When you sell mutual fund units for more than you paid, the profit is capital gains — and the tax depends on just two things: how long you held, and how much the gain is. After the July 2024 Budget, the numbers changed; here are the current rules, with examples.
Equity funds
Hold an equity fund (or equity-oriented hybrid) for over 12 months and gains are long-term: taxed at 12.5%, but only on the amount above ₹1.25 lakh of gains in a financial year — the first ₹1.25 lakh is free. Sell within 12 months and gains are short-term: taxed at a flat 20%, no exemption.
Debt and other funds
Debt funds work differently: for units bought after 1 April 2023, all gains are short-term — taxed at your slab rate, whatever the holding period. Gold funds and international funds follow a similar treatment; their classification as long-term ended with the 2024 rules. Check a fund's category before assuming any rate.
Two worked examples
| Situation (FY 2026-27) | Tax |
|---|---|
| Equity fund held 3 years, gain ₹2.5 lakh | 12.5% × (2.5L − 1.25L) = ₹15,625 |
| Equity fund sold in month 9, gain ₹40,000 | 20% × 40,000 = ₹8,000 |
Illustrative only. Your slab, the fund's category and the holding period decide the final number.
The practical levers: timing (crossing the 12-month line converts 20% into 12.5%), harvesting (using the ₹1.25 lakh free window each year), and spread (splitting redemptions across two financial years).
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Message IFI on WhatsApp →Quick recap
- Equity funds: 12+ months = 12.5% LTCG above ₹1.25 lakh/year; under 12 = 20% STCG.
- Debt funds bought after Apr 2023: slab rate, always short-term.
- The July 2024 Budget raised both rates and the exemption; Budget 2026 left them unchanged, so they continue for FY 2026-27.
- Timing, harvesting and spreading redemptions are the legal levers.
Frequently asked questions
How much capital gain is tax-free on mutual funds?
For equity funds held over 12 months, the first 1.25 lakh of long-term gains in a financial year is exempt; the rest is taxed at 12.5%. Short-term gains (under 12 months) get no exemption and are taxed at 20%.
What is the LTCG rate for FY 2026-27?
12.5% on long-term equity gains above the 1.25 lakh yearly exemption, a rate set on 23 July 2024 and left unchanged by Budget 2026. Short-term equity gains pay 20%.
Are debt fund gains taxed at slab rates?
For units purchased on or after 1 April 2023, yes - debt fund gains are treated as short-term and taxed at your slab rate regardless of holding period. Gold and international funds follow similar rules.
What is tax harvesting?
Selling and booking gains up to the tax-free limit each year - currently 1.25 lakh of long-term equity gains - and reinvesting, so gains are used across years instead of piling up for one large taxable event.