Taxation of Mutual Funds: What Every Investor Needs to Know - STCG, LTCG, Dividend Income and ELSS

Want to know everything in detail? Read this article to learn about the latest capital gains tax rate, the associated rules, and some important amendments. Lastly, you will also understand what a tax-saving mutual fund is and how it works. 

As per the current Income Tax rules, for equity mutual funds, gains are divided into short-term (less than 12 months) and long-term (12 months or more). But for debt funds, the rules changed after 31st March 2023. 

Any debt mutual fund bought on or after this date is taxed as short-term, no matter how long you hold it. Now, this means the profit from such funds will be added to your income and taxed as per your slab.

For more clarity, check out the latest short-term and long-term capital gains tax brackets for 2026: 

As an investor, you must understand that after the new rule, only mutual funds investing more than 65% in equity and equity-related instruments can qualify for LTCG tax benefits.

For debt-heavy funds (more than 65% in debt and money market instruments ), all gains are now treated as short-term and taxed as per your income slab. To avoid manual calculations and calculate tax accurately, you can even use an online capital gains calculator. 
 

• The STCG tax arising from selling listed equity shares, equity-oriented mutual funds, and business trust units within 12 months has increased from 15% to 20%. Other short-term assets continue to be taxed as per your income slab.

• The tax exemption limit on long-term gains from equity and equity-oriented funds has increased from ₹1 lakh to ₹1.25 lakh per financial year. However, the tax rate on gains above this limit has also gone up from 10% to 12.5%.

• Hybrid mutual funds that invest up to 65% in debt and money market instruments (not pure equity or pure debt) are now taxed at 12.5% without indexation benefits.

• From 23 July 2024, indexation benefits (used to reduce tax by adjusting purchase cost for inflation) are no longer available.

   

Based on the current provisions of the Act, any income distributed by mutual fund houses in respect of units of mutual funds are fully taxable in the hands of the investor. Such income amount is:

• Added to the investor’s total income under the head “Income from Other Sources” 

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• Taxed according to their applicable income-tax slab rate.

A tax-saving mutual fund is also called an Equity Linked Savings Scheme (ELSS). It is a special type of mutual fund that lets you save on income tax under Section 80C of the Income Tax Act (only under the old regime). 

By investing in an ELSS, you can claim a deduction of up to ₹1.5 lakh from your taxable income in a financial year. An ELSS scheme primarily invests in equity and equity-related instruments and is taxed as an “equity fund”. 

More importantly, this scheme comes with a mandatory lock-in period of 3 years. You cannot withdraw your investment before this duration. 

Thus, at the time of redemption, your gains are classified as long-term capital gains (as you have already held the ELSS for more than 3 years). Next, LTCG exceeding ₹1.25 lakh in a financial year is taxed at 12.5% as per current rules. Gains below this limit are tax-free!

If you are looking to invest in a tax-saving mutual fund, Tata Mutual Fund™ offers the Tata ELSS Fund. It is an open-ended equity-linked savings scheme with a statutory lock-in of 3 years and tax benefits.  The investment objective of the scheme is to provide medium to long-term capital gains along with income tax relief to its unitholders .

However, there is no assurance or guarantee that the investment objective of the scheme will be achieved. As an investor, you can start investing in this scheme with an SIP or a lump sum amount of just ₹500. 

It may be noted that the risk-o-meter specified above is based on an internal assessment. The same shall be updated as per provision no. 6.16.1.j of SEBI Master Circular on Mutual Fund dated 20.03.2026, on Product labelling in mutual fund schemes on an ongoing basis.

For more information, you can visit www.tatamutualfund.com. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. What is the tax on mutual funds in 2026?

Mutual fund taxation primarily depends on the type of fund and how long you hold it. As per the current provisions, equity-oriented funds (with atleast 65% invested in listed equity share of domestic companies) attract:

• 20% STCG tax if sold within or upto 12 months

and

• 12.5% LTCG tax if sold after 12 months on gains exceeding the applicable exemption limit of ₹1.25 lakh in a tax year.

In comparison, debt-oriented funds (with more than 65% invested in debt and money market instruments) purchased on or after April 1, 2023, are taxed as per the investor's income tax slab rates, irrespective of the holding period. Further, mutual funds other than equity-oriented funds and specified mutual funds are taxed at 12.5% for LTCG, if sold after 24 months and as per the investor’s income tax slab rates, if sold within or upto 24 months. 

It is to be noted that a holding period of 12 months should be considered in case of listed securities.

Additionally, income earned in respect of units of mutual fund schemes is also taxable according to the applicable income tax slab rates.

2. How are mutual funds taxed in India?

As an investor, you can potentially earn from mutual funds from two sources: 

Capital gains and income in respect of units of mutual funds. Capital gains arise when you redeem your units at a profit. The applicable tax depends on whether the fund is equity-oriented or debt-oriented and the holding period.

Whereas any income received in respect of units of mutual funds other than capital gains is added to your total income and taxed according to your income tax slab rates.

3. What are LTCG and STCG in a mutual fund?

LTCG (Long-Term Capital Gain) and STCG (Short-Term Capital Gain) refer to the profit earned when mutual fund units are redeemed. For equity-oriented mutual funds, gains are treated as short-term if units are sold within or upto 12 months and long-term if the units are held for more than 12 months.

In contrast, for many debt-oriented funds (with more than 65% invested in debt and money market instruments) purchased on or after April 1, 2023, this distinction no longer applies, and gains are taxed according to the investor's income tax slab rates (regardless of the holding period).

It is to be noted that a holding period of 12 months should be considered in case of listed securities.

4. How are debt funds taxed in India?

Debt mutual fund taxation depends on when the investment was made and exposure to debt and money market instruments. After the latest amendments introduced in the Union Budget 2026, gains arising from specified mutual funds, being purchased on or after April 1, 2023, are:

• Added to an investor’s total income

and

• Taxed according to the applicable income tax slab rates, irrespective of the holding period.

Additionally, income earned in respect of units of mutual fund schemes is also taxed according to the investor's slab rates.

5. Is there any tax on mutual funds?

Yes, mutual fund investments may attract tax when you redeem your units or receive any other income in respect of units of mutual funds. The tax on redemption depends on the type of mutual fund and the holding period.

In addition, income earned in respect of units of mutual fund schemes received from any mutual fund is fully taxable and must be reported under "Income from Other Sources" while filing your income tax return.

6. How to avoid LTCG tax on mutual funds?

As an investor, you can manage your tax liability by planning your redemptions. For equity-oriented mutual funds, LTCG up to ₹1.25 lakh is exempt from tax in a tax year.

Thus, you may potentially spread redemptions across multiple tax years, instead of redeeming all investments at once. This may help utilise the ₹1.25 lakh exemption more effectively.

However, before making any redemption decisions, you may seek advice from a qualified tax professional, if required.

7. How to calculate tax on mutual fund redemption?

Firstly, determine your capital gain by subtracting the purchase cost from the redemption value. Next, identify whether the fund is equity-oriented or debt-oriented and calculate the holding period. Based on these two factors, apply the relevant tax rules.

The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.