Investing in mutual funds is one of the most popular ways for Indians to build wealth, but the real return on your investment is what stays in your pocket after the taxman takes his share. In 2026, the rules for Long-Term Capital Gains (LTCG) on mutual funds are designed to favor those who stay invested for the long haul, though the rates have seen some recent updates.

The logic is simple: if you hold your units for a certain period, the government treats you as a serious investor rather than a quick-profit trader. This holding period is the secret sauce that determines whether you pay a flat lower rate or your full income tax slab rate. Whether you are investing in an equity fund for your child’s education or a debt fund for stability, knowing how to calculate your tax can help you plan your withdrawals much better.

Mutual Fund Taxation: Equity vs. Debt (2026 Rules)

The tax treatment depends entirely on the category of the mutual fund. The rules for 2025-2026 are summarized below:

Fund Category

What is Long-Term?

LTCG Tax Rate (2026)

Indexation Benefit?

Equity-Oriented Funds (>65% Equity)

> 12 Months

12.5%

Debt Funds (Bought before April 1, 2023)

> 24 Months

12.5%

No (New Rule)

Debt Funds (Bought after April 1, 2023)

Never

Taxed at Slab Rate

Hybrid/Balanced Funds (>65% Equity)

> 12 Months

12.5%

The ₹1.25 Lakh Golden Buffer

For Equity Mutual Funds, the first ₹1.25 Lakh of your total long-term profit in a financial year is completely tax-free. This is a combined limit for all your equity-related profits (Stocks + Mutual Funds). You only pay the 12.5% tax on the amount that crosses this limit.

How to calculate LTCG on Equity Mutual Funds

To calculate your tax, follow this simple 3-step process:

Find the Total Profit: Sale Price - Purchase Price.
Apply the Exemption: Total Profit - ₹1,25,000.
Calculate Tax: Taxable Profit × 12.5% (+ 4% Cess).

Calculation Example:

Let’s say you sold units of a Blue-chip Equity Fund in February 2026.

Invested Amount (2022): ₹5,00,000
Sale Value (2026): ₹7,50,000
Total Long-Term Profit: ₹2,50,000
Exemption Limit: ₹1,25,000
Taxable Amount: ₹2,50,000 - ₹1,25,000 = ₹1,25,000
Final Tax (12.5%): ₹15,625 (+ 4% Cess = ₹16,250)

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Latest Exemptions & Saving Strategies

Even with the 12.5% tax, there are legal ways to reduce your burden:

1. Tax Loss Harvesting

If you have some mutual funds that are currently in a loss, you can sell them to book that loss. This loss can be subtracted from your total profits, bringing your taxable amount down. You can then reinvest the money back into the market.

2. The Grandfathering Clause

If you bought equity mutual funds before January 31, 2018, any profit you made up to that date is completely tax-free. Only the growth after Jan 2018 is used to calculate your LTCG.

3. Section 54F Exemption

If you sell a huge amount of mutual fund units to buy a Residential House, you can claim an exemption on the capital gains tax under Section 54F, provided you follow the reinvestment timelines.

Frequently Asked Questions (FAQs)

Is the ₹1.25 Lakh exemption separate for each fund?

No. It is a total annual limit for all your equity gains combined. If you make ₹1L profit from Fund A and ₹1L from Fund B, your total is ₹2L, and you pay tax on ₹75,000.

What happens to Debt Funds bought recently?

Any debt fund (where equity is less than 35%) bought after April 1, 2023, is always taxed at your Income Tax Slab. There is no Long-Term benefit for these anymore.

Does the 12.5% rate apply to ELSS (Tax Saving) funds?

Yes. ELSS funds have a 3-year lock-in. When you sell them after 3 years, they are treated as Equity Mutual Funds and taxed at 12.5% above the ₹1.25L limit.

What is Switching in Mutual Funds?

If you move money from a Growth plan to a Dividend plan (or vice versa), it is considered a sale. You have to calculate and pay capital gains tax on that switch.

Do I pay tax even if I don't withdraw cash but just move funds?

Yes. Any Switch or Redemption is a taxable event in the eyes of the Income Tax department.

Is there TDS on Mutual Fund withdrawals for Indian residents?

No. There is no TDS on capital gains for resident Indians. You are responsible for calculating and paying the tax yourself.

Can I carry forward my mutual fund losses?

Yes. If you have a Long-Term Capital Loss, you can carry it forward for 8 years to balance it against future gains.

What about Dividends from Mutual Funds?

Dividends (now called IDCW) are added to your total income and taxed at your Income Tax Slab Rate. There is also a 10% TDS if your dividends from one AMC exceed ₹10,000 in a year.

Is there any exemption for senior citizens?

There is no special rate for senior citizens, but since their basic exemption limit is higher (up to ₹3 Lakhs or ₹5 Lakhs), they might pay less overall tax if their total income is low.

How is the 12.5% rate better than the old 10%?

While the rate increased from 10% to 12.5% in 2024, the exemption limit also increased from ₹1L to ₹1.25L. For small investors with profits around ₹2 Lakhs, the actual tax amount hasn't changed much.

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