LTCG Tax on Mutual Funds India 2026:
Rates, Rules & Zero-Tax Strategies

Most Indian mutual fund investors know they will pay some tax on gains. Very few know the exact rate, which fund type it applies to, whether their Section 87A rebate helps, or how their SIP redemption splits between LTCG and STCG. Getting these details wrong can cost ₹10,000 to ₹50,000 in avoidable tax in a single financial year.

1. Quick Reference: Capital Gains Tax on Mutual Funds FY 2026-27

Before diving into calculations, here is the complete tax picture for every mutual fund category in India for FY 2026-27. Budget 2026 (presented February 1, 2026) confirmed no changes to LTCG or STCG rates on mutual funds. The 12.5% LTCG and 20% STCG rates on equity funds, and slab-rate taxation of debt funds, all continue unchanged into FY 2026-27. Only the STT on commodity futures was raised to 0.05%, which does not affect mutual fund investors directly.

Section 87A note: The ₹12L rebate does not apply to LTCG or STCG from equity funds (taxed at special rates under Section 111A / 112A). It applies only to income taxed at slab rates, so conservative hybrid and debt fund STCG may qualify depending on your total income.

*No changes to capital gains tax rates in Budget 2026. Rules effective from July 23, 2024 (Finance Act 2024) and April 1, 2023 (Finance Act 2023) continue to apply for FY 2026-27. All rates exclude 4% Health and Education Cess and applicable surcharge.

2. Equity Mutual Fund LTCG: Rules, Formula, and Worked Examples

Equity mutual funds are the most common investment vehicle for salaried Indian investors, and understanding LTCG on them is non-negotiable before any redemption. The governing section is Section 112A of the Income Tax Act 2025 (formerly the 1961 Act).

The three conditions for Section 112A LTCG

For equity LTCG at 12.5% to apply, three conditions must be met: (1) the asset must be listed equity shares, units of equity-oriented mutual funds, or units of a business trust; (2) Securities Transaction Tax (STT) must have been paid on both acquisition and transfer; and (3) the holding period must exceed 12 months. If any condition is not met, standard STCG or slab-rate treatment applies.

The LTCG formula

Worked example: Single lumpsum equity fund redemption

Note that Rohan's remaining ₹8,00,000 minus ₹16,250 = ₹7,83,750 is his net after-tax redemption value. His effective post-tax return is significantly better than if he had been taxed at full slab rates. This is the advantage of holding equity funds for the long term.

Use the Capital Gains Calculator to run this calculation for your specific numbers, including partial redemptions and multiple fund positions in a single financial year.

The grandfathering clause for pre-January 31, 2018 purchases

If you invested in equity mutual funds before January 31, 2018 and are redeeming now, the grandfathering rule applies. Your deemed cost of acquisition is the higher of your actual purchase price or the Fair Market Value (FMV) on January 31, 2018. Gains from the original purchase price to the FMV on January 31, 2018 are completely exempt. Only gains above the FMV on that date are taxable.

This means early investors who bought equity funds before 2018 at low NAVs may have a significantly higher tax-free base than the actual cost. Your AMC's CAMS or KFintech statement will show the applicable cost for tax purposes. Do not use your actual purchase NAV for old holdings without checking the grandfathered FMV first. The same cost-of-acquisition logic applies to inherited units: when mutual fund units are transmitted to a nominee or legal heir after the investor's death, the heir redeems using the original investor's purchase price as cost basis, and the full holding period including the deceased's tenure counts. Understanding how transmission works before redeeming inherited units is critical — the complete guide on what happens to mutual funds after death in India covers the tax treatment alongside the transmission documents, nominee rules, and SEBI 2025 changes.

3. STCG at 20%: The Impatient Investor's Tax

Short-term capital gains (STCG) on equity mutual funds applies when you sell within 12 months of purchase. The rate is 20% under Section 111A, significantly higher than the LTCG rate of 12.5%. This 7.5% difference is the mathematical case for holding equity funds beyond 12 months.

The single most valuable tax action an equity fund investor can take is waiting until a holding crosses 12 months before redeeming. Two extra months can save ₹5,000–₹20,000 per lakh of gains depending on your total portfolio. This is not a sophisticated strategy; it is simply patience, and it is the most underused tax saving tool in India.

When STCG hits harder than you expect

The 20% STCG rate under Section 111A applies regardless of your income slab. A salaried professional in the 5% tax bracket still pays 20% on short-term equity gains, not 5%. There is no slab benefit, no basic exemption offset, and no ₹1.25 lakh threshold like LTCG. Every rupee of STCG is taxable. Budget 2026 made no changes to this rate, confirming that the jump from the pre-July 2024 rate of 15% to 20% is now the permanent baseline for FY 2026-27.

The most common STCG traps in practice: redeeming an SIP corpus without checking that all instalments have completed 12 months (FIFO applies, so recent instalments are always STCG); switching between fund plans or growth-to-IDCW options (treated as redemption, triggering gains on the date of switch); and panic-selling during a market correction only to see the market recover after you have already crystallised a loss or short-term gain at 20%. For equity fund investors, checking the holding period before every redemption takes 30 seconds and can save thousands. Use the SIP calculator with LTCG tax to model the real post-tax return difference between an 11-month and a 13-month exit. Switching between the growth option and IDCW mid-investment is itself a taxable redemption — which is why the choice between growth and dividend payout structure is worth evaluating from the start using the dividend vs growth calculator.

4. The Section 87A Rebate Trap: Why Your ₹12L Salary May Not Save You

This is the most commonly misunderstood rule in mutual fund taxation in 2026, and it has caught many salaried middle-class investors off guard.

Under the new tax regime, Section 87A provides a rebate of up to ₹60,000, which effectively makes total income up to ₹12 lakh tax-free. This sounds like it should eliminate tax on mutual fund gains for moderate earners. It does not.

What this means in practice: if your total income is ₹10 lakh (salary ₹9L, equity LTCG ₹1L above exemption), your salary income is effectively tax-free due to the ₹60,000 rebate. But your equity LTCG is still taxed at 12.5%. The rebate does not offset LTCG or STCG from equity mutual funds.

The practical implication: if you are a salaried professional with total income under ₹12 lakh who also has equity mutual fund gains, you will pay tax on those gains even though your salary is tax-free, a structural disparity that AMFI has formally requested the government to fix, and as of FY 2026-27, no change has been made.

5. Debt Fund Taxation: The Three-Scenario Problem

Debt mutual fund taxation is the most complex area of mutual fund tax in India, because the rules change entirely based on when you bought the units. There are three distinct scenarios, and each has a completely different tax outcome.

Scenario 1: Bought before April 1, 2023, sold before July 23, 2024

Old rules apply. If held for more than 36 months: LTCG at 20% with indexation. If held for 36 months or less: STCG taxed at your income slab rate. This is now a historical scenario since July 2024 has passed, but relevant if you are calculating past tax liability or filing delayed returns.

Scenario 2: Bought before April 1, 2023, sold on or after July 23, 2024

The Budget 2024 rules apply, and this is the scenario most relevant for long-term investors who have older debt fund positions. The holding period threshold for LTCG was reduced from 36 months to 24 months. The LTCG rate changed from 20% with indexation to 12.5% without indexation. For short-term gains (held under 24 months), slab rate applies.

Scenario 3: Bought on or after April 1, 2023, any sale date

This is the most punitive scenario. Under Section 50AA (Finance Act 2023), all gains from debt mutual funds where equity allocation is below 35%, purchased on or after April 1, 2023, are treated as short-term capital gains regardless of how long you hold them. Even if you hold for 5 years, the gains are fully taxed at your income slab rate. No LTCG treatment applies, ever.

The practical implication: for most investors in the 20–30% tax bracket, post-April 2023 debt funds offer no tax advantage over FDs. The Mutual Fund Tax Calculator handles all three debt fund scenarios based on your purchase date and shows your exact tax liability.

6. Hybrid, Gold, and International Funds: What Category Are You In?

Hybrid and specialty funds cause the most confusion because their tax treatment depends on equity allocation percentage, a number that many investors never check.

Hybrid funds: the 65% equity line

The threshold that determines whether a fund is "equity-oriented" for tax purposes is 65% domestic equity allocation. Above that line, equity LTCG rules apply (12.5% after 12 months). Below it, non-equity rules apply (12.5% after 24 months, or slab rate for post-April 2023 if below 35% equity).

Aggressive hybrid funds (typically 65–80% equity), balanced advantage funds (dynamic equity), and large and mid-cap funds generally cross the 65% threshold and qualify as equity-oriented. Conservative hybrid funds, dynamic bond funds, and most debt-dominant hybrid funds do not. Always check the fund's actual portfolio allocation , not just the category name, because a "balanced" fund may fall on either side of the 65% line.

Gold ETFs vs Gold FoFs

Gold ETFs are listed, non-equity units. From Budget 2024, they qualify for LTCG at 12.5% after a 12-month holding period (same as equity, but no ₹1.25L exemption). Gold FoFs (Fund of Funds that invest in Gold ETFs) are unlisted non-equity units. They qualify for LTCG at 12.5% after a 24-month holding period. The distinction matters: selling a Gold ETF one month short of 12 months triggers 20% STCG; selling a Gold FoF before 24 months triggers slab-rate STCG. If you are deciding between gold, FDs, and equity as an asset class rather than just comparing tax treatment, the gold vs FD vs equity guide covers post-tax real returns across all three. For investors specifically weighing Gold ETFs against Sovereign Gold Bonds, the SGB vs physical gold tax guide covers the full comparison including how SGB redemption at maturity is completely exempt from capital gains tax.

International funds from FY 2025-26

International equity FoFs were previously caught under Section 50AA (slab-rated regardless of holding) if they invested through foreign equity. From FY 2025-26, SEBI clarified that international equity FoFs are no longer classified as Specified Mutual Funds under Section 50AA. They now follow the non-equity fund grid: LTCG at 12.5% after 24 months. This is a meaningful improvement for investors in international funds who had been sitting on gains taxed at slab rates.

7. SIP LTCG Calculation: The FIFO Method With Real Example

SIP investors face the most complex capital gains calculations because every monthly instalment is treated as a separate purchase with its own holding period and cost. When you redeem, the FIFO (First In, First Out) method applies: the earliest purchased units are treated as sold first.

This means a single redemption from a long-running SIP can contain both LTCG (older instalments, held over 12 months) and STCG (recent instalments, held under 12 months). Understanding this split is critical for ITR filing and for timing your redemptions to maximise the portion that qualifies as LTCG.

SIP LTCG worked example

The key practical takeaway for SIP investors: check the age of your earliest SIP units before redeeming. If you are close to the 12-month boundary on some instalments, waiting one extra month can reclassify them from STCG (20%) to LTCG (12.5% with exemption). This requires no skill, just knowing your investment dates and the FIFO rule.

Your fund's CAMS or KFintech statement shows every instalment with NAV and date. Use the Mutual Fund Tax Calculator to enter multiple purchase lots and get a tax breakdown by LTCG and STCG.

8. Capital Loss Set-Off and Carry Forward Rules

When a mutual fund position closes at a loss, the loss can be used to reduce your tax on gains elsewhere. The rules have a specific hierarchy that every investor should know.

The set-off hierarchy

Short-term capital loss (STCL) can be offset against both STCG and LTCG in the same financial year; it is flexible. Long-term capital loss (LTCL) can only be offset against LTCG; it cannot be used against STCG or any other income.

To carry losses forward, you must file your ITR by the due date (July 31 for salaried investors, August 31 for ITR-3/4 from FY 2026-27). Missing the deadline forfeits the carry-forward. Losses are tracked by the income tax department in the CAS (Consolidated Account Statement) system, so your AMC statement and ITR must match.

A practical example of loss harvesting in action: suppose you have ₹1,80,000 LTCG from an equity fund redemption and ₹70,000 STCL from a debt fund that lost value. The STCL offsets the LTCG, bringing your net LTCG down to ₹1,10,000. Since this falls within the ₹1.25 lakh annual exemption, your LTCG tax liability becomes zero. Without the set-off, you would have paid 12.5% on ₹55,000 (the amount above the exemption). For the broader picture of how capital gains interact with your overall tax planning, the capital gains tax guide covers all asset classes including property and gold alongside mutual funds. Employees holding listed ESOP shares should plan their share sales and mutual fund redemptions together against the same ₹1.25 lakh annual pool, since exercising and selling in the same year as a large fund redemption can push the combined LTCG well above the exemption. The ESOP and RSU tax calculator shows exactly how much of the exemption remains after stock option gains.

9. Three Legal Strategies to Pay Less Capital Gains Tax

Knowing the rates is only half the job. The other half is structured planning around when you redeem, how much you book in a year, and how you offset. One step many investors skip before applying any of these strategies: if you hold multiple equity funds, first run a portfolio overlap check to identify which funds are holding the same underlying stocks. If two funds share 60-70% of their portfolio, the exit decision is straightforward regardless of tax consequences. Here are three strategies every equity mutual fund investor should know.

Strategy 1: The ₹1.25 lakh annual harvest

Every financial year, the first ₹1.25 lakh of LTCG from equity funds and equity shares combined is completely exempt from tax. Most investors treat this as passive; they earn gains and eventually pay tax on whatever exceeds ₹1.25 lakh.

The active version is different. Even if you have no plans to redeem, you can sell units to book up to ₹1.25 lakh of LTCG in March each year, and immediately reinvest the proceeds into the same or a similar fund , preferably the direct plan version if you have not already switched, since the lower expense ratio in direct plans compounds into meaningfully higher NAV over a decade. This resets your cost basis to the current NAV, reducing the taxable gain that will accumulate in future years. The reinvestment creates a fresh holding period, so the net effect is zero: same fund exposure, but higher cost basis and lower future tax.

Over 10–15 years, systematic annual harvesting of ₹1.25 lakh can save ₹2–5 lakh in cumulative tax for a serious equity investor , and the reinvested proceeds continue compounding at the full pre-tax NAV. If you are reinvesting into the growth option rather than IDCW, the compounding effect stays fully intact — the dividend vs growth calculator shows exactly how much of that long-term gap is driven by tax treatment across a 10–15 year horizon. The Mutual Fund Tax Calculator can model your current capital gains and how much is available to harvest this financial year.

Strategy 2: Tax-loss harvesting before March 31

If any of your mutual fund positions are underwater (current NAV below your cost), selling before March 31 books a capital loss that can offset gains elsewhere in that financial year. The loss can then be immediately reinvested, either in the same fund (after 24 hours to avoid wash sale optics) or in a similar fund.

This works best when you have a mix of positions: some with significant gains (taxable) and some with losses (tax shelters). Offsetting ₹50,000 of gains with ₹50,000 of losses saves approximately ₹6,500–₹10,000 in tax (depending on LTCG vs STCG), at essentially zero cost since the reinvested amount maintains the same market exposure.

Strategy 3: Time SIP redemptions for LTCG status

As demonstrated in the FIFO example above, the exact date of redemption determines how many instalments qualify as LTCG vs STCG. For an active SIP portfolio, an investor who checks the instalment dates before redeeming can often shift 1–3 instalments from STCG (20%) to LTCG (12.5% or exempt) simply by waiting one to four weeks.

If you are planning a partial redemption from a SIP fund, use CAMS or KFintech to check the date and NAV of your oldest unredeemed units. If the next instalment is 2–3 weeks from crossing 12 months, waiting costs nothing and saves 7.5% in tax on that amount. On a ₹30,000 instalment with ₹5,000 gain, that is a ₹375 saving for three weeks of patience.