For tax year 2026-27, equity fund gains are taxed at 12.5% above ₹1.25 lakh a year if held more than 12 months, and 20% if held less. Debt fund units bought on or after 1 April 2023 are taxed at your slab rate however long you hold them. Gold, international and multi-asset funds pay 12.5% after 12 months (listed) or 24 months (unlisted), with no ₹1.25 lakh exemption.
This guide covers how mutual fund gains and dividends are taxed for tax year 2026-27 (1 April 2026 to 31 March 2027). From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act, and it has since been amended by the Finance Act, 2026. Section numbers changed, but the rates did not: they are the same as in 2025-26. If you are filing your return for FY 2025-26 in 2026, the same rates apply under the old section numbers (111A, 112, 112A and 50AA).
The one idea to hold on to: a fund's tax treatment depends on what it holds, not what it is called. A "hybrid" fund can be taxed like an equity fund, and a gold ETF is not taxed like a debt fund.
The Four Tax Buckets for Mutual Funds
For tax year 2026-27, every mutual fund falls into one of four buckets:
| Bucket | What qualifies | Long-term if held | Long-term rate | Short-term rate |
|---|---|---|---|---|
| Equity-oriented fund (section 196 / section 198) | At least 65% in listed shares of Indian companies: large, mid, small, flexi cap, ELSS, index funds, arbitrage funds, most balanced advantage and equity savings funds. Also an FoF that puts at least 90% into an exchange-traded fund which itself holds at least 90% in Indian listed shares | More than 12 months | 12.5% on gains above ₹1.25 lakh a year | 20% |
| Specified mutual fund (section 76), bought on or after 1 April 2023 | More than 65% in debt and money market instruments (debt, liquid, gilt, most conservative hybrid funds), or an FoF with 65% or more in such funds | Never: always short-term | Not applicable | Your slab rate |
| Specified mutual fund bought before 1 April 2023 | Same funds, older units | More than 24 months (unlisted) or 12 months (listed) | 12.5%, no indexation | Your slab rate |
| Other funds (section 197) | Less than 65% in Indian equity and not more than 65% in debt: multi-asset funds, gold and silver ETFs and FoFs, international ETFs and FoFs | More than 12 months if listed (ETFs); more than 24 months if unlisted (FoFs and other funds) | 12.5%, no indexation | Your slab rate |
Add 4% health and education cess to every rate, plus surcharge if your income is high enough. On equity gains and on long-term gains taxed at 12.5% (sections 196, 197 and 198), surcharge cannot go above 15%; slab-taxed gains carry the normal surcharge. The ₹1.25 lakh yearly exemption applies only to equity-oriented funds (and listed shares), not to gold, international or debt funds. No bucket gets indexation any more.
The fund's equity or debt share is measured over the year, not on the day you sell. For specified funds the Act uses the annual average of daily closing figures. Each fund's scheme information document or key information memorandum says how it expects to be taxed.
What changed recently, and when
- From 1 April 2023: new units of debt-heavy funds lost long-term treatment. Their gains are taxed at slab whatever the holding period.
- From 23 July 2024: equity LTCG went from 10% to 12.5%, the exemption from ₹1 lakh to ₹1.25 lakh, and equity STCG from 15% to 20%. Indexation was removed for mutual funds.
- From 1 April 2025: the "specified mutual fund" definition was narrowed to funds with more than 65% in debt. Before that, it covered any fund with 35% or less in Indian equity, which caught gold, international and many hybrid funds. Many older articles still describe the old rule.
- From 1 April 2026: the Income-tax Act, 2025 took over, with new section numbers and the term "tax year". Rates were unchanged.
Equity Funds: The Rules in Detail
- Long-term means more than 12 months. Units held for exactly 12 months or less are short-term.
- Long-term gains: 12.5% on the total equity LTCG above ₹1.25 lakh in the tax year. The ₹1.25 lakh is one limit across all your equity funds and listed shares, not per fund.
- Short-term gains: 20% on the whole gain.
- STT: 0.001% securities transaction tax is deducted when you redeem equity fund units. You don't pay it separately.
- Units bought before 1 February 2018: your cost is the higher of what you paid and the lower of the NAV on 31 January 2018 and your sale value. This protects gains made before LTCG on equity was reintroduced.
Two points catch people out. In the new regime, the rebate that makes income up to ₹12 lakh tax-free does not apply to tax on income taxed at special rates, such as these capital gains. And if you are a resident whose other income is below the basic exemption limit, the unused part of that limit reduces your taxable capital gain.
Debt Funds: The Purchase Date Decides
For debt funds, the date you bought matters more than how long you have held.
- Bought on or after 1 April 2023: all gains are added to your income and taxed at your slab rate, whether you hold for one month or ten years.
- Bought before 1 April 2023: if held for more than 24 months (unlisted units, which is most open-ended debt funds), the gain is long-term and taxed at 12.5% without indexation. If held for less, slab rate.
If you hold old and new units of the same debt fund, the gains on each lot are taxed under the rule for that lot.
Gold, Silver, International and Multi-Asset Funds
These are now "other funds". Gains are long-term after more than 12 months for listed units (a gold ETF, silver ETF or international ETF bought on the exchange) and after more than 24 months for unlisted units (a gold FoF, an international FoF, or a multi-asset fund). Long-term gains are taxed at 12.5% without indexation and without the ₹1.25 lakh exemption. Short-term gains are taxed at slab.
For more on these products, see our guides to gold ETFs and international mutual funds.
Worked Examples (Tax Year 2026-27)
Illustrative examples for a resident individual. They ignore surcharge and assume no other capital gains or losses in the year unless stated.
Example 1: ELSS sold after four years
₹10 lakh invested in an ELSS in May 2022, sold in May 2026 for ₹16 lakh. Gain ₹6 lakh.
- Equity-oriented, held more than 12 months, so long-term.
- Taxable: ₹6,00,000 − ₹1,25,000 = ₹4,75,000.
- Tax at 12.5% = ₹59,375. Plus 4% cess (₹2,375) = ₹61,750.
Example 2: Dynamic bond fund bought in 2021
₹5 lakh invested in 2021, sold in 2026 for ₹6.6 lakh. Gain ₹1.6 lakh. The investor is in the 30% slab.
- Units bought before 1 April 2023 and held more than 24 months, so long-term.
- Tax at 12.5% = ₹20,000. Plus cess (₹800) = ₹20,800.
- Contrast: if the same units had been bought in 2024, the gain would be taxed at slab: 30% of ₹1.6 lakh = ₹48,000, plus cess (₹1,920) = ₹49,920.
Example 3: Gold ETF held 30 months
₹3 lakh in a gold ETF in November 2023, sold in May 2026 for ₹4.5 lakh. Gain ₹1.5 lakh.
- Listed, held more than 12 months, so long-term.
- Tax at 12.5% = ₹18,750. Plus cess (₹750) = ₹19,500, whatever your slab.
- A gold FoF needs more than 24 months. Thirty months meets that, so the tax would be the same.
Example 4: Balanced advantage fund held 26 months
₹2 lakh invested in March 2024, sold in May 2026 for ₹2.55 lakh. Gain ₹55,000.
- Most balanced advantage funds keep at least 65% in Indian shares (part of it hedged with derivatives), so they are taxed as equity funds. Check your fund's tax note.
- Long-term, and ₹55,000 is within the ₹1.25 lakh exemption, so tax is ₹0 if you have no other equity LTCG in the year.
- If you had already used the exemption elsewhere: 12.5% of ₹55,000 = ₹6,875, plus cess (₹275) = ₹7,150.
Example 5: Equity fund sold within a year
A gain of ₹40,000 on an equity fund held for eight months is short-term: 20% = ₹8,000, plus cess (₹320) = ₹8,320. There is no exemption for short-term gains.
To work out your actual return before tax, use the XIRR calculator, or check any fund's history from AMFI NAVs in the mutual fund analyser.
SIPs: Every Instalment Is Taxed Separately
Each SIP instalment is a separate purchase with its own date and cost. When you redeem, units are treated as sold first-in, first-out.
Say you ran a monthly SIP in an equity fund from April 2024 and redeem everything on 10 May 2026:
- Instalments up to April 2025 have been held more than 12 months: long-term.
- The instalment of 10 May 2025 has been held exactly 12 months: short-term. Long-term needs more than 12 months. Waiting a day would make it long-term.
- Instalments from June 2025 onwards: short-term.
So a partial redemption of your oldest units can often stay inside the ₹1.25 lakh exemption. Many investors redeem just enough long-term gains each year to use it. The SIP calculator helps you estimate how gains build up instalment by instalment.
ELSS has one more rule: each instalment is locked in for three years from its own date.
Dividends (IDCW)
- IDCW payouts are added to your income and taxed at your slab rate.
- The fund deducts 10% TDS if your IDCW from it exceeds ₹10,000 in the year (section 393).
- For non-residents, TDS on IDCW is 20%, or the lower treaty rate if you give a Tax Residency Certificate and Form 41.
For most people in a higher slab, the growth option is more tax-efficient: you pay tax only when you sell, and possibly at a lower capital gains rate. If you need regular cash, a systematic withdrawal plan from the growth option is taxed as capital gains on each withdrawal; the SWP calculator shows how long a corpus lasts.
ELSS and Section 123 (old 80C)
ELSS is the only mutual fund that gives a deduction when you invest. It counts toward the ₹1.5 lakh limit under section 123 (old 80C), and only in the old regime. The new regime under section 202 is the default, and it does not allow this deduction. On sale, ELSS is taxed like any equity fund. See new vs old tax regime if you are deciding.
Switches, Losses and Other Situations
- Switching from Regular to Direct, or between schemes, is a sale and a fresh purchase. Gains are taxed in the year of the switch. Our guide to direct vs regular plans covers when the switch is worth the tax.
- STPs: each transfer out of the source fund is a redemption and is taxed.
- Losses: a short-term capital loss can be set off against short-term or long-term gains. A long-term loss can be set off only against long-term gains. Capital losses cannot be set off against salary or business income. Unused losses can be carried forward for eight tax years if you file your return on time.
- Scheme mergers: units you receive when two schemes of the same type are merged are not taxed at the time of the merger.
Deciding whether to exit a fund that is lagging? Our guide on selling an underperforming fund works through the tax side.
NRIs
NRIs pay the same capital gains rates, but the fund deducts tax at source on redemption. TDS is at the rate in the Finance Act for that type of gain: for example 12.5% on equity LTCG above the exemption, 20% on equity STCG, and 30% on gains from specified (debt) funds, plus surcharge and cess. Treaty relief needs a Tax Residency Certificate and Form 41. The resident-only benefits above (the basic exemption shortfall) do not apply to non-residents. See our NRI mutual fund guide for details.
Summary for Tax Year 2026-27
- Equity-oriented funds (65%+ Indian equity): 20% if held 12 months or less; 12.5% above ₹1.25 lakh after that.
- Debt funds bought from 1 April 2023 (more than 65% debt): slab rate, always.
- Debt funds bought before 1 April 2023: 12.5% after 24 months; slab before that.
- Gold, silver, international and multi-asset funds: 12.5% after 12 months (ETFs) or 24 months (FoFs and unlisted funds); slab before that. No ₹1.25 lakh exemption.
- IDCW: slab rate, with 10% TDS above ₹10,000 a year from each fund for residents.
Add cess, and surcharge if it applies. Check each fund's tax classification in its scheme documents, especially hybrid funds and FoFs.