How much you keep from a mutual fund depends heavily on what kind of fund it is and how long you held it. Budget 2024 changed several of the numbers, so here's the current picture. (Tax rules change; treat this as a guide and confirm the latest before acting.)
Equity funds (65%+ in equities)
- Short-term (held 12 months or less): gains taxed at 20% (raised from 15% in Budget 2024, for transfers on or after 23 July 2024).
- Long-term (held over 12 months): taxed at 12.5% (raised from 10%), but only on gains above ₹1.25 lakh per financial year (the exemption was lifted from ₹1 lakh). No indexation.
The ₹1.25 lakh exemption is per year, per taxpayer — using it annually is a legitimate way to reduce tax (see tax-loss harvesting).
Debt funds (specified mutual funds, under 35% equity)
For units bought on or after 1 April 2023: the entire gain is taxed at your slab rate, regardless of holding period. There's no long-term benefit and no indexation anymore. This is the single biggest recent change — it removed the old tax edge debt funds had over fixed deposits.
Hybrid funds — it depends on the equity content
Hybrids are taxed according to how much equity they hold:
- 65%+ equity (e.g. aggressive hybrid) → taxed like an equity fund.
- Lower equity (conservative hybrid, many balanced-advantage variants) → taxed like a debt fund (slab).
Always check a hybrid's equity allocation before assuming its tax treatment.
Gold, international and fund-of-funds
This corner changed too. Broadly, from FY 2025-26, certain gold funds, international funds and fund-of-funds held over 24 months qualify for 12.5% LTCG, with shorter holdings taxed at slab. The rules here have shifted more than once recently, so verify the current treatment for the specific fund.
Dividends (IDCW option)
Dividends from mutual funds are taxed at your slab rate in your hands, with TDS deducted by the fund. For most investors the growth option is more tax-efficient than the dividend (IDCW) option.
Two things people forget
- A "switch" is a sale. Moving from one scheme to another (including regular → direct) is a redemption + fresh purchase — a taxable event with possible exit load.
- Holding period is measured per purchase. Each SIP instalment has its own clock for short- vs long-term.
Practical takeaways
- Hold equity funds beyond 12 months to get the lower LTCG rate.
- Use the ₹1.25 lakh equity exemption each year.
- Remember debt funds are now slab-taxed — weigh that against FDs and equity when choosing.
- Favour growth over dividend options for tax efficiency.