How mutual funds are taxed: LTCG & STCG explained

How your mutual fund gains are taxed depends on two things: the type of fund (equity vs debt) and how long you held it. The rules changed materially in recent years — the current framework, in plain English, is below. (Rates as per current rules; always verify before filing.)

Equity funds (≥65% in Indian stocks)

• STCG (held under 12 months): 20% on the gain.
• LTCG (held 12 months or more): 12.5% on gains above ₹1.25 lakh per financial year. Gains up to ₹1.25 lakh a year are tax-free.

Debt funds (bought on/after 1 April 2023)

All gains are added to your income and taxed at your slab rate, regardless of holding period — the old long-term rate and indexation benefits were removed for new investments. This changed the maths for debt funds meaningfully: their edge over fixed deposits now rests on flexibility and deferral (you're taxed only when you redeem, not yearly like FD interest), not on a lower rate.

Hybrid funds

Taxed like equity if they keep ≥65% in Indian equities (aggressive hybrids, most balanced advantage funds); otherwise like debt. Check the fund's category on its detail page before assuming.

A worked example

You invest ₹10 lakh in an equity fund. Fourteen months later it's worth ₹12 lakh and you redeem. Your gain is ₹2 lakh and it's long-term (held over 12 months). The first ₹1.25 lakh is exempt; the remaining ₹75,000 is taxed at 12.5% = ₹9,375. Had you redeemed at eleven months instead, the entire ₹2 lakh would be short-term, taxed at 20% = ₹40,000. Three extra months of patience cut the tax bill by more than three-quarters — holding period is the single biggest tax lever you control.

Rules worth knowing

• Tax arises only on redemption or switch — never while you stay invested. Growth-option compounding is untaxed until you sell.
• Every switch counts as a sale — including STP transfers and switching from regular to direct plans of the same fund.
• SIPs are taxed instalment-by-instalment — each instalment has its own purchase date and its own 12-month clock (first-in-first-out on redemption).
• IDCW payouts are taxed at your slab rate in the year received — one reason Growth usually beats IDCW.
• You can deliberately use the ₹1.25 lakh exemption every year — see tax harvesting.

→ Want regular income tax-efficiently? See SWP. (General information, not tax advice — confirm with a professional.)