How are different mutual funds taxed in India?

In the 1992 Barcelona Olympics, British sprinter Derek Redmond tore his hamstring mid-race. As thousands watched, he pushed through the pain, hobbling toward the finish. But what made that moment iconic was when his father ran from the stands, wrapped an arm around him, and helped him across the line.

Now, imagine your financial journey. You’ve trained, saved, planned – but just as you’re nearing your goals, an unexpected burden stops you in your tracks: taxes. You didn’t plan for them, you didn’t fully understand them – and now they’re holding you back from fulfilling your financial goals.

In this previous article, we learned how different fund categories can help you achieve unique goals. Now, you’ll get to know the taxation of each category to help you make the right long-term investment decisions.

Why is understanding mutual fund taxation important?

The importance of understanding mutual fund taxation cannot be overstated. Taxes have a direct impact on your investment returns. A clear grasp of tax implications allows you to plan better and ensure that you are making decisions that work to your advantage in the long run. In addition, with the various tax laws in place, understanding how your investments are taxed can help you minimise your tax liability.

The tax structure on mutual fund investments in India can differ based on the type of fund you invest in (equity, debt, hybrid, etc.) and the duration for which you hold the investment.

With this note, let’s dive into the specifics of mutual fund taxation in India for FY 2025-26.

What are equity-oriented funds?

These funds invest at least 65 per cent in equity or equity-related instruments. They are taxed in the following manner:

• Short-term capital gains tax: If a fund is held for less than a year, the tax on the gains is 20 per cent.
• Long-term capital gains tax: If a fund is held for over a year, the tax rate is 12.5 per cent for gains beyond Rs 1.25 lakh per annum. This means any gains up to Rs 1.25 lakh for the financial year are tax-free.

Equity mutual funds come under this category of mutual funds. That’s why they're a popular investment choice for long-term investors.

Suggested read: Three tax-efficient mutual funds for safe, short-term investors

What are debt-oriented funds?

These funds invest less than 65 per cent in equity and equity-related instruments. The gains are taxed at the slab rate regardless of the holding period. The slab rate is the income tax rate you have with regard to your income level. We’ve explained the New Tax Regime and its corresponding changes, after the Budget 2025-26, in this detailed guide.

Debt mutual funds come under this category of mutual funds.

Suggested read: Should you invest in income plus arbitrage funds?

How are hybrid mutual funds taxed?

We’ve discussed this fund category in detail in a previous article. To summarise, these funds invest in two or more asset classes. Generally, they invest in a mix of equity and debt to offer growth and stability, respectively. After all, equity rises well in a bull market, but the debt component protects the corpus during bearish phases.

A hybrid fund can be either treated as an equity-oriented fund or a debt-oriented fund, depending on the equity exposure. Hence, if a fund has an average exposure of over 65 per cent to equities or equity-related instruments, it will be treated as an equity-oriented fund.

For other cases, where the exposure falls below 65 per cent, it is treated as a debt-oriented fund.

How are ELSS funds taxed?

After the Budget 2025-26, there have been a couple of changes which have made the New Tax Regime more appealing. For instance, salaried individuals with income up to Rs 12.75 lakh (including the Rs 75,000 as standard deduction) can claim a rebate under Section 87A. Thus, they effectively pay no tax.

This is a huge step up from the last budget, wherein salaried individuals with income up to Rs 7.5 lakh (including the Rs 50,000 as standard deduction). However, this improvement also means that the Old Tax Regime is completely obsolete.

Earlier, many people opted for ELSS to save taxes, but 80C deductions are part of the Old Tax Regime. We’ve included the total deductions (80C, 80D, House Rent Allowance (HRA)/home loan interest, NPS, etc.) you need to save more tax on the old regime.

That said, for people earning up to Rs 12.75 lakh, opting for the new regime is a no-brainer!

Suggested read: Budget 2025 discussion: Does the new tax regime really suit every taxpayer?

Conclusion

Taxation is an often overcomplicated aspect of investing. That’s why most investors simply wait for their tax bill at the end of the year. However, with prudent tax planning, you can ensure you reach your goals faster.

If you’re new to investing and have a long-term vision, you should opt for a hybrid fund. Perhaps to benefit from the equity-like tax treatment, choose a fund that has a high equity exposure. That said, there are cases where the average exposure may fall below 65 per cent. So, discuss with an experienced professional about how your fund will get taxed.

That said, you can use our Portfolio Manager tool to get complete visibility into the taxation of your investments. Simply visit our tool and upload your investments. It requires three quick, easy steps:

• Visit our Portfolio Manager tool.
• Click on the three dots in the top right corner.
• And choose the most convenient method for uploading your investments.

FAQs

What is the tax treatment of equity mutual funds in India?

Equity mutual funds, investing at least 65 per cent in domestic equities, are subject to short-term capital gains tax (STCG) if held for less than 12 months, at a rate of 20 per cent. Long-term capital gains (LTCG) are taxed at 12.5 per cent on gains exceeding Rs 1.25 lakh per annum.

How are debt mutual funds taxed?

Debt mutual funds invest less than 65 per cent in equity and are taxed based on the investor’s income tax slab rate. The taxation is the same regardless of the holding period.

How are hybrid mutual funds taxed?

Hybrid mutual funds are taxed based on their equity exposure. If the fund has over 65 per cent equity exposure, it is treated as an equity-oriented fund, and its taxation follows equity tax rules. If it has less than 65 per cent equity exposure, it is treated as a debt-oriented fund, and its taxation follows debt mutual fund rules.

How do ELSS funds affect tax savings?

ELSS (Equity-Linked Savings Schemes) provides tax-saving benefits under Section 80C, allowing deductions of up to Rs 1.5 lakh. Post-Budget 2025-26, the New Tax Regime is more beneficial for those earning up to Rs 12.75 lakh, as they can claim a rebate under Section 87A, effectively reducing their tax liability.

What tax deductions can I use with mutual funds?

For equity funds, long-term capital gains exceeding Rs 1.25 lakh are taxed at 12.5 per cent, while debt funds are taxed based on the investor's income slab. Salaried individuals can use deductions under Sections 80C, 80D, and NPS to reduce their taxable income in the Old Tax Regime.

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This article was originally published on June 25, 2025.