Every redemption of a mutual fund unit is a taxable event. What you pay depends on two things: the kind of fund it is, and how long you held the units. Most investors I meet get at least one of the two wrong, usually because the article they read was written for last year’s rules.
The rates themselves have been stable since July 2024, so that part is easy. What changed on 1 April 2026 is the law: the Income-tax Act, 2025 replaced the 1961 Act, and every section number you had memorised is new. Section 111A is now Section 196, Section 112A is now Section 198, and Section 50AA, the one that hurts debt fund investors, is now Section 76, with the rates left untouched.
Below I have worked the arithmetic out in full: an equity redemption, a debt redemption, the purchase-date cutoff that splits debt funds into two very different treatments, and a harvesting calculation you can copy into a spreadsheet. Rates are from the Income Tax Department’s own section pages for the 2025 Act, linked at the end.
The rates for FY 2026-27
| Fund type | Long term after | STCG rate | LTCG rate |
|---|---|---|---|
| Equity-oriented fund (65%+ in listed Indian equity) | 12 months | 20% (Section 196) | 12.5% above ₹1,25,000 a year (Section 198) |
| Specified mutual fund (over 65% in debt and money market), units bought on or after 1 April 2023 | Never: always deemed short term (Section 76) | Your slab rate | Not applicable |
| Everything else: gold funds, international funds, many fund-of-funds, debt units bought before 1 April 2023 | 24 months | Your slab rate | 12.5%, no indexation (Section 197) |
The ₹1,25,000 exemption applies per person per financial year, and it covers all your Section 198 assets together: equity fund units, listed shares and business trust units draw on one common pool. Not per fund, and not per redemption.
Health and education cess of 4 percent sits on top of every figure in that table, and very high earners add surcharge, which is capped at 15 percent for capital gains. The examples below include cess so the numbers match what you would actually pay.
Slab rate means your marginal rate of income tax. If you are not sure what yours is, the full slab workings for this year are in our piece on the old vs new tax regime.
Which bucket your fund falls in
An equity-oriented fund, under Section 198, is one where at least 65 percent of the proceeds sit in equity shares of domestic companies listed on a recognised stock exchange. Plain equity funds and index funds on Indian indices normally qualify, and so do aggressive hybrids. You do not have to work this out yourself: the factsheet tells you, and if a scheme is taxed as equity the AMC says so prominently.
A specified mutual fund, under Section 76, invests more than 65 percent of its total proceeds in debt and money market instruments. A fund-of-fund that puts 65 percent or more into such funds counts too. For units acquired on or after 1 April 2023, any gain is deemed short-term capital gain no matter how long you hold, which means slab rate with no concessional option at all.
That leaves a middle bucket: funds that are neither 65 percent Indian equity nor more than 65 percent debt. Gold funds and international equity funds live here, along with some conservative hybrids. They become long term after 24 months and then pay 12.5 percent under Section 197. Sold earlier, the gain is ordinary short-term gain at slab.
The date 1 April 2023 matters because Section 76 only captures units acquired on or after it. Debt fund units you bought before that date fall into the middle bucket, so holding them past 24 months makes the gain long term at 12.5 percent. Example 3 shows how large that difference is in rupees.
Worked example 1: an equity fund held three years
Say you invested ₹6,00,000 in an equity fund in October 2023 and redeem the full holding in November 2026 for ₹9,10,000. This is an illustration, not a return forecast.
Step 1, the gain:
Capital gain = ₹9,10,000 − ₹6,00,000 = ₹3,10,000
Step 2, classify it. Held 37 months, which is more than 12, so it is LTCG under Section 198.
Step 3, apply the exemption, assuming no other equity LTCG this year:
Taxable LTCG = ₹3,10,000 − ₹1,25,000 = ₹1,85,000
Step 4, the tax:
Tax = 12.5% × ₹1,85,000 = ₹23,125
Cess = 4% × ₹23,125 = ₹925
Total = ₹24,050
Notice the effective rate. ₹24,050 on a gain of ₹3,10,000 works out to about 7.8 percent, well below the headline 12.5 percent, because the exemption absorbed the first slice. On smaller gains the effect is stronger, and at ₹1,25,000 or below the tax is zero.
Worked example 2: the same fund redeemed at eight months
Now say you put ₹3,00,000 into an equity fund in March 2026 and redeem in November 2026 for ₹3,45,000.
Gain = ₹45,000, held 8 months, so STCG under Section 196
Tax = 20% × ₹45,000 = ₹9,000
Cess = 4% × ₹9,000 = ₹360
Total = ₹9,360
Had you waited past the 12-month mark, that same ₹45,000 would have been LTCG, and if your total equity LTCG for the year stayed within ₹1,25,000 the tax on it would have been nil. Four months of patience, in that case, is worth the whole ₹9,360, which is 20.8 percent of the gain. I tell students this is the first thing to check before any equity redemption: open the statement, find the purchase date, count the months.
Worked example 3: a debt fund where the purchase date decides the tax
Take two lots in the same debt fund, each showing a gain of ₹1,05,000 on an investment of ₹5,00,000, both redeemed in November 2026. Assume a 30 percent slab.
Lot A, bought June 2023, falls on or after 1 April 2023. Section 76 deems the entire gain short term regardless of the 41-month holding:
Tax = 30% × ₹1,05,000 = ₹31,500
Cess = 4% × ₹31,500 = ₹1,260
Total = ₹32,760
Lot B, bought January 2023, sits before the cutoff. Held more than 24 months, so it is LTCG under Section 197:
Tax = 12.5% × ₹1,05,000 = ₹13,125
Cess = 4% × ₹13,125 = ₹525
Total = ₹13,650
Same fund and same gain, yet Lot A pays ₹19,110 more purely because of when the units were bought. If you hold pre-April-2023 debt units, treat them as a separate and more tax-efficient pool, and think twice before churning them into anything new. Once sold, that treatment is gone for good.
SIPs and partial redemptions
Each SIP instalment is a separate purchase with its own date, cost and holding-period clock, and redemptions are matched against units on a first-in, first-out basis.
Say you ran a ₹10,000 monthly SIP in an equity fund for 24 months, putting in ₹2,40,000, and you now want to redeem in month 30. The oldest units go first. Instalments 1 to 18 were all bought more than 12 months ago by then, so a redemption of roughly three-quarters of the holding stays entirely in LTCG. Only when you go deeper, into instalments 19 to 24, do you start picking up units that are still short term, and a single redemption can then throw up both kinds of gain on one statement.
Your capital gains statement from CAMS or KFintech does this lot-by-lot matching for you, so before a large partial redemption it is worth pulling that statement and seeing where the FIFO line falls. The arithmetic behind SIP returns themselves, XIRR and step-ups, is worked out in our SIP maths article.
Tax-loss harvesting, with the arithmetic
Harvesting means selling a holding that sits at a loss so the realised loss offsets gains you have already booked. The set-off rules, from the Income Tax Department’s own guidance, are strict in one direction: a long-term capital loss can be set off only against long-term capital gains, while a short-term capital loss can be set off against both short-term and long-term gains. Unused losses carry forward for 8 years, provided you file your return by the due date.
Say you booked ₹2,40,000 of equity LTCG earlier this financial year. Without harvesting:
Taxable = ₹2,40,000 − ₹1,25,000 = ₹1,15,000
Tax = 12.5% × ₹1,15,000 = ₹14,375, cess ₹575, total ₹14,950
You also hold an international fund bought 30 months ago, now showing a ₹40,000 loss. Selling it realises a long-term capital loss, which sets off against the LTCG before the exemption is applied:
Net LTCG = ₹2,40,000 − ₹40,000 = ₹2,00,000
Taxable = ₹2,00,000 − ₹1,25,000 = ₹75,000
Tax = 12.5% × ₹75,000 = ₹9,375, cess ₹375, total ₹9,750
The harvest saved ₹5,200, which is exactly 12.5 percent of the loss plus cess. A short-term loss is worth more per rupee because it can also offset STCG taxed at 20 percent: the same ₹40,000, set against equity STCG, saves ₹8,320 including cess. So when both kinds of loss are sitting in the portfolio, use the short-term ones where the rate is highest and let the long-term ones go against long-term gains.
If you still believe in the losing fund, you can buy it back after the sale. The new units start with a fresh cost and a fresh holding-period clock, so what you have done is defer tax and reset your basis higher, nothing cleverer than that. The mirror-image technique, deliberately booking gains each year to use the ₹1,25,000 exemption before it lapses, is covered in our tax alpha guide for advisors.
Where investors go wrong
The most common mistake I see, in client portfolios and in my classroom alike, is treating the ₹1,25,000 exemption as a per-fund allowance. Redeem four equity funds with a ₹1,00,000 long-term gain in each and you do not have four exempt gains. You have ₹4,00,000 of LTCG, of which ₹2,75,000 is taxable, giving ₹34,375 of tax plus ₹1,375 cess, ₹35,750 in all.
The second is forgetting that a switch between schemes is a redemption followed by a fresh purchase. That includes a switch from the regular plan to the direct plan of the very same scheme. The full tax above applies even though no money ever reached your bank account, so check the gain before you make the switch, not after.
The third is holding the IDCW (dividend) option while sitting in a high slab. Payouts are taxed as ordinary income at your slab every year, whereas the growth option lets the whole gain wait until redemption, where equity rates and the exemption are usually kinder.
To be fair about the other side of this: if your equity gains run below ₹1,25,000 a year and you hold no post-2023 debt funds, the exemption already does the entire job. You do not need a harvesting strategy, an advisor or a course for that, and an annual glance at your capital gains statement is enough. The planning earns its keep in portfolios that carry mixed buckets, losses brought forward and slab-rate debt gains at the same time, which is also why set-off and capital gains computation get a full module in the CFP curriculum we teach at HOFP.
Frequently asked questions
Is the ₹1.25 lakh LTCG exemption per fund or per person?
Per person, per financial year. All your long-term gains covered by Section 198, which includes equity-oriented mutual funds, listed equity shares and business trust units, share one ₹1,25,000 exemption. Redeeming across multiple funds or demat accounts does not create additional exemptions.
Are debt mutual funds always taxed at my slab rate now?
Only units acquired on or after 1 April 2023 fall under the deemed short-term rule of Section 76. Units bought before that date become long-term capital assets after 24 months and are taxed at 12.5 percent without indexation under Section 197. The two lots can sit in the same folio with completely different tax outcomes.
Did the new Income-tax Act, 2025 change capital gains rates on mutual funds?
No. The Act, in force from 1 April 2026, renumbered the provisions but kept the rates that have applied since 23 July 2024: 20 percent STCG and 12.5 percent LTCG on equity funds, slab rate on specified debt funds. Section 111A became 196, Section 112A became 198, Section 112 became 197 and Section 50AA became 76.
How are SIP redemptions taxed?
Each SIP instalment is a separate lot with its own purchase date and holding period, and redemptions consume the oldest units first (FIFO). In an equity fund, units from instalments older than 12 months produce LTCG and newer ones produce STCG, so a single redemption can generate both types in one statement.
How long can I carry forward a capital loss?
For 8 years immediately following the year the loss was first computed, but only if you filed that year’s return by the due date. A carried-forward long-term loss can only be used against future long-term gains, while a short-term loss remains usable against both short-term and long-term gains.
What rate applies to gold funds and international funds?
They are usually neither equity-oriented nor specified mutual funds, so they sit in the middle bucket: gains are long term after 24 months and taxed at 12.5 percent without indexation, and gains before 24 months are taxed at your slab rate. Check the scheme’s factsheet, because a fund’s actual allocation decides its bucket.
Sources
- Income Tax Department, Income-tax Act 2025, Section 196 (tax on short-term capital gains in certain cases): https://wm.incometaxindia.gov.in/w/section-196-78
- Income Tax Department, Income-tax Act 2025, Section 198 (tax on long-term capital gains in certain cases): https://wm.incometaxindia.gov.in/w/section-198-78
- Income Tax Department, Income-tax Act 2025, Section 197 (tax on long-term capital gains): https://wm.incometaxindia.gov.in/w/section-197-78
- Income Tax Department, Income-tax Act 2025, Section 76 (specified mutual funds and market linked debentures): https://wm.incometaxindia.gov.in/w/section-76-106
- Income Tax Department, set-off and carry forward of losses under the income-tax law: https://wm.incometaxindia.gov.in/w/set-off-and-carry-forward-of-losses-under-the-income-tax-law%E2%80%8B
- Capital gains holding periods and rates under the Income-tax Act, 2025 (myITreturn help centre): https://help.myitreturn.com/hc/en-us/articles/60943188924313-Capital-Gains-Holding-Periods-Tax-Rates-Income-Tax-Act-2025
- Capital gains under the new Income-tax Act, 2025 for tax period 2026-27 (Taxguru): https://taxguru.in/income-tax/capital-gains-income-tax-act-2025-tax-period-2026-27.html
- SIP taxation and FIFO rules for each instalment (DSP Mutual Fund): https://www.dspim.com/knowledge-hub/personal-finance-guide/tax-on-sip-investments-how-each-instalment-is-taxed
- Surcharge and health and education cess for FY 2026-27 (Finlecture): https://finlecture.in/indian-tax-system/surcharge-in-income-tax/
