Taxation on Mutual Fund Returns in FY 2025–26 

If you’re someone who’s been investing in mutual funds or just getting started, understanding how taxes affect your returns is non-negotiable. Sure, mutual funds are a smart way to build wealth over time—but if you ignore taxation, you could end up with lower post-tax returns than you expected. 

In this blog, you’ll get a complete guide to mutual fund taxation in FY 2025–26. You’ll understand how equity and debt mutual funds are taxed, the impact of systematic investment plans (SIPs), how to handle redemptions, and even how tax-saving mutual funds like Equity Linked Saving Schemes (ELSS) work. We’ll also look at how to calculate your tax liability and report it correctly while filing your income tax return (ITR). 

Let’s break it down. 

Basics of Mutual Fund Taxation 

Mutual fund taxation in India is based primarily on: 

• The type of fund (equity vs. debt) 

• The holding period (short-term vs. long-term) 

• The nature of income (capital gains vs. dividends) 

The Income Tax Department classifies gains into Short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG). The thresholds for each differ based on the type of fund. 

Quick Breakdown: 

Also, dividends received from mutual funds are taxable in your hands as per your income slab (post-Budget 2020 removal of Dividend Distribution Tax). 

Tax on Equity Mutual Funds 

STCG and LTCG Rules for Equity Funds 

Equity mutual funds are those where at least 65% of the portfolio is invested in equity shares of domestic companies. 

• Short-term Capital Gains: If you sell equity mutual fund units within 12 months, the gains are taxed at 20% for redemptions/transfers on or after July 23, 2024 (updated from 15%). 

• Long-term Capital Gains: Gains over ₹1.25 lakh in a financial year (if held for more than 12 months) are taxed at 12.5% (updated from 10%) without indexation for redemptions/transfers on or after July 23, 2024. 

Holding Period and Applicable Tax Rates 

So, if you are an active trader in equity funds, you’re likely to incur more STCG. But if you’re holding for over a year, you’re in a more tax-efficient zone. 

Tax on Debt Mutual Funds 

New Taxation Rules (Post-April 2023 Changes) 

Before April 1, 2023, debt mutual funds held over 36 months were eligible for LTCG at 20% with indexation. That’s no longer the case. 

After April 1, 2023, regardless of holding period, gains from debt funds are now taxed as short-term capital gains, that is, added to your income and taxed as per your slab rate (no indexation allowed). 

For investments made before April 1, 2023, and redeemed after July 23, 2024, LTCG on debt mutual funds is now taxed at 12.5% on gains above ₹1.25 lakh, without indexation (updated from 20% with indexation). 

 This includes liquid funds, money market funds, short-duration debt funds, and so on. 

Example: 

You invest ₹5,00,000 in a debt fund and redeem it after 3 years for ₹5,75,000. If the investment was made after April 1, 2023, the ₹75,000 gain will be added to your taxable income and taxed as per your slab (say, 30%). 

If the investment was made before April 1, 2023, and redeemed after July 23, 2024, the gain above ₹1.25 lakh will be taxed at 12.5% without indexation. 

Taxation on SIPs and Redemption 

Systematic Investment Plans make taxation a bit tricky. Each installment is treated as a separate investment with its own holding period. 

So, when you redeem, your gains are calculated based on the first-in, first-out (FIFO) method. 

Real-life Example: 

You start a SIP of ₹10,000/month in an equity mutual fund starting April 2023. You redeem ₹1,20,000 in April 2025. Here’s how the gains are calculated: 

• The units bought in April 2023 have a holding period of 2 years → LTCG 

• Units bought in May 2024 have < 12 months → STCG 

That means a part of your redemption will be taxed at 12.5% (LTCG) and the rest at 20% (STCG), depending on which SIPs you’re selling. 

Tax-Saving Mutual Funds (ELSS) 

Equity Linked Savings Schemes (ELSS) are a popular tax-saving tool under Section 80C. 

Section 80C Deduction 

You can invest up to ₹1.5 lakh in ELSS in a financial year and claim that amount as a deduction under Section 80C. 

However: 

• ELSS funds come with a 3-year lock-in period. 

• Gains after 3 years are taxed as LTCG at 12.5% (after a ₹1.25 lakh exemption). 

Example: 

You invest ₹1,50,000 in an ELSS in April 2022. In April 2025, it grows to ₹2,10,000. Gain = ₹60,000. This is fully tax-free since it’s under the ₹1.25 lakh LTCG exemption limit. 

How to Calculate Tax on Mutual Fund Redemption 

Tools and Calculators Available 

Calculating capital gains can be complex if you’ve made multiple purchases and redemptions. But several platforms and tools make this easier: 

• CAMs and KFinTech offer consolidated capital gains statements. 

• You can also use digital platforms like Zerodha Coin, Paytm Money, or ET Money—they auto-calculate gains with FIFO. 

These platforms even distinguish between STCG and LTCG for you, making tax filing easier. 

Pro Tip: Don’t wait till year-end. Check your gains mid-year to plan redemptions and avoid breaching the ₹1.25 lakh LTCG exemption. 

Filing Taxes on Mutual Fund Returns 

Your capital gains from mutual funds must be reported under: 

• Schedule CG in the ITR form 

• Dividend income under ‘Income from Other Sources’ 

Make sure you 

• Match your capital gain figures with your Annual Information Statement (AIS) 

• Use correct ISIN codes and folio numbers, especially if manually entering data 

Missing out or incorrectly reporting may lead to scrutiny notices. 

Conclusion 

Mutual fund taxation might look overwhelming, but once you understand the rules and stay updated with the latest changes, you’ll be better equipped to make smarter investment and redemption decisions. Whether it’s understanding LTCG vs STCG, planning SIP redemptions, or using ELSS to lower your tax liability, each piece of this puzzle matters. So don’t just chase high returns; focus on post-tax returns. And as always, keep records, track gains, and consult a tax advisor if your portfolio is complex. 

FAQs  

Are mutual fund gains tax-free? 

No. Equity fund gains above ₹1 lakh (LTCG) are taxed at 10%, and STCG is taxed at 15%. Debt fund gains are taxed as per your income slab. 

Can I claim losses on mutual funds? 

Yes. You can set off STCG losses against any capital gains. LTCG losses can only be set off against LTCG. 

How to report foreign mutual fund income? 

Foreign mutual fund gains are treated as debt fund gains—taxed as per your slab. You must report them in the foreign asset section of your ITR and may also need to disclose them under FATCA.