Mutual Fund Taxation in India (FY 2025–26): Updated After July 2024

The July 2024 Union Budget made some of the biggest changes to mutual fund taxation in recent years.

If you invest in equity, debt, hybrid, or even gold mutual funds, the way your gains are taxed has shifted. For many investors, these updates could mean paying more tax on short-term gains, losing indexation benefits, or facing new holding-period rules.

This guide explains the changes with tables and examples, so you’ll know exactly how your funds are taxed in FY 2025–26 and what it means for your returns.

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Mutual Fund Taxation in India - Before vs After 23 Jul 2024

Notes:
– All tax rates above are exclusive of surcharge and 4% Health & Education Cess.
– NRIs are subject to TDS on capital gains as per Sections 111A/112A/115E, unlike residents.

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Dividend Taxation on Mutual Funds

When a mutual fund declares a dividend, it doesn’t come from “extra profits” the way company dividends do. Instead, the fund’s NAV (Net Asset Value) reduces by the amount of dividend declared.

Example:
If an equity fund has a NAV of ₹22 and declares a dividend of ₹3 per unit, the NAV will fall to ₹19 after the payout. The value of your holding stays the same - only part of it is paid out as cash.

How Are Dividends Taxed?

• Tax in your hands: Dividends are added to your income and taxed at your applicable income tax slab rate.
• TDS (Tax Deducted at Source):
  • AMCs deduct 10% TDS if your total dividends from that AMC exceed ₹5,000 in a financial year.
  • No TDS if dividends are below ₹5,000.
• Residents vs NRIs:
  • For resident Indians, TDS is only on dividends (not on capital gains).
  • For NRIs, both dividends and capital gains are subject to TDS as per applicable sections.

Investor Takeaway

• Dividend plans are not tax-efficient if you fall in the 30% slab, since the payout is fully taxed at that rate.
• Many long-term investors prefer growth plans, where profits stay invested and only get taxed when you redeem.

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Taxation by Fund Type

1. Equity-Oriented Mutual Funds (≥65% Indian equity)

These are funds where at least 65% of assets are in Indian equities. This includes:

• Large-cap, mid-cap, and small-cap equity funds
• Thematic and sector funds
• Arbitrage funds
• Aggressive hybrid funds (if equity ≥65%)

Tax rules (from 23 July 2024):

• Short-Term Capital Gains (STCG):
  If units are held for 12 months or less → Taxed at 20% (+ surcharge & 4% cess)
• Long-Term Capital Gains (LTCG):
  If units are held for more than 12 months → Taxed at 12.5%
  Annual exemption: first ₹1.25 lakh of LTCG across all equity shares and equity-oriented funds is tax-free

Example (Equity Fund):
Dr. Mehta invests ₹5,00,000 in a large-cap fund in August 2024.
– Sells in March 2025 (after 7 months) → STCG = slab doesn’t apply; taxed flat at 20%.
– Sells in September 2026 (after 25 months) → LTCG = taxed at 12.5%, but he can use the ₹1.25 lakh exemption before tax applies.

Tip: Growth option in equity funds is usually tax-friendlier unless you need regular income.

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2. Debt-Oriented Mutual Funds (≤35% equity)

These include liquid funds, money market funds, G-Sec funds, corporate bond funds, floater funds, and conservative hybrid funds with ≥65% debt.

Rule depends on purchase date:

• Units bought on/after 1 April 2023:
  • All gains are taxed at your slab rate, regardless of holding period
  • No LTCG benefit, no indexation
• Units bought on/before 31 March 2023:
  • Sold before 23 July 2024:
    • Holding ≤36m → STCG at slab
    • Holding >36m → LTCG at 20% with indexation
  • Sold on/after 23 July 2024:
    • Holding ≤24m → STCG at slab
    • Holding >24m → LTCG at 12.5% (no indexation)

Example (Debt Fund):
An investor in the 30% tax slab buys ₹10,00,000 of a corporate bond fund in Feb 2023.
– If sold in Aug 2025 (after 30 months): LTCG @12.5% (no indexation).
– If the same fund was bought in May 2023: even after 5 years, tax = slab rate (30%).

Tip: Debt funds bought after April 2023 are less tax-efficient for high-bracket investors compared to equity or hybrid options.

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3. Hybrid Funds (35–65% equity)

These “middle-lane” funds balance equity and debt between 35% and 65%. Examples: balanced hybrid funds with 40–60% equity, some multi-asset funds.

Tax rules (from 23 July 2024):

• STCG: Holding period ≤24 months → taxed at your slab rate
• LTCG: Holding period >24 months → taxed at 12.5% (no indexation)

Example (Hybrid Fund):
Dr. Shah invests ₹6,00,000 in a hybrid fund with 45% equity in Aug 2023.
– If redeemed in July 2025 (after 23 months) → STCG, taxed at slab rate.
– If redeemed in Oct 2026 (after 38 months) → LTCG @12.5%.

Tip: Hybrids can smooth returns, but the new 24-month slab rule makes short-term exits tax-costly.

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4. International Funds, Gold Funds & Fund of Funds

These are non-equity funds, as they don’t meet the 65% Indian equity test. Examples: International equity FoFs, Gold ETFs, Gold FoFs, Multi-asset FoFs.

Tax rules (from 23 July 2024):

• STCG: Holding ≤24 months → taxed at your slab rate
• LTCG: Holding >24 months → taxed at 12.5% (no indexation)

Example (Gold ETF):
Dr. Nair invests ₹3,00,000 in a Gold ETF in Jan 2024.
– Redeems in Jan 2025 (after 12 months) → STCG @ slab rate.
– Redeems in Feb 2027 (after 37 months) → LTCG @12.5%.

Tip: Gold and international funds are good diversifiers, but don’t expect special tax treatment anymore.

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Loss Set-Off & Carry Forward

Just like gains, losses from mutual funds also have specific tax rules. Understanding them helps you plan redemptions better and avoid losing tax benefits.

Rules for Setting Off Losses

• Short-Term Capital Loss (STCL): Can be set off against both STCG and LTCG in the same year.
• Long-Term Capital Loss (LTCL): Can be set off only against LTCG, not against STCG.

Carry Forward of Losses

• If your capital loss can’t be fully adjusted in the same year, you can carry it forward for up to 8 assessment years.
• To claim this benefit, you must file your Income Tax Return (ITR) within the due date each year.

Example

Suppose Dr. Arora has:

• ₹1,50,000 LTCG from equity funds, and
• ₹70,000 STCL from a hybrid fund.

Here’s how it works:
– The ₹70,000 STCL can be set off against LTCG.
– Net taxable LTCG = ₹80,000.
– Since LTCG exemption limit is ₹1.25 lakh, no tax is payable in this case.

Takeaway: Properly reporting and carrying forward losses can save significant tax over the years. Many investors miss filing on time and lose this benefit.

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Quick Reference Table

Notes:
– All tax rates are exclusive of surcharge and 4% Health & Education Cess.
– NRIs face TDS on both dividends and capital gains as per Sections 111A, 112A, 115E.
– STT (Securities Transaction Tax) applies on redemption of equity-oriented funds, not on debt funds.

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FAQs

Q1. What is the tax rate on equity mutual funds in India?

STCG (≤12 months): 20% (+ surcharge & 4% cess)
LTCG (>12 months): 12.5% (+ surcharge & 4% cess), with ₹1.25 lakh annual exemption across all equity investments.

Q2. Are dividends from mutual funds tax-free?

No. Dividends are taxed at your slab rate. AMCs deduct 10% TDS if the total dividend payout per financial year from that AMC exceeds ₹5,000.

Q3. What is the taxation on debt mutual funds bought after 1 April 2023?

All gains are taxed at your income tax slab rate, regardless of holding period. There is no LTCG concept and no indexation benefit.

Q4. How are hybrid mutual funds taxed?

If equity portion is 35–65%: Held ≤24 months → STCG taxed at slab; Held >24 months → LTCG @12.5% (no indexation).
If equity portion is ≥65%: taxed like equity funds (12m/20%/12.5%).

Q5. Can I adjust losses from mutual funds against other capital gains?

Yes.
Short-term capital loss (STCL): can be set off against both STCG and LTCG.
Long-term capital loss (LTCL): can only be set off against LTCG.
Losses can be carried forward for up to 8 years if you file your ITR on time.

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Key Takeaway

Mutual fund taxation in India has changed significantly since 23 July 2024.

• Equity funds are now taxed at 20% STCG and 12.5% LTCG (with ₹1.25 lakh exemption).
• Debt funds bought after April 2023 offer no long-term tax advantage - all gains are taxed at your slab.
• Hybrid, gold, and international funds follow the 24-month rule with 12.5% LTCG.
• Dividends remain taxed at slab, with 10% TDS beyond ₹5,000 per AMC.

Smart tax planning can make a big difference to your net returns.

Ready to see how taxation impacts your portfolio?

• Book a consultation with a Finnovate expert to structure your investments tax-smart.

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Disclaimer: This article is for informational purposes only and does not constitute financial, investment, or policy advice.