Capital Gains Tax on Mutual Funds FY 2026-27: LTCG, STCG, and the ₹1.25 Lakh Exemption

By Nitish Bharadwaj · Published Jun 22, 2026 · 6 min

After Budget 2024 revamped the capital gains framework, equity mutual fund investors now pay 20% on short-term gains and 12.5% on long-term gains above ₹1.25 lakh — rates confirmed unchanged for FY 2026-27. Debt fund investors who bought after April 2023 pay at their slab rate regardless of how long they hold. Getting these numbers right — and timing redemptions smartly around the ₹1.25 lakh annual exemption — can save several thousand rupees at tax time. This guide covers every fund type with a comparison table.

After the Budget 2024 overhaul and with no further changes in Budget 2025, the capital gains tax framework for mutual funds is settled for FY 2026-27. Two numbers define the landscape: 20% on short-term equity gains and 12.5% on long-term equity gains above ₹1.25 lakh. For debt funds bought after April 2023, the picture is simpler — and less favorable. Here is the complete, fund-by-fund breakdown.

Equity Funds: The Two-Rate System

Equity-oriented mutual funds — those investing at least 65% of their assets in Indian equities — are governed by Sections 111A and 112A of the Income Tax Act. Sell within 12 months of purchase: pay 20% Short-Term Capital Gains tax (Section 111A). Hold for more than 12 months: pay 12.5% Long-Term Capital Gains tax on gains above ₹1.25 lakh (Section 112A). Both rates were introduced by Budget 2024, effective July 23, 2024, and confirmed unchanged for FY 2026-27 by the Income Tax Department. No indexation benefit is available on equity fund gains.

The ₹1.25 Lakh Exemption: Use It Every Year

Every financial year, you can redeem equity mutual fund units with up to ₹1.25 lakh in long-term gains completely tax-free. Gains above that threshold are taxed at 12.5%. The exemption resets at the start of each financial year — unrealised gains from earlier years are not counted against the current year's limit. If you are sitting on ₹3 lakh of unrealised LTCG, redeeming ₹1.25 lakh worth before March 31 and reinvesting immediately in the same fund resets your cost basis upward — tax-free. Done across three years, you pay zero instead of ₹21,875 (12.5% on ₹1.75 lakh) in one shot. India has no wash-sale rule, so immediate reinvestment is fully permitted.

Debt Funds: The April 2023 Divide

The Finance Act 2023 removed the favorable LTCG tax treatment from debt mutual funds for investments made on or after April 1, 2023. All gains on such units — whether held one month or five years — are added to your gross total income and taxed at your applicable slab rate. In the 30% bracket, the effective rate (with 4% health and education cess) is 31.2%. For units purchased before April 1, 2023, gains after a 24-month holding period qualify as LTCG and are taxed at 12.5% without indexation — the indexation benefit that once made long-held debt funds near-zero-tax propositions no longer applies.

Hybrid Funds: Equity Allocation Is Everything

The tax treatment of hybrid mutual funds — those blending equity and debt — depends entirely on whether the fund maintains at least 65% of its assets in Indian equities. Aggressive hybrid and balanced advantage funds that stay above 65% equity are treated as equity-oriented: 20% STCG, 12.5% LTCG above ₹1.25 lakh. Funds below the threshold — such as conservative hybrid and most multi-asset allocation funds — fall into the debt tax bucket and are taxed at slab rate for post-April 2023 investments. Check the fund's latest monthly portfolio disclosure on the AMC website before assuming which category applies.

SIP Investors: Each Instalment Has Its Own Holding Clock

For Systematic Investment Plans, every monthly instalment is a separate investment with its own purchase date. If your SIP started 18 months ago, only the units from months 1 through 6 have crossed the 12-month mark and qualify for LTCG rates — the remaining 12 months of units are still STCG. Fund platforms and brokerages compute this automatically in your annual Tax P&L statement. Download it before filing your ITR to avoid manual errors; do not attempt to compute lot-wise gains by hand.

Before this lot-wise capital gains calculation even applies, check whether the redemption attracts an exit load — the fee is deducted first, and only the net redemption amount then flows into the capital gains computation above. Exit load follows the same FIFO, lot-wise logic as capital gains, which is exactly why a large lump-sum redemption from an old SIP can still trigger a load on its most recent instalments; see our exit load guide for typical load periods by fund category.

Three Actions Before March 31

• LTCG harvest: Review equity fund holdings for unrealised long-term gains. Redeem units up to the ₹1.25 lakh annual exemption and immediately reinvest to step up your cost basis — legally tax-free.
• Loss booking: Identify loss-making positions. Short-term losses offset any capital gain; long-term losses offset LTCG. Book them before March 31 and the loss carries forward for up to 8 years.
• CAS reconciliation: Download your Consolidated Account Statement from CDSL (mycams.com) or NSDL (karvy.com) and cross-check it against your fund house tax P&L report. Discrepancies are common when you hold funds across multiple platforms.

One choice made at the time of investment affects when this entire tax framework applies to you: whether your fund units are held under the Growth option or the IDCW (formerly "Dividend") option. See our Growth vs IDCW comparison for why IDCW payouts are taxed as income every year they are declared, while Growth defers tax until you actually redeem.

Not every capital asset gets this two-rate, exemption-and-set-off treatment. Crypto and other Virtual Digital Assets sit completely outside this framework — a flat 30% on every rupee of gain regardless of holding period, with no set-off allowed even between different VDAs and no loss carry-forward at all. See our crypto tax guide for the full breakdown of how much harsher VDA taxation is by comparison.

REIT and InvIT units sit somewhere between these two extremes — the capital gains portion follows a similar STCG/LTCG structure to equity funds, but the periodic payouts themselves are taxed component by component rather than as a single dividend or growth figure. See our REIT and InvIT taxation guide for how the interest, dividend, rental, and return-of-capital pieces of a distribution are each taxed differently.