You pay tax on a mutual fund only when you sell (redeem or switch) units at a profit, or when the fund pays you an IDCW (dividend). Simply holding units — even if they have doubled — creates no tax. Below are the rules for the 2026-27 tax year. The new Income-tax Act, 2025 took effect on 1 April 2026; it renumbered the sections, but the mutual fund rates below were carried over unchanged.
Step 1: what kind of fund is it?
For tax, funds fall into three groups based on what they hold:
- Equity-oriented funds: at least 65% in Indian shares. This includes large, mid, small and flexi cap funds, ELSS, index funds on Indian indices, aggressive hybrid funds, and arbitrage and equity savings funds.
- Debt-oriented (“specified”) funds: more than 65% in bonds and money-market instruments — liquid, overnight, corporate bond, gilt and similar funds.
- Everything else: funds in between, such as balanced or conservative hybrids with 35% to 65% in equity, gold funds, international funds and fund-of-funds that do not fall into the first two groups.
The fund’s scheme information document and the fund house’s tax note say which group it belongs to. When in doubt, ask your distributor or tax adviser.
Step 2: the rates
| Fund type | Short-term (held…) | Long-term (held…) |
|---|---|---|
| Equity-oriented | 12 months or less: 20% | More than 12 months: 12.5% on gains above ₹1.25 lakh a year |
| Debt-oriented, bought on or after 1 April 2023 | Always taxed at your slab rate, however long you hold | |
| Debt-oriented, bought before 1 April 2023 | 24 months or less: slab rate | More than 24 months: 12.5%, without indexation |
| Other funds (hybrids with 35–65% equity, gold and international fund-of-funds) | 24 months or less: slab rate | More than 24 months: 12.5% |
A health and education cess of 4% is added to the tax, and surcharge applies at higher incomes. Exchange-traded funds that are listed on a stock exchange count as long-term after 12 months rather than 24.
Worked examples
1. Equity fund held for three years
You invested ₹5 lakh and redeem for ₹7 lakh. The gain is ₹2 lakh. The first ₹1.25 lakh of long-term equity gains in a year is exempt, so ₹75,000 is taxed at 12.5% = ₹9,375, plus 4% cess = ₹9,750.
2. Equity fund sold after eight months
A ₹50,000 gain is short-term: 20% = ₹10,000, plus cess = ₹10,400. Waiting four more months would have made it long-term — and, if your other long-term gains that year were small, entirely tax-free.
3. Liquid fund held for two years
A ₹40,000 gain on units bought after April 2023 is added to your income. In the 30% slab that is ₹12,000, plus cess = ₹12,480. In the 10% slab it is far less.
How SIPs are taxed
Every SIP instalment is a separate purchase with its own date. When you redeem, units are sold on a first-in, first-out basis: the oldest units go first. So if you have run a SIP for three years in an equity fund and redeem part of it, the units from your first two years are long-term, and only the units bought in the last twelve months are short-term. Your account statement shows the purchase date of every lot.
IDCW (dividend) payouts
IDCW payouts are added to your income and taxed at your slab rate. The fund house deducts TDS of 10% if your IDCW from that fund house exceeds ₹10,000 in a year. For most investors who do not need regular cash, the growth option is more tax-efficient: nothing is taxed until you redeem.
Smart, legal ways to pay less
- Use the ₹1.25 lakh exemption every year. If you hold long-term equity units with gains, you can redeem enough to book about ₹1.25 lakh of gain and reinvest the same day. You pay no tax and your purchase price resets higher, reducing tax later. This is often called tax-gain harvesting.
- Cross the holding period before selling. The difference between 20% and 12.5% (or zero) is often a few weeks.
- Prefer SWP over IDCW for income. An SWP taxes only the gain portion of each withdrawal.
- Remember that switches are sales. Moving from one scheme to another, or from regular to direct, is taxed like a redemption.
- ELSS: investment up to ₹1.5 lakh a year is deductible only under the old tax regime. Under the new regime there is no deduction, though ELSS remains a regular equity fund with a three-year lock-in.
One trap under the new regime
The new tax regime’s rebate makes ordinary income up to ₹12 lakh tax-free. It does not cover capital gains taxed at special rates, such as equity STCG at 20% or LTCG at 12.5%. If your salary is ₹10 lakh and you also book ₹3 lakh of equity gains, plan the gains rather than assuming they are covered.
Frequently asked questions
Do I pay tax if I do not sell?
No. Unrealised gains are not taxed in growth options.
Can I set off losses?
Yes. Capital losses can be set off against capital gains — short-term losses against both short- and long-term gains, long-term losses only against long-term gains — and unused losses can be carried forward for eight years if you file your return on time.
Where do I find my gains for the return?
Request a capital gains statement from the registrar (CAMS or KFintech) or ask us; we send it to clients every year before filing season.
This is general information for the 2026-27 tax year, not tax advice. Rules change with each Budget; check the latest position or speak to a tax professional before acting. Questions? Message us on WhatsApp.
Figures above are illustrations based on assumed rates of return and are not a promise or guarantee of future returns. Mutual fund investments are subject to market risks, read all scheme related documents carefully. WishWiseWealth is an AMFI-registered Mutual Fund Distributor (ARN-188221).