Income Tax on Mutual Funds India 2025-26 — LTCG, STCG, Dividend and TDS

Mutual fund investments are taxed differently depending on the type of fund (equity vs. debt) and the holding period. The Finance Act 2024 significantly revised capital gains tax rates applicable from July 23, 2024. Here is the complete guide to income tax on mutual fund investments for FY 2025-26 (AY 2026-27).

Equity Mutual Funds (ETFs, Equity Funds, ELSS)

Funds that invest at least 65% in equity shares of Indian companies are classified as "equity-oriented funds" for tax purposes.

• Short-Term Capital Gains (STCG): Held for 12 months or less → taxed at 20% flat (Section 111A) — no basic exemption benefit
• Long-Term Capital Gains (LTCG): Held for more than 12 months → taxed at 12.5% flat (Section 112A) — with exemption of ₹1.25 lakh per financial year (enhanced from ₹1 lakh w.e.f. July 23, 2024)
• LTCG is calculated without indexation (cost inflation indexing not available for equity MFs)

Debt Mutual Funds (Bond Funds, Liquid Funds, FMPs)

Funds with less than 65% equity exposure are "non-equity" or "debt-oriented" funds.

• Gains from debt mutual funds — both short-term and long-term — are taxed at slab rates (as per your income tax bracket) from April 1, 2023 onwards
• No LTCG rate benefit or indexation available for debt MFs purchased after April 1, 2023
• Debt MFs purchased before April 1, 2023 (grandfathered): LTCG at 20% with indexation (for units held beyond 3 years)

Hybrid Funds

• Equity-oriented hybrid funds (65%+ equity): Same as equity funds above
• Debt-oriented hybrid funds (<65% equity): Same as debt funds — slab rate taxation

Dividend from Mutual Funds

• Dividend declared by mutual funds is taxed in the investor's hands at slab rates
• TDS under Section 194K: 10% TDS on dividend exceeding ₹5,000 per year (for resident investors)
• Submit Form 15G (individuals with zero tax liability) or 15H (senior citizens) to avoid TDS

Conclusion

Mutual fund taxation in India has been significantly revised — with equity LTCG at 12.5%, STCG at 20%, and debt MF gains taxed at slab rates. SPOTON helps investors plan redemptions, harvest losses, and file accurate ITRs declaring all mutual fund transactions. Contact us for expert investment tax planning in Kerala.