ₹20,000 on the ₹4–8 lakh band at 5%, and ₹40,000 on the ₹8–12 lakh band at 10%. Total ₹60,000, which is exactly the rebate.
The rebate is a cliff, not a taper. Cross ₹12 lakh of taxable income and it disappears, so the tax on the first ₹12 lakh reappears in full. Marginal relief stops the jump being absurd immediately above the line, but the planning point holds: if you are close to the threshold, the tax year in which you book a capital gain can decide whether you keep the rebate.
It does not cover income taxed at special rates. Capital gains on equity are taxed at 12.5% or 20% whether or not your other income is under ₹12 lakh. A ₹3 lakh long-term equity gain is taxable even for someone whose salary is ₹10 lakh.
Surcharge and cess
Surcharge is charged on the tax, not the income: 10% above ₹50 lakh, 15% above ₹1 crore and 25% above ₹2 crore. The old regime adds a 37% band above ₹5 crore, which the new regime does not. Health and education cess of 4% applies to tax plus surcharge, with no exemption.
The surcharge cap is the reason the new regime is usually cheaper at the top of the income scale regardless of deductions. At ₹6 crore of income the difference between a 25% and a 37% surcharge outweighs almost any deduction the old regime allows.
New regime or old regime, which costs less
The new regime wins for most salaried taxpayers because the rate cut is larger than the deductions given up. At ₹15 lakh of salary the new regime costs about ₹97,500 against roughly ₹1,95,000 under the old regime, even with ₹2.5 lakh of deductions claimed. The old regime competes only with an unusually heavy deduction load.
The full working, because the conclusion depends on it.
New regime. Standard deduction of ₹75,000 leaves ₹14.25 lakh. Nil on the first ₹4 lakh, ₹20,000 at 5%, ₹40,000 at 10%, and ₹33,750 on the ₹12–14.25 lakh slice at 15%. That is ₹93,750, plus 4% cess. ₹97,500.
Old regime. Standard deduction of ₹50,000, the full ₹1.5 lakh under Section 123 and ₹50,000 under Section 124 bring taxable income to ₹12.5 lakh. Tax is ₹12,500 on the 5% band, ₹1,00,000 on the 20% band and ₹75,000 on the 30% band. That is ₹1,87,500, plus cess. ₹1,95,000.
Twice the cost, with ₹2.5 lakh already deducted. Closing that gap takes HRA in a metro plus home loan interest on top of a full Section 123 claim.
You choose each tax year when you file. A salaried taxpayer can switch freely year to year. Someone with business income who moves back to the old regime can generally only switch once, so that decision needs more care.
Capital gains tax on mutual funds
Equity mutual fund gains are taxed at 12.5% after 12 months, with the first ₹1.25 lakh of long-term gains each tax year exempt, and at a flat 20% before 12 months. Debt fund units bought on or after 1 April 2023 are taxed at your slab rate however long you hold them.
Three categories decide the rate, and the boundary between them moved on 1 April 2026
Equity-oriented schemes hold at least 65% in shares of domestic companies. Beyond 12 months, gains are long-term at 12.5% above the ₹1.25 lakh annual exemption. At 12 months or less, short-term at a flat 20%.
Specified mutual funds now means a scheme holding more than 65% in debt and money market instruments, or a fund-of-funds holding 65% or more in such a scheme. Every gain is short-term at slab rate, for units bought on or after 1 April 2023.
Everything else falls outside both definitions. Many gold and silver funds-of-funds, international funds-of-funds, equity funds-of-funds, and hybrids in the middle. These are taxed as non-equity assets: 12.5% without indexation beyond 24 months, slab rate below it.
Until 1 April 2026 a specified mutual fund meant one holding not more than 35% in domestic equity, a test that swept most of the third group into slab-rate treatment. The rewrite narrowed it to genuinely debt-heavy schemes, which improved the position for gold, international and equity funds-of-funds. Pages still quoting the 35% test are describing the law before the change.
What a redemption actually costs
The three redemptions, worked
1. Equity fund held for four years
2. Equity fund held for seven months
3. Debt fund bought in 2024
The ₹1.25 lakh exemption is a single annual allowance across all your long-term equity gains, not one per scheme, not one per folio. It resets each tax year, which is the basis on which large redemptions get staggered across 31 March.
Tax on mutual fund dividends
Mutual fund dividends are taxed at your slab rate as income from other sources. The fund deducts 10% TDS under Section 393 once dividends from that fund house exceed ₹10,000 in a tax year. TDS is not the final tax. A 30% bracket investor owes the balance at filing. DDT was abolished in 2020.
Until 2020 the fund house paid Dividend Distribution Tax before distributing, and the dividend reached you tax-free. That system ended with the Budget of 2020, and the burden moved to the recipient.
The ₹10,000 threshold rose from ₹5,000 on 1 April 2025, and applies per fund house per tax year. Non-residents are deducted at 20% plus surcharge and cess, or the treaty rate where a tax residency certificate is produced.
The structural consequence matters more than the rate. A dividend, or IDCW, is taxed at your slab rate in the year it is paid, whether or not you wanted the cash. A gain in the growth option is taxed only when you redeem, at capital gains rates, in a tax year you choose. For anyone above the 10% band the growth option defers and generally reduces the tax. That describes how the two options are taxed; which one you hold is your decision.
ELSS and Section 123
Section 123, formerly Section 80C, allows a deduction of up to ₹1.5 lakh a tax year, and ELSS funds qualify. It is available only under the old regime. Choosing the new regime removes it entirely. ELSS carries a three-year lock-in, the shortest of the Section 123 options.
The lock-in runs from the date of each instalment, not from the folio. A monthly SIP into ELSS locks each contribution separately, so the instalment paid in January 2027 is free in January 2030 while later ones are still held.
Gains on ELSS are taxed as equity-oriented. 12.5% above the ₹1.25 lakh annual exemption, which the three-year lock-in guarantees you reach as long-term. Whether Section 123 is worth using at all depends on which regime you are in and what else you already claim, and that choice is yours
How to report capital gains in your ITR
Every redemption is reported separately in the capital gains schedule, with purchase date, sale date, cost and consideration, not as one annual total. Get a consolidated capital gain statement from CAMS or KFintech rather than assembling it from account statements. It covers every fund house on one PAN in the format the return requires.
The volume is larger than people expect. A monthly SWP running all year is twelve separate redemptions. Each instalment draws on units bought at different times, matched first-in-first-out, so a single withdrawal can produce both a long-term and a short-term gain from the same folio.
Three things count as a sale even though no money reaches your bank account:
- A switch between schemes. A redemption from one and a purchase in the other
- A switch between growth and IDCW options of the same scheme
- A transfer between regular and direct plans
Report your losses as well. A short-term capital loss can be set off against both short-term and long-term gains; a long-term loss only against long-term gains. Anything unused carries forward for eight tax years. But only if the return was filed by the due date. A belated return forfeits the carry-forward, which is the most expensive consequence of filing late for an investor.
Advance tax on capital gain
No TDS is deducted when a resident investor redeems mutual fund units, so the tax is yours to calculate and pay. If your total liability after TDS exceeds ₹10,000 in a tax year it is payable in instalments through the year. 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.
The instalments are cumulative, and interest on a shortfall is computed per instalment. A large gain booked in the June quarter is not cured by paying the whole amount in March. The shortfall in each earlier instalment still carries interest.
This is the most common surprise for investors who have only ever been salaried, because TDS has always handled it for them. The practical habit is to work out the tax on any significant redemption at the time you make it, and pay it in the instalment it belongs to rather than at the end of the year.
Which ITR form to file
Investors who redeemed mutual fund units during the year generally cannot use ITR-1, because capital gains beyond a small exempt amount rule it out. ITR-2 is the usual form for salary plus capital gains. ITR-3 covers business or professional income, and ITR-4 presumptive business income. Filing the wrong form makes the return defective.
- ITR-1. Salary, one house property and interest income, within the prescribed limit
- ITR-2. Salary plus capital gains, more than one property, or foreign assets
- ITR-3. Business or professional income
- ITR-4. Presumptive business income
If you redeemed anything at all during the year, assume ITR-2 unless your accountant tells you otherwise.
ITR filing due date for FY 2026-27
Individuals who do not require an audit file by 31 July 2027 for FY 2026-27, and audit cases by 31 October 2027. A belated or revised return is possible up to 31 December 2027, with a late fee of ₹5,000, or ₹1,000 where total income is below ₹5 lakh. Plus 1% a month interest on unpaid tax.
Pull four documents before you start: Form 16 from your employer, the Annual Information Statement and Form 26AS from the portal, and the consolidated capital gain statement from your registrar.
Much of the return arrives pre-filled from the AIS. Check it rather than trust it. Mutual fund transactions are the field most often missing or misstated, and the return is your responsibility, not the portal’s.
Filing is not complete until the return is verified. An unverified return is treated as never filed, whatever the acknowledgement says, and the carry-forward of losses goes with it. An Aadhaar OTP is the quickest route.
Income tax refund status
A refund arises where TDS and advance tax together exceed what you owe, and is paid automatically once the return is processed. It goes to the bank account nominated in the return, which must be pre-validated on the portal and held in your own name. Track it under refund status after logging in.
When a refund stalls it is almost always one of four things: the bank account was never validated, the name on the account does not match the PAN, the return was filed but never verified, or the figures do not reconcile with Form 26AS.
Common Questions
Under the new regime, yes, for ordinary income, through the Section 156 rebate, and up to ₹12.75 lakh of gross salary once the ₹75,000 standard deduction applies. The rebate does not extend to income taxed at special rates, so capital gains on equity remain taxable at 12.5% or 20%.
Not for resident investors. You compute the gain and pay the tax yourself, through advance tax or self-assessment tax. NRIs are treated differently and TDS does apply on redemption.
Yes. A switch is a redemption followed by a purchase, and the gain on the redemption is taxable in that tax year even though no money reached your bank. The same applies to switching between growth and IDCW options, and between regular and direct plans.
For units of a specified mutual fund bought on or after 1 April 2023, yes, whatever the holding period. Since 1 April 2026 a specified mutual fund means one investing more than 65% in debt and money market instruments. Narrower than the “not more than 35% equity” test it replaced. Schemes outside both that test and the equity-oriented test get 12.5% long-term treatment after 24 months.
The deduction does; the number changed. It is Section 123 of the Income-tax Act, 2025 from 1 April 2026, with the same ₹1.5 lakh limit and the same eligible investments, and it remains available only under the old regime.
Not always, but you should if TDS was deducted, because a return is the only way to reclaim it. Filing is also required regardless of income in certain situations, including large bank deposits, high electricity spending and foreign travel above prescribed amounts.
Returns, Form 16, Form 26AS and capital gain statements for at least six years after the end of the relevant tax year. Keep purchase records for anything you still hold for as long as you hold it. You will need the acquisition cost whenever you eventually sell.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.