Long Term Capital Gain Tax on Mutual Funds: By Fund Type
Long Term Capital Gain Tax on Mutual Funds
Long term capital gain tax on mutual funds is 12.5% on equity funds, on gains above ₹1.25 lakh in a tax year, once you have held the units for more than 12 months. Everything that is not an equity fund follows a different rule, and for some funds that rule changed on 1 April 2026.
Three things decide what you pay: which category your fund falls into, how long you held it, and when you bought it. The category is the part most people get wrong, because a fund’s name does not tell you its tax treatment. A gold fund and a gold ETF hold the same metal and are taxed on different holding periods.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and SIF distributor (ARN-194216). We are not tax advisers.
Which category is your fund?
Every mutual fund falls into one of three tax categories, and the boundary between them moved on 1 April 2026. Check the scheme document for the actual allocation rather than going by the fund’s name.
| Category | Test | Long-term after | Long-term rate | Short-term rate |
|---|---|---|---|---|
| Equity-oriented | At least 65% in shares of Indian companies | 12 months | 12.5% above ₹1.25 lakh | 20% flat |
| Specified mutual fund | More than 65% in debt and money market instruments | Never, if bought on or after 1 April 2023 | — | Your slab rate |
| Everything else | Neither of the above | 24 months | 12.5%, no indexation | Your slab rate |
Your slab rate is the rate that applies to your income as a whole, from 5% up to 30%.
The middle row is the one that changed. Until 1 April 2026 a specified mutual fund meant a scheme holding **not more than 35% in Indian shares**. That pulled almost everything which was not an equity fund into slab-rate treatment. The test is now **more than 65% in debt and money market instruments**, a much narrower net. A fund-of-funds that puts 65% or more into a scheme meeting that debt test counts as a specified mutual fund too.
No indexation applies to any of the three. Indexation, which let you raise your purchase price for inflation before working out the gain, was removed for all assets from 23 July 2024.
LTCG tax rate on equity mutual funds
Long term capital gain tax on equity mutual funds is 12.5% on gains above ₹1.25 lakh in a tax year, with no indexation. The rate and the threshold took effect on 23 July 2024, replacing 10% above ₹1 lakh. An equity-oriented fund is one holding at least 65% of its assets in shares of Indian companies.
Three things about the ₹1.25 lakh that catch people out.
It is annual, not per fund. One allowance covering all your long-term equity gains in the tax year, and it resets on 1 April.
It is shared with your shares. Listed shares and equity mutual funds draw on the same ₹1.25 lakh together. It is not one allowance for each.
Only the excess is taxed. Gains up to the threshold are exempt, and 12.5% applies to what sits above it.
Units bought before 1 February 2018 use a substituted purchase price rather than what you actually paid. The rule protects gains that had already built up by 31 January 2018 from a tax that did not exist then. It can only reduce your gain or leave it unchanged. The full calculation, with worked examples both ways, is on the page for long term capital gain tax on shares, and it works identically for equity fund units.
Debt funds and the 1 April 2023 cut-off
Debt fund taxation depends on when you bought the units, not on how long you held them.
| Units Bought | Held More Than 24 Months | Held 24 Months or Less |
|---|---|---|
| Before 1 April 2023 | Long-term, 12.5%, no indexation | Short-term, your slab rate |
| On or after 1 April 2023 | Short-term, your slab rate | Short-term, your slab rate |
For units bought on or after 1 April 2023 there is no long-term category at all. Every gain is short-term at your slab rate however long you hold them, and no indexation is available.
That puts these funds close to fixed deposit interest in tax terms. The one advantage left is timing: tax falls due when you redeem, not each year as the interest accrues.
Where the tax on your gains takes your total liability past ₹10,000 for the year, it becomes an advance tax obligation, payable in instalments during the year in the quarter you redeemed, rather than settled at filing. The Income Tax Department’s rate tables carry the current slabs, and how the pieces fit together is covered in the income tax section.
The third category nobody explains
Funds that are neither 65% Indian equity nor more than 65% debt sit in a third category with rules of its own: long-term after 24 months, taxed at 12.5% with no indexation, and at your slab rate below that. Most pages on this subject describe only two categories and leave these investors with nowhere to look.
What sits here:
1. Gold and silver funds-of-funds, which hold units of a gold or silver ETF rather than the metal directly
2. International funds and international funds-of-funds, because overseas shares are not shares of Indian companies
3. Equity funds-of-funds, which hold units of other equity schemes rather than shares
4. Hybrid and multi-asset schemes holding neither 65% Indian equity nor more than 65% debt
These are the funds that moved on 1 April 2026. Under the old 35% test most of them were specified mutual funds, so every gain was short-term at slab rate however long you held it. Under the new test they fall outside, which means a holding of more than 24 months is now long-term at 12.5%
For a taxpayer in the 30% band that is the difference between 30% and 12.5% on the same gain. On ₹4,00,000 of gain from an international fund held three years: about ₹1,20,000 of tax under the old treatment, ₹50,000 under the new, before cess. Cess is the 4% health and education surcharge added to the tax itself rather than to the gain.
The change applies to redemptions from 1 April 2026. It does not reach back to gains you already realised and reported under the old rule.
Gold and silver: why the ETF and the fund are taxed differently
A gold ETF becomes long-term after 12 months. A gold fund-of-funds holding that same ETF becomes long-term after 24 months. Both are then taxed at 12.5% with no indexation, and both are taxed at your slab rate before the threshold.
| Feature | Gold or silver ETF | Gold or silver fund-of-funds |
|---|---|---|
| What you hold | A unit listed on an exchange | Units of a scheme that holds the ETF |
| Long-term after | 12 months | 24 months |
| Long-term rate | 12.5%, no indexation | 12.5%, no indexation |
| Short-term rate | Your slab rate | Your slab rate |
| Needs a demat account | Yes | No |
The reason is the listing, not the metal. A listed security gets the 12-month threshold; an unlisted unit gets 24 months. The fund-of-funds is a unit of a scheme rather than a listed security, so it waits twice as long for the same rate.
For anyone holding both, the ETF reaches the lower rate a year earlier. For anyone choosing between them, the fund-of-funds needs no demat account, which is an account that holds securities in electronic form, and it accepts a monthly instalment. That is why it exists.
How to calculate LTCG tax on mutual funds
Five steps, and the exemption applies only to equity funds.
1. Take the redemption value. What you receive when you sell or redeem the units.
2. Deduct the exit load, if there is one. Some schemes charge a fee for redeeming before a set period.
3. Subtract what you paid. Your cost of acquisition. No indexation applies to any category.
4. That is your gain.
LTCG = redemption proceeds − cost of acquisition − exit load
5. Apply the ₹1.25 lakh exemption if it is an equity fund, then the rate.
Worked: an equity fund
You redeem equity fund units for ₹6,00,000. You paid ₹4,20,000. No exit load.
Gain: ₹1,80,000.
Less the ₹1.25 lakh exemption: ₹55,000 taxable.
At 12.5%: ₹6,875, or ₹7,150 with 4% cess.
Worked: a debt fund bought after April 2023
You redeem debt fund units for ₹3,00,000. You paid ₹2,50,000
Gain: ₹50,000, all of it short-term whatever the holding period.
Added to your income and taxed at your slab rate. At 30%, ₹15,000, or ₹15,600 with cess.
There is no exemption and no long-term rate to reach.
SIPs and how holding periods are calculated
Each SIP instalment is a separate purchase with its own holding period. When you redeem, the oldest units are treated as sold first.
So a single redemption from a long-running SIP can produce both kinds of gain at once. In a three-year monthly SIP into an equity fund, instalments older than 12 months are long-term at 12.5%; the most recent twelve are short-term at 20%
This matters most on a large redemption. Redeeming the whole holding in one go pulls in the newest units, which are the ones taxed at the higher rate. Redeeming only the units that have crossed the threshold avoids that, and your fund house’s capital gains statement, or a consolidated statement from CAMS or KFintech, shows which instalments those are. CAMS and KFintech are the two registrars holding mutual fund records for most fund houses.
Switching between funds or options
A switch is a redemption. Moving from one scheme to another, from a regular plan to a direct plan of the same scheme, or from growth to IDCW, all count as selling the units you hold and buying new ones.
Tax falls due on the gain in the scheme you are leaving, in the year of the switch, whether or not any money reaches your bank account. The new holding starts a fresh holding period from the switch date, so units that were nearly long-term go back to zero.
Two consequences worth planning around. A switch late in a tax year can be moved a few weeks into the next one, which gives the gain a fresh ₹1.25 lakh exemption. And a switch made just before units cross 12 months converts what would have been a 12.5% gain into a 20% one.
Frequently Asked Questions
For equity funds held more than 12 months, 12.5% on gains above ₹1.25 lakh in a tax year, with no indexation. Funds that are neither equity-oriented nor debt-heavy become long-term after 24 months and are taxed at 12.5%. Debt funds bought on or after 1 April 2023 have no long-term treatment at all and are taxed at your slab rate.
₹1.25 lakh in a tax year. It is one allowance across all your long-term equity gains together, shares and equity funds combined, not one per scheme or per folio, and it resets each tax year. It does not apply to short-term gains.
A gold fund-of-funds becomes long-term after 24 months and is then taxed at 12.5% with no indexation, at your slab rate before that. A gold ETF becomes long-term after 12 months at the same 12.5%. The difference is that the ETF is a listed security and the fund-of-funds is not.
As a non-equity asset, because overseas shares are not shares of Indian companies. Long-term after 24 months at 12.5% with no indexation, slab rate below that. Until 1 April 2026 most international funds were specified mutual funds, so every gain was short-term at slab rate. This is an improvement for anyone holding one beyond two years.
From 1 April 2026, a scheme investing more than 65% of its proceeds in debt and money market instruments, or a fund-of-funds putting 65% or more into such a scheme. Units bought on or after 1 April 2023 produce gains taxed at your slab rate however long you hold them. The previous test was a scheme holding not more than 35% in Indian shares, which covered a much wider set of funds.
No. Indexation, which allowed a purchase price to be raised for inflation before working out the gain, was removed for all assets from 23 July 2024. No category of mutual fund gets it.
Yes. A switch is a redemption of one scheme and a fresh purchase of another, so the gain on the units you leave is taxable in the year of the switch. That applies to a switch between schemes, between regular and direct plans of the same scheme, and between growth and IDCW options.
Each instalment is a separate purchase with its own holding period, and the oldest units are treated as sold first. A three-year SIP redeemed in full will have some instalments past the long-term threshold and the most recent ones still short-term, so one redemption can produce both kinds of gain.
Closing
Rates, thresholds and fund category definitions reflect the law for FY 2026-27 and change with each Budget.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and SIF distributor (ARN-194216), Connaught Place, New Delhi. We are not tax advisers and nothing here is a recommendation about any scheme or about your return.
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.