Most investors meet the tax rules on the day they redeem — which is the one day nothing can be done about them. That is a shame, because tax is not a footnote to a mutual fund return. It is the gap between the number on the statement and the money that reaches your bank account. The rules changed materially in July 2024, and a good deal of what still circulates on WhatsApp is out of date. This post sets out how gains are taxed today, what decides your rate, and the mechanics that surprise SIP investors most often.
01 — You are taxed when you sell, not while you hold
A fixed deposit taxes you every year on the interest, whether or not you touch the money — the bank deducts TDS and the interest is added to your income. A mutual fund held in the growth option does not work that way. However far the NAV has risen, there is no tax event while you hold the units. Tax arises only when you redeem, switch, or transfer them.
This is a structural feature of the product, not a loophole. A gain that is not taxed each year stays invested and keeps compounding. The longer you hold, the more that deferral is worth.
Two consequences follow, and both catch people out:
- A switch from one scheme to another is a redemption plus a fresh purchase. It is a taxable event even though no money reached your bank account.
- Moving from the regular plan to the direct plan of the same scheme is also a switch — and also taxable.
02 — Two questions decide your rate
Every mutual fund gain in India is priced off two answers:
- What does the fund hold? Equity-oriented, or not.
- How long did you hold it? Above or below the holding-period threshold for that type.
"Equity-oriented" is a statutory test, not marketing language. The scheme must invest more than 65% of its proceeds in equity shares of domestic companies. That percentage is stated in the scheme document, and it is what the Income-tax Act reads — not the word "equity" in the scheme's name.
03 — Equity-oriented funds
| Gain type | Holding period | Rate | Section |
|---|---|---|---|
| Short-term (STCG) | 12 months or less | 20% | 111A |
| Long-term (LTCG) | More than 12 months | 12.5% on gains above ₹1,25,000 a year | 112A |
Applicable surcharge and 4% health and education cess sit on top of both. There is no indexation on equity LTCG — there never was.
These are the rates for transfers on or after 23 July 2024. Before that date they were 15% and 10%, and the long-term exemption was ₹1,00,000. If a note you are reading still says 10%, it is describing a regime that no longer exists. Budget 2026 left these rates unchanged.
One detail is worth being precise about: the ₹1,25,000 is an exemption on gains, not on the amount you redeem. It applies per person per financial year across all your equity long-term gains taken together — not per scheme, not per folio, and it does not carry forward if unused.
Illustrative example. Units held for three years and redeemed at a long-term gain of ₹3,00,000:
| Line | Amount |
|---|---|
| Long-term gain | ₹3,00,000 |
| Less: annual exemption | ₹1,25,000 |
| Taxable gain | ₹1,75,000 |
| Tax at 12.5% | ₹21,875 |
| Add 4% cess | ₹875 |
| Total tax | ₹22,750 |
The figures above are arithmetic on an assumed gain. They are not a projection of what any investment will earn.
04 — Debt funds: the April 2023 rule still stands
For units of a debt fund bought on or after 1 April 2023, there is no long-term category at all. Section 50AA deems the gain short-term however long you held it, and it is added to your total income and taxed at your slab rate.
| Your slab | Tax on a ₹1,00,000 debt gain, including cess |
|---|---|
| 5% | ₹5,200 |
| 20% | ₹20,800 |
| 30% | ₹31,200 |
Units bought before 1 April 2023 sit under the older treatment: held for more than 24 months, the gain is long-term and taxed at 12.5% without indexation; held for 24 months or less, it is taxed at your slab rate. Indexation on these units was withdrawn for transfers on or after 23 July 2024.
Your consolidated account statement carries the purchase date of every unit you own, and that date is what decides which side of the line a holding falls on.
05 — Hybrid funds and everything in between
There is no separate hybrid category in the Income-tax Act. A hybrid scheme is taxed by what it actually holds, measured against the same tests:
| Scheme holds | Taxed as |
|---|---|
| More than 65% in domestic equity | Equity-oriented — 20% / 12.5% |
| More than 65% in debt and money market instruments | Specified fund — slab rate |
| Neither of the above | Long-term after 24 months at 12.5%, otherwise slab rate |
That middle row changed on 1 April 2026. The definition of a "specified mutual fund" was narrowed to schemes holding more than 65% in debt and money market instruments, which moved gold and international fund-of-funds out of the slab-rate net and into the third row. If you hold either, the treatment you read about in 2024 is no longer the treatment that applies.
Aggressive hybrid schemes generally clear the 65% equity test; conservative hybrid schemes generally do not. Check the scheme document rather than assuming from the name.
06 — Every SIP instalment is a separate purchase
This is the mechanic that catches most people, and it is worth understanding before you redeem rather than after.
A SIP is not one investment. Each instalment buys units on its own date, and each instalment starts its own holding-period clock. When you redeem, units are taken out on a first-in, first-out basis — the oldest units go first.
So an investor who started an equity SIP in October 2024 and redeems the whole folio in September 2026 will find the position split: the instalments from October 2024 to September 2025 have crossed twelve months and are long-term, while everything from October 2025 onwards is still short-term and taxed at 20%. A single redemption can produce both kinds of gain in the same transaction.
The same logic applies to an ELSS SIP, where each instalment also serves its own three-year lock-in independently.
07 — Dividends are taxed as income
If you hold the IDCW option — what used to be called the dividend option — the payout is added to your income and taxed at your slab rate. This has been the position since April 2020; the older regime, where the fund paid the tax and the payout reached you tax-free, is long gone.
The fund house deducts TDS at 10% under Section 194K where your IDCW from that fund house crosses ₹10,000 in a financial year. TDS is not the final tax. It is a credit against what you eventually owe, and if your slab is above 10% the balance is still payable.
08 — If you are an NRI
The rates above are the same, but the collection mechanism is not. For non-residents, the fund house deducts TDS on the capital gain at the time of redemption rather than leaving it to be paid later. Where a Double Taxation Avoidance Agreement gives a lower rate, claiming it needs a Tax Residency Certificate on file. Missing PAN details pull in higher rates under Section 206AA.
09 — What this means in practice
None of the above tells you when to sell. What it does tell you is that the tax position is a function of things you can see in advance — the fund's holding pattern, your purchase dates, and which financial year a redemption falls in. All three are on your consolidated account statement before you act, and none of them are visible after the fact.
The single most useful habit is to look at the purchase dates behind a holding before redeeming it, rather than treating the folio as one block. The second is to remember that the ₹1,25,000 exemption is annual and does not accumulate.
Bottom Line
Tax does not change whether an investment was a good idea, but it does change what you keep. Equity gains are taxed at 20% below twelve months and 12.5% above ₹1,25,000 beyond that. Debt gains bought after April 2023 are taxed at your slab rate whenever you sell. Hybrid schemes follow whatever they actually hold. And every SIP instalment carries its own clock, which is why a single redemption can be taxed two different ways at once.
This article is for educational purposes only and is not tax or investment advice. Tax rules described here reflect the position as at September 2026 and can change with any Finance Act. Individual circumstances differ — please consult a qualified tax professional before acting on anything above.
About the Author
Hariprasath Loganathan NISM-Certified MF Distributor | Foundation Wealth
I am a certified financial expert on Mutual Funds, NPS, and Fixed Deposits. My approach is simple — educate first, plan next. I believe that when you understand why you're investing, you stay committed through market ups and downs. I combine structured financial literacy with personalised, goal-based investment planning.
Educate. Plan. Grow.
📧 hariprazath@gmail.com 📞 +91 9944060203 🌐 https://foundationwealth.in