Capital Gains Tax on Mutual Funds in India
If you've invested in mutual funds in India, understanding capital gains tax is not optional — it directly determines how much money you actually keep after selling. And with Budget 2024 changing both the LTCG and STCG rates, many investors are now paying more tax than they realise.
In this guide, I'll break down exactly how capital gains tax works on mutual funds for FY 2026–27 (AY 2027–28) — with real number examples, a clear rate table, and a free calculator to find your tax liability in under 60 seconds.
STCG vs LTCG rules · Budget 2024 rate changes · The ₹1.25L threshold · Equity vs debt tax treatment · How SIP taxation works · Real calculation examples
What Is Capital Gains Tax on Mutual Funds?
When you sell mutual fund units for more than you paid, the profit is called a capital gain. The Indian government taxes this profit, and the rate depends on two things: what type of fund you're in, and how long you held the units. Get these right and you can save lakhs in tax over a lifetime of investing.
STCG vs LTCG: The Holding Period Rules
The same fund sold on different dates can attract completely different tax rates. Here's how the holding period determines your bracket:
| Fund Type | LTCG Threshold | STCG Rate | LTCG Rate | Threshold |
|---|---|---|---|---|
| Equity Mutual Funds | 12+ months | 20% | 12.5% | ₹1.25L/yr |
| Debt Mutual Funds (Sec 50AA, post Apr 2023)† | No LTCG benefit | Slab rate | Slab rate | None |
| Hybrid / Balanced Funds (65%+ equity) | 12+ months | 20% | 12.5% | ₹1.25L/yr |
| Gold ETF (domestic) | 24+ months | Slab rate | 12.5% | None |
| International / Overseas Funds | Varies — check scheme classification | None | ||
† The definition of "specified mutual fund" under Section 50AA was revised for FY 2026–27, effective 1 April 2026. If your fund's classification changed around that date, check its current status with your AMC or a tax professional rather than relying on older references.
Tax treatment of international/overseas mutual funds can depend on the scheme structure, portfolio composition, acquisition date and whether Section 50AA applies. Check the tax classification of the specific scheme rather than assuming equity-mutual-fund tax treatment.
These rates have been in effect since 23 July 2024: STCG rose from 15% → 20%, LTCG rose from 10% → 12.5%, and the tax-free threshold increased from ₹1L → ₹1.25L. They remain the applicable rates for FY 2026–27 (AY 2027–28). If you're using a tool or reference dated before July 2024, double-check it reflects these current numbers.
The ₹1.25 Lakh LTCG Threshold
The first ₹1,25,000 of long-term capital gains from equity mutual funds each financial year is completely tax-free. Only gains above this are taxed at 12.5%. This threshold resets every April 1st, which is why some investors use a strategy commonly called tax-loss/gains harvesting. The ₹1.25 lakh threshold is aggregate across all your eligible LTCG for the financial year — it's not ₹1.25 lakh per fund. If you hold multiple equity funds and sell several at a long-term gain in the same year, all those gains are added together and the ₹1.25 lakh threshold applies once to the combined total.
The idea: if unrealised LTCG is approaching ₹1.25L before March 31, an investor may choose to sell and immediately reinvest, booking the gain within the tax-free limit and resetting the cost basis for future sales. This is an educational illustration of how the threshold works, not a recommendation to act — it involves real costs (brokerage, exit loads if applicable, and a brief period out of the market) and the tax benefit needs to be weighed against those before deciding whether it's worth doing in your own situation.
If your total income is under ₹12 lakh, the Section 87A rebate can bring your regular income tax to zero under the new regime — but it does not apply to capital gains taxed at special rates, such as equity STCG (Section 111A) and equity LTCG (Section 112A). Even if your salary and other income comfortably clear the rebate threshold, you can still owe capital gains tax on top of that. There's a separate, narrower relief that sometimes gets confused with this: if your total income excluding capital gains falls below the basic exemption limit (₹4L under the new regime; ₹2.5L–₹5L under the old regime depending on age), the unused portion of that exemption can be set off against your capital gains before tax is calculated — this mainly helps people with little or no other income, such as retirees living primarily off investments. This is a technical area where the exact numbers matter; if it materially affects your return, a Chartered Accountant can confirm the specifics for your situation.
Real Calculation Examples
Example 1: Equity fund held 2 years (LTCG)
Example 2: Equity fund sold in 8 months (STCG)
Notice that in Example 2, even though the gain is much smaller, the tax bill is higher in proportion — simply because of early redemption. If this same ₹60,000 gain had instead qualified for LTCG treatment (assuming no other LTCG was booked that financial year), it would fall entirely within the ₹1.25L annual threshold and attract no tax at all — versus the ₹12,480 actually payable here. The comparison depends on how much of your threshold is already used elsewhere in the year, but it illustrates why holding period matters.
How SIP Taxation Works — The FIFO Method
Each monthly SIP instalment has its own purchase date and cost. When you sell, the FIFO method (First In, First Out) applies — oldest units are sold first. In practice this works in your favour: your earliest instalments cross the 12-month mark first, qualifying for lower LTCG rates before newer ones do.
Calculate Your Estimated Capital Gains Tax
Enter your purchase price, sale price, asset type, and holding period. Get your STCG/LTCG classification and estimated tax instantly — current tax rules for FY 2026-27 applied.
Use Free Capital Gains Calculator →How to Legally Reduce Your Tax
- Where consistent with your investment objective, consider the 12-month holding threshold before redeeming. The applicable tax rate can differ significantly either side of it — even one day early moves you from 12.5% LTCG to 20% STCG.
- Understand the ₹1.25L annual threshold. Some investors book gains up to this limit each March and reinvest, to use the threshold rather than let it lapse unused — weigh the transaction costs and market-timing risk against the tax saved before deciding if this fits your situation.
- Set off capital losses against gains. Short-term losses can be set off against both STCG and LTCG. Long-term losses only against LTCG.
- ELSS and Section 80C. Under the old tax regime, eligible ELSS investments can qualify for Section 80C deduction, subject to the overall ₹1.5 lakh limit. This deduction is generally unavailable under the new tax regime. LTCG treatment on redemption after the 3-year lock-in applies regardless of regime.
- Equity LTCG is 12.5% after 12 months — first ₹1.25L/year is tax-free
- Equity STCG is generally taxed at 20% when eligible units are sold within 12 months
- Gains on units covered by Section 50AA and acquired on or after 1 April 2023 are generally deemed short-term and taxed at the applicable slab rate, irrespective of holding period
- SIP units follow FIFO — oldest units qualify for LTCG treatment first
- The ₹1.25 lakh annual Section 112A threshold can create tax-harvesting opportunities, subject to transaction costs, market movement and individual circumstances