How Mutual Funds Are Taxed
An overview of how capital gains from equity, debt and hybrid mutual funds are taxed in India under current rules.
Mutual fund gains are taxed as capital gains, but the rate depends on the type of fund and how long you held it. Rules have changed several times in recent Budgets, so always confirm the current position.
Equity-oriented funds
Funds holding at least 65% in Indian shares are taxed as equity funds. Selling within 12 months gives short-term gains taxed at 20%. Selling after 12 months gives long-term gains taxed at 12.5% on the amount above ₹1.25 lakh in a financial year. A worked example is in the equity capital gains guide.
Debt funds
For debt funds bought after the 2023 rule change, gains are generally taxed at your income tax slab rate, regardless of holding period. This removed the earlier indexation benefit for most debt funds. Compare after-tax outcomes in the FD vs debt funds guide.
Hybrid funds
Tax depends on the equity share. Funds that stay mostly in equity are treated like equity funds; others follow debt or special rules. Check the fund's category and the current law.
Dividends
Dividends from funds are added to your income and taxed at your slab rate. Funds may also deduct TDS above a threshold.
Practical tips
- Hold equity funds beyond 12 months where possible.
- Use the annual ₹1.25 lakh long-term exemption by booking gains gradually.
- Keep your capital gains statement ready for filing your ITR.
Tax law changes with each Budget. This is general information, not tax advice; consult a chartered accountant for your case.
Frequently asked questions
Are mutual fund gains taxed every year?
Not unless you sell or switch. Tax applies when units are redeemed or switched, and dividends are taxed when paid.
Is switching between funds taxable?
Yes. A switch is treated as a sale from one fund and a purchase of another, so capital gains tax can apply.
More guides
Calculators
Last reviewed: October 2026. General education, not financial advice.