How mutual funds are taxed in 2026

Tax is where most beginners' confidence runs out. The rules changed in 2024, and the Income-tax Act, 2025 replaced the old 1961 Act from 1 April 2026, renumbering sections along the way. None of this is as hard as it sounds. For a mutual fund investor there are only a handful of rules to know, and once you know them you can plan redemptions calmly rather than fearing the tax man.

Equity funds: the two rates to remember

A fund counts as an equity fund for tax if at least 65 percent of its money is in Indian shares. Most equity schemes and aggressive hybrid funds qualify. Gains on these are taxed by how long you held the units.

• Held 12 months or less: short-term capital gain, taxed at 20 percent.
• Held more than 12 months: long-term capital gain, taxed at 12.5 percent, but only on the part of your total long-term equity gains in a year that exceeds ₹1.25 lakh.

That ₹1.25 lakh exemption resets every financial year and applies to your combined long-term gains across all equity funds and listed shares. A small, steady investor may never pay long-term tax at all. Cess applies on top of these rates, as it does on all income tax.

Had the same units been sold at eleven months, the whole ₹2 lakh would have been short-term and the tax about ₹40,000. Holding the extra month would have saved roughly ₹30,000. Dates matter.

Debt funds and other categories: taxed as income

Debt funds bought on or after 1 April 2023 do not get long-term treatment at all. Whatever the holding period, the gain is added to your income and taxed at your slab rate, the same as bank interest. If you are in the 30 percent slab, a debt fund gain is taxed at 30 percent. Units bought before that date follow older rules and are worth checking separately. Gold funds, international funds and conservative hybrids each have their own treatment under the current rules, and the capital gains statement from your registrar will classify them for you. When in doubt, go by what that statement says, as notified by SEBI and the tax department.

ELSS and the old-regime deduction

Equity linked savings schemes are equity funds with a three-year lock-in. Investments up to ₹1.5 lakh a year qualify for a deduction under what used to be Section 80C and is now Section 123 of the Income-tax Act, 2025. Two conditions matter. The deduction is available only if you file under the old tax regime; the new regime, which is the default, does not allow it. And each SIP instalment has its own three-year lock, so a monthly ELSS SIP started this April will have its last instalment unlocked three years after next March. Gains after the lock-in are taxed like any other equity fund.

IDCW, stamp duty and the things people forget

Some schemes offer an IDCW option, which pays out part of your money periodically. Those payouts are taxed at your slab rate in the year you receive them, and the fund house deducts 10 percent TDS once payouts exceed ₹10,000 in a year. For most investors the growth option is simpler: nothing is paid out, nothing is taxed until you redeem, and you control the timing.

Two small items round out the picture. Every purchase carries stamp duty of 0.005 percent, deducted from the amount before units are allotted; on a ₹3,000 SIP that is 15 paise. And exit load, charged by some schemes on early redemption, goes back into the scheme and is not a tax, but it does reduce what you receive. There has been no entry load on mutual funds since 2009.