How are mutual fund gains taxed in 2026-27?

How a mutual fund gain is taxed depends on two things: the type of fund and how long you held the units. The rates below apply to units redeemed or switched on or after 23 July 2024, when the Finance (No. 2) Act, 2024 changed them. The Income-tax Act, 2025 carries them into tax year 2026-27.

• Equity-oriented funds (at least 65% in Indian shares, including most equity index funds and equity ETFs): gains on units held for 12 months or less are short-term and taxed at 20% (formerly Section 111A). Gains on units held longer are long-term and taxed at 12.5% on the part above ₹1.25 lakh a year (formerly Section 112A).
• Debt-oriented funds bought on or after 1 April 2023: gains are added to your income and taxed at your slab rate, however long you hold the units. There is no long-term rate and no indexation.
• Debt funds bought before 1 April 2023: units held for more than 24 months are long-term and taxed at 12.5% without indexation; shorter holdings are taxed at your slab rate.

A 4% health and education cess is added to the tax, and a surcharge can apply at high incomes. The ₹1.25 lakh exemption is one limit per person per year, shared across all your listed shares, equity funds and equity ETFs, not a separate limit for each fund.

The table shows the tax, including cess but before any surcharge, on a year's gains from equity funds. It assumes no other equity gains in the year, so the full exemption is available for the long-term column.

• Long-term gains up to ₹1.25 lakh in a year are tax-free; a gain of ₹5 lakh pays ₹48,750.
• Selling the same ₹5 lakh gain a few weeks too early, inside 12 months, costs ₹1,04,000, about 2.1 times as much.
• The new regime rebate does not cover tax on gains taxed at these special rates, even when your other income is low.

Resident individuals whose other income is below the basic exemption limit can usually set the unused part against these gains. Dividends from any fund are different: they are added to your income and taxed at your slab rate.

Every SIP instalment buys a separate set of units with its own purchase date. When you redeem, the units bought first are treated as sold first (first in, first out). So an SIP that started more than a year ago can produce a mix of long-term and short-term gains in one redemption.

Take an SIP of ₹10,000 a month started on 5 April 2025, redeemed in full on 19 October 2026, assuming each instalment grew at 12% a year. Of the 19 instalments, only 7 were held for more than 12 months.

The long-term part falls within the yearly exemption, so all of the tax here comes from the short-term units. Redeeming only the oldest units, and waiting for the rest to cross 12 months, would have reduced it. ELSS units add a further rule: each instalment is locked in for three years from its own date.

The exemption does not carry forward. If you hold long-term gains and do not sell, the year's ₹1.25 lakh is lost. Some investors therefore redeem enough units each year to book long-term gains up to the limit and reinvest the money soon after. The cost of the new units becomes the higher price, so future taxable gains are smaller. Used in full every year, this saves up to ₹16,250 a year in tax.

1. Redeeming a whole SIP folio when only some units are long-term. Sell the oldest units first, or wait.
2. Assuming debt funds still get indexation or a lower long-term rate. Units bought from April 2023 are taxed at your slab rate.
3. Treating a switch between schemes as tax-free. A switch is a redemption and a fresh purchase, so it is taxed.
4. Forgetting that losses can help. Capital losses can be set off against gains under the usual rules and carried forward if you file your return on time.
5. Leaving the exemption unused year after year on a large long-term portfolio.