Short-Term Capital Gain Tax on Mutual Funds
Short-term capital gain tax on mutual funds has three different answers, and which one applies depends on what your scheme holds rather than on what it is called. Equity funds held twelve months or less are taxed at 20%. Specified mutual funds are taxed at your slab rate however long you hold them. Everything else sits in a third category with a twenty-four month line.
The test that sorts a fund into the middle category was rewritten on 1 April 2026, so a scheme that was outside it last year may be inside it now.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We do not recommend schemes and we are not tax advisers. The choice is yours.
Which category is your fund in
Every mutual fund falls into one of three categories for capital gains. Getting this right is the whole exercise, because the rate, the holding period and even whether a holding period exists all follow from it. The scheme’s name will not tell you. Its asset allocation will.
| Category | What It Holds | Short-Term if Held | Short-Term Rate |
|---|---|---|---|
| Equity-oriented | At least 65% in Indian equity | 12 months or less | 20% |
| Specified mutual fund | More than 65% in debt and money market instruments | Always short-term | Your slab rate |
| Everything else | Neither of the above | 24 months or less | Your slab rate |
The specified mutual fund row carries a condition the table cannot hold: it reaches only units acquired on or after 1 April 2023. More on that below.
The third category is the one most guides skip. It covers gold and silver fund-of-funds, international funds, funds that invest in other equity funds, and hybrid schemes that sit below the 65% equity line without crossing the 65% debt line. How each of these is built is set out in types of mutual funds.
Equity mutual funds: 20%, not 15%
Gains on equity-oriented mutual funds held for twelve months or less are taxed at 20%, plus applicable surcharge and 4% cess. The rate rose from 15% on 23 July 2024, and a large number of pages, calculators and even some fund house literature still print the old figure.
The charge sits at Section 196 of the Income-tax Act 2025, headed tax on short-term capital gains in certain cases.
Two conditions attach to the 20% rate.
The scheme must be equity-oriented, meaning at least 65% of its assets in Indian equity. A fund holding 60% Indian equity and 40% overseas equity is not equity-oriented for tax, whatever its name suggests.
Securities transaction tax must have been paid on the transaction. For units bought and redeemed through the normal route this is automatic.
The ₹1.25 lakh allowance applies to long-term gains on equity, not to short-term ones. There is no equivalent threshold here.
There is, however, a relief most pages miss. A resident individual whose other income falls short of the basic exemption limit may set the unused portion against short-term gains taxed at the special rate. A resident with ₹1,00,000 of other income and ₹3,00,000 of short-term equity gains applies the unused exemption first, and the 20% rate runs only on what is left.
A non-resident does not get this. The adjustment is open to residents only. It is one of the sharper differences in how the same gain is taxed depending on who holds it.
Specified mutual funds: no holding period at all
Specified mutual funds have no long-term treatment at all. Gains are added to your income and taxed at your slab rate whether you held the units for three weeks or nine years. Holding longer never improves the position, which makes this the one category where a holding period does not exist.
The definition sits in Section 76 of the Income-tax Act 2025, which replaced Section 50AA of the 1961 Act, and it changed on 1 April 2026.
Two conditions sit alongside it, and both are easy to miss.
The treatment reaches only units acquired on or after 1 April 2023. Section 76(2)(a) applies the short-term rule to a unit of a specified mutual fund bought from that date. Units held from before it sit outside the provision and follow the ordinary rules for the scheme, so a holding built up over several years can fall on both sides of the line in a single redemption.
The 65% test is an average, not a snapshot. The section measures the percentage against the annual average of the daily closing figures, so a scheme does not cross in and out of the definition on the strength of one day’s position.
| The Test | Before 1 April 2026 | From 1 April 2026 |
|---|---|---|
| The test | Not more than 35% in equity | More than 65% in debt and money market instruments |
These are not two ways of saying the same thing. A fund holding 50% debt and 50% gold passed the old test, because its equity was nil. It fails the new one, because its debt is not more than 65%. A fund holding 70% debt and 30% equity fails the old test and meets the new one.
The practical consequence is that some schemes moved between categories on 1 April 2026 without changing a single holding. If you bought on the basis of how a fund was taxed, check whether that is still the position.
The third category, and the twenty-four month line
Funds that are neither equity-oriented nor specified mutual funds have a twenty-four month holding period. Sell within it and the gain is short-term, taxed at your slab rate. Hold beyond it and the gain becomes long-term, where long term capital gain tax on mutual funds runs at 12.5%.
This covers more than people expect.
Gold and silver fund-of-funds. A gold exchange-traded fund has a twelve-month line. A fund-of-funds holding units of that same gold exchange-traded fund has twenty-four. The metal is identical; the structure decides the holding period.
International and global funds, because their equity is not Indian equity.
Equity fund-of-funds, which generally hold units of other funds rather than shares directly. Classification turns on the scheme’s own structure and holdings. Read the scheme document rather than assuming every fund-of-funds lands in the same place.
Hybrid schemes below 65% equity that also stay below 65% debt. A multi asset allocation fund holding 50% equity, 25% debt and 25% commodities lands here.
Working out the short term capital gain tax on your mutual funds
The calculation itself is short, and the difficulty is almost always in classifying the fund rather than in the arithmetic. Once you know which of the three categories your scheme falls into, the rest is subtraction and one multiplication. Two worked examples show how far apart the answers can sit.
Cost of acquisition is what you paid for the investment. Transfer expenses cover charges directly tied to the sale, such as an exit load. There is no indexation on short-term gains for any category.
Equity Fund: ₹2,00,000 Gain After 8 Months
Specified Mutual Fund: ₹2,00,000 Gain
The same gain, the same holding period, but a different tax outcome. The scheme’s classification and applicable tax rules determine how the gain is taxed.
Units bought at different times
Most people hold units bought across many dates, through a systematic investment plan or through repeated purchases. Each instalment is treated as a separate acquisition with its own date, which means a single redemption can straddle the short-term and long-term line. The order in which units are deemed sold then decides your tax.
Redemptions follow first-in, first-out. The oldest units are deemed sold first, so a single redemption can produce short-term gains on recent instalments and long-term gains on older ones in the same transaction.
For a monthly systematic investment plan in an equity fund, instalments made within the twelve months before you redeem will be short-term. Earlier instalments will be long-term. Your consolidated account statement and the capital gains statement from the registrar will show the split.
The rebate under Section 156 does not cover these gains
A resident whose total income falls under the threshold could once use the rebate to bring the final tax to nil. That rebate is granted by Section 156 of the Income-tax Act 2025, formerly Section 87A of the 1961 Act, and it no longer reaches these gains.
The mechanism is worth reading rather than assuming. Section 156(3) caps the rebate at the income tax payable at the rates set out in Section 202(1), which are the ordinary slab rates. Tax charged at a special rate is not computed at those rates, so it sits outside the cap and the rebate cannot absorb it. Under the former Section 87A the Finance Act 2025 reached the same result by a different route, inserting an express bar from assessment year 2026-27.
Short-term gains on equity funds are taxed at a special rate, so they fall outside what the rebate can absorb. A resident with modest total income who redeems an equity fund at a short-term gain cannot wipe that tax out with the rebate.
Gains on specified mutual funds are taxed at slab rates rather than a special rate, so they are not special-rate income in the same way. That is one of the few places where the slab-rate treatment works in the holder’s favour.
The position is contested for earlier years. The bar is express in the statute from assessment year 2026-27, and appellate decisions have addressed whether it reaches years before that. Which year your redemption falls in therefore matters, and so does the distinction between the previous year, the assessment year and the tax year under the new Act. Check your own position with a chartered accountant rather than relying on a general page.
Surcharge and cess
Cess runs at 4% on the tax in every case. Surcharge depends on your total income and on the regime you are in, and it is another place where the three categories diverge. The cap on special-rate gains does not reach slab-rate income, which works against the holder of a specified mutual fund.
The slabs, the two regimes and how the surcharge bands stack are set out in income tax on investments in India.
Under the new tax regime, surcharge on capital gains taxed at special rates is capped at 15%, even where your total income would otherwise attract 25%. Gains on specified mutual funds, being slab-rate income rather than special-rate income, do not get that cap.
It is one of the quieter asymmetries in the system: the category that denies you long-term treatment also denies you the surcharge cap.
Reporting short-term gains in your return
Short-term capital gains are reported in the capital gains schedule of your income tax return. Equity fund gains taxed at the special rate and specified mutual fund gains taxed at slab rates go in different places, so the classification matters at filing as well as at calculation.
Three practical points.
Get the capital gains statement from the registrar, not from your own records. CAMS and KFintech issue one covering all schemes they service, with the holding period and gain already computed per transaction.
Reconcile it against the Annual Information Statement. Redemptions are reported to the department, and a mismatch between what you file and what they already hold generates a query.
A short-term capital loss is more useful than a long-term one. It can be set off against both short-term and long-term gains, where a long-term loss can only go against long-term gains. Unused losses carry forward for eight assessment years, but only if the return was filed by the due date.
Frequently Asked Questions
For equity-oriented mutual funds held twelve months or less, 20% plus surcharge and 4% cess. For specified mutual funds, which hold more than 65% in debt and money market instruments, gains are taxed at your slab rate regardless of holding period. Other funds, including gold fund-of-funds and international funds, are short-term if held twenty-four months or less and taxed at slab rates.
Twenty per cent, plus applicable surcharge and 4% cess. The rate rose from 15% on 23 July 2024. Many published pages and calculators still show 15%.
A debt scheme holding more than 65% in debt and money market instruments is a specified mutual fund. Its gains are added to your income and taxed at your slab rate, with no holding period distinction and no long-term treatment at any point.
Not for specified mutual funds. Gains are short-term in effect however long you hold, so there is no point at which the treatment improves. Funds that fall outside the specified definition have a twenty-four month holding period.
Yes, on 1 April 2026. The test moved from “not more than 35% in equity” to “more than 65% in debt and money market instruments”. The two tests do not capture the same set of funds, so some schemes changed category without changing their holdings.
No. The ₹1.25 lakh exemption applies to long-term gains on equity, not to short-term gains. Short-term gains are taxed from the first rupee.
Not against gains taxed at special rates, which includes short-term gains on equity funds, following a bar inserted by the Finance Act 2025 from assessment year 2026-27. A tribunal ruling in September 2026 held the bar prospective, so earlier years may differ. Check your own position with a chartered accountant.
Each instalment is a separate acquisition with its own date, and redemptions follow first-in, first-out. A single redemption from an equity fund can therefore produce short-term gains on instalments made in the last twelve months and long-term gains on older ones.
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.