Two facts decide the tax on a mutual fund redemption: what the scheme actually holds, and how long you held the units. Everything else follows from those two answers.
The short answer
There is no single mutual fund tax rate in India. The Income-tax Act sorts schemes into a small number of categories based on portfolio composition, and each category has its own qualifying period and its own rates. So the practical question is never “what is the tax on mutual funds” — it is “which category is my scheme in, and how long have I held these particular units”.
This page is the map: how to place your scheme, what rule then applies, and what sits outside the capital gains rules altogether. If you already know your fund is equity-oriented and you want the long-term gain worked out properly — the exemption, the grandfathered cost, the FIFO split on an SIP — that belongs on the companion page, LTCG tax on mutual funds.
Step one: find out what your scheme actually holds
Category names on a fund factsheet are SEBI product labels. Tax categories are separate, and they are decided by portfolio allocation. A fund with “balanced” or “hybrid” in its name can fall into any of three tax buckets depending on how much domestic equity it holds. Check the scheme information document or the monthly portfolio disclosure, not the name.
Equity-oriented schemes
A scheme qualifies when at least 65% of its assets are invested in listed equity shares of domestic companies. This covers most diversified equity funds, ELSS, index funds tracking Indian indices, arbitrage funds and aggressive hybrid funds. A fund-of-funds qualifies on a separate test: at least 90% invested in units of domestic equity ETFs.
Specified mutual funds
Introduced by Section 50AA, this covers schemes investing more than 65% of assets in debt and money market instruments — liquid funds, corporate bond funds, gilt funds, most short-duration funds. It also covers a fund-of-funds that puts 65% or more into such debt-oriented schemes.
Other funds
Everything that is neither of the above: less than 65% in domestic listed equity and less than 65% in debt. In practice this is multi-asset allocation funds, gold and silver ETFs and their fund-of-funds, international equity funds and ETFs, and conservative or balanced hybrids sitting in the middle. This is the bucket most investors misplace.
Step two: the rule that applies to each category
These rates apply to transfers made on or after 23 July 2024 and are unchanged for FY 2026-27.
| Tax category | Becomes long-term after | Long-term rate | Short-term rate |
|---|---|---|---|
| Equity-oriented (65%+ domestic listed equity) | 12 months | 12.5% on gains above Rs 1.25 lakh in the financial year | 20% |
| Equity fund-of-funds (90%+ in domestic equity ETFs) | 12 months | 12.5% on gains above Rs 1.25 lakh in the financial year | 20% |
| Specified mutual funds (more than 65% debt and money market) | Never — no long-term category exists | Not applicable | Your income tax slab rate, whatever the holding period |
| Other funds (gold, silver, international, multi-asset, mid-equity hybrids) | 12 months if the units are listed on an exchange, 24 months if they are not | 12.5%, with no Rs 1.25 lakh exemption | Your income tax slab rate |
Rates under the Income-tax Act as applicable for tax year 2026-27. Surcharge and cess apply on top. Indexation is not available in any of these rows.
Two details are easy to miss. The Rs 1.25 lakh annual exemption belongs to Section 112A and therefore to equity-oriented schemes only — a gold ETF pays 12.5% from the first rupee. And the listed-versus-unlisted distinction in the last row is why a gold ETF held on an exchange turns long-term in 12 months while a gold fund-of-funds bought from the AMC takes 24.
If your debt units predate April 2023
Section 50AA applies to units acquired on or after 1 April 2023. Debt fund units bought before that date are treated as other funds: long-term after 24 months and taxed at 12.5% on redemption today, short-term at slab rates before that. If you have held a debt fund across that boundary, one folio can contain units under two different regimes, and the older units are the ones with the better treatment.
What sits outside the capital gains rules
IDCW payouts
Income distribution cum capital withdrawal — what used to be called dividend — is not a capital gain. It is added to your total income and taxed at your slab rate, whichever category the scheme belongs to. The fund house deducts TDS at 10% under Section 194K once your distributions from that fund house cross Rs 10,000 in a financial year.
TDS on redemption
For a resident investor, no tax is deducted when you redeem. The gain reaches your bank in full and the tax is yours to compute and pay. For a non-resident investor the position reverses: the fund house withholds tax on the gain at the point of redemption, and the rate depends on scheme category and holding period, subject to relief under an applicable tax treaty.
Securities transaction tax
STT of 0.001% is charged on the redemption of equity-oriented units. It is small, it is already reflected in what you receive, and it is not deductible against the capital gain — but paying it is one of the conditions that lets the concessional equity rates apply in the first place.
Three events investors do not expect to be taxable
- A switch. Moving from one scheme to another, or between plans of the same scheme, is a redemption followed by a fresh purchase. It is fully taxable even though no money reached your bank account.
- Each SIP instalment. Every monthly instalment is a separate lot with its own purchase date and its own holding-period clock. A single redemption can therefore produce both long-term and short-term gains at once.
- A systematic transfer or withdrawal plan. An STP is a switch on a schedule; an SWP is a redemption on a schedule. Both are taxed instalment by instalment.
Where the tax shows up
Nobody sends you a tax bill. You report capital gains yourself in Schedule CG of your income tax return, with equity gains under Section 112A reported separately. Your consolidated account statement and the capital gains statement from the registrar give the figures; the Annual Information Statement shows what the department already knows. If the tax due is large enough, it falls into the advance tax cycle rather than waiting for the filing deadline.
How we think about this at FinEdge
Tax is an outcome of a decision, not a reason for one. The investors who lose most to tax are rarely the ones who paid the wrong rate — they are the ones who redeemed early because a market fell, or churned a portfolio to chase a better-looking fund, and paid short-term rates on money that was meant to stay invested for a decade.
The useful discipline is the ordinary one: decide the holding period from the goal, choose the scheme category to match that horizon, and let the tax treatment be a consequence of a sound decision rather than the driver of a poor one. Where a redemption is genuinely needed, the sequence and the timing within a financial year are worth planning — and that is a conversation with your investment manager and your tax adviser, not a rule of thumb.
Common questions
Which mutual funds count as equity for tax?
Those holding at least 65% in listed equity shares of Indian companies. An international equity fund does not qualify, however equity its portfolio looks, because the holdings are not domestic.
Does the fund house deduct tax when I redeem?
Not for resident investors. You receive the full redemption proceeds and are responsible for computing and paying the tax. Non-resident investors have tax withheld at source.
Is switching between two schemes taxable even though I did not withdraw money?
Yes. A switch is treated as a redemption of the first scheme and a fresh purchase of the second, and the gain on the first is taxed in that year.
Where do I find which tax category my fund is in?
The scheme information document states the asset allocation the fund must maintain, and the monthly portfolio disclosure shows what it actually holds. Both are on the AMC website.
This page explains the general position under Indian tax law as it applies for the tax year 2026-27. It is not tax advice, and it does not account for your individual circumstances. Please confirm your position with a qualified tax adviser before acting.
