How to Calculate Capital Gains Tax on Mutual Funds

• Equity mutual fund units sold on or after 23 July 2024 attract 20% short-term tax and 12.5% long-term tax on gains above ₹1.25 lakh a year.
• Debt and other specified mutual funds bought on or after 1 April 2023 are taxed at your income tax slab rate: no indexation, no long-term benefit, whatever the holding period.
• Every SIP instalment counts as a separate purchase, so one redemption can throw up both short-term and long-term gains at once.
• The IDCW (dividend) option is taxed at your slab rate; the growth option is taxed only as capital gains when you redeem.
• Gains go in Schedule CG of ITR-2 or ITR-3; from AY 2025-26, equity LTCG up to ₹1.25 lakh can also be filed in the simpler ITR-1.

Mutual funds reward you in two ways: a slice of what the fund earns and the profit you pocket when you sell. That second part, the profit on selling or redeeming your units, is what the tax office treats as a capital gain; and the rules around it were rewritten after Budget 2024. Here is how capital gains on mutual funds are worked out and taxed under the rules that apply for FY 2025-26.

A capital gain is the profit you make when you sell an asset for more than it cost. That asset can be something physical, like a house or a plot of land, or something financial, like shares, bonds or mutual fund units. With mutual funds, the gain shows up the moment you sell or redeem your units for more than you paid. There is a small distinction worth knowing: when you sell units to another investor, you are transacting in the market, whereas when you redeem, you hand the units back to the fund house in return for their current value.

For tax purposes mutual funds fall into two broad camps, and which camp a fund sits in decides how its gains are treated. Equity-orientated mutual funds keep more than 65% of their money in equities; they chase higher stock-market returns and carry higher risk. Debt-orientated mutual funds hold less than 65% in equity and lean on instruments like bonds, aiming for steadier, lower-risk returns.

How long you stay invested, the holding period, decides whether your gain is short-term or long-term. A short-term capital gain (STCG) arises when you sell within the qualifying short-term window; a long-term capital gain (LTCG) arises when you hold beyond it. For equity mutual funds the dividing line is 12 months; sell within a year and it is STCG, or hold longer and it is LTCG.

For debt and specified mutual funds bought on or after 1 April 2023, this short-term/long-term split no longer applies; every gain is deemed short-term regardless of how long you hold and is taxed at your slab rate. The old 36-month rule and indexation survive only for debt units purchased before that date.

Also Read: Understanding the Types of Income Tax in India

Whatever the fund type, the arithmetic starts from the same building blocks:

• The sale value (what you receive on selling or redeeming)
• The cost of acquisition (what you originally paid)
• Any cost of sale tied to the transaction, such as Securities Transaction Tax (STT).

For equity funds, whether the gain is short-term or long-term, the formula is:

Capital Gains = Sale Value − Cost of Sale − Cost of Acquisition.

For debt funds, the indexation benefit has been withdrawn for units bought on or after 1 April 2023, so for those units you simply take sale value minus cost, with no inflation adjustment. Indexation now applies only to debt units purchased before 1 April 2023 that qualify as long-term.

Also Read: Capital Gains Tax on Property: Calculation and Exemptions

The Finance Act, 2024, raised the tax on equity capital gains with effect from 23 July 2024. It is as follows:

In plain terms, equity STCG is now 20%, up from 15% earlier. Equity LTCG is now 12.5% on the portion above the ₹1.25 lakh annual exemption, up from 10% above ₹1 lakh. A 4% health and education cess sits on top of both. Debt and specified fund gains are taxed at your slab rate. Funds sitting between 35% and 65% equity fall under the standard framework; long-term, after 24 months, they are taxed at 12.5%, rather than under either the equity or the specified-fund rules.

The 23 July 2024 cut-off matters because your tax depends on the date you sold, not the date you bought. Equity units sold before that date were taxed at 15% (STCG) and 10% above ₹1 lakh (LTCG). Units sold on or after it are taxed at 20% and 12.5% above ₹1.25 lakh. If your sales straddle both windows in the same year, they must be reported separately; the ITR forms now carry distinct fields for pre- and post-23 July transactions.

A SIP looks like one investment, but the tax office sees it as many. Each monthly instalment buys units on its own date, so each instalment has its own purchase date and holding period. When you redeem, units are usually taken out oldest-first, and each batch is judged separately.

Say you began a ₹10,000 monthly SIP in an equity fund in August 2024 and redeem the lot in September 2025. The units bought in August 2024 have been held over 12 months, so their gain is long-term (12.5% above the ₹1.25 lakh limit). The units bought in, say, November 2024 have been held for under 12 months, so their gain is short-term (20%). The most recent installments are also short-term. So a single redemption can produce both LTCG and STCG at once, which is precisely why the capital gains statement from your AMC or from

Every scheme offers two ways to take your returns, and they are taxed very differently. Under the IDCW option (Income Distribution cum Capital Withdrawal, once called the dividend option), the fund pays out money periodically; that payout is added to your total income and taxed at your slab rate, exactly like the old dividend treatment. Under the Growth option, nothing is paid out; earnings stay invested and lift the NAV, and you are taxed only when you redeem and only on the capital gain.

Losses are not wasted; the law lets you use them to shrink taxable gains, within rules. A short-term capital loss (STCL) is the flexible one: it can be set off against both short-term and long-term gains in the same year. A long-term capital loss (LTCL) is stricter and can be set off only against long-term gains. Whatever you can’t use this year can be carried forward for up to 8 assessment years, provided you file your return by the due date; a loss only carries forward if it was reported in the ITR for the year it arose.

You can’t dodge the tax, but a few legitimate habits keep it in check, and it is always worth speaking to a qualified tax professional for advice suited to your situation. These habits are as follows:

• Use the annual exemption: equity LTCG up to the yearly limit is tax-free, so booking gains up to that ceiling and reinvesting can keep you under it.
• Time your profit booking: watch your equity gains through the year and realise them before they cross the exemption line where it makes sense.
• Harvest losses: offset gains by selling loss-making units, using the set-off rules above.

Where you report depends on the rest of your income. Salaried investors with capital gains but no business income should use ITR-2, while those with business or professional income (including F&O traders) should use ITR-3. Inside the form, gains go in Schedule CG, with equity long-term gains detailed scrip-wise in Schedule 112A. Because of the 23 July 2024 rate change, transactions before and on/after that date are reported separately.

One welcome simplification from AY 2025-26: if your only capital gain is equity LTCG under Section 112A up to ₹1.25 lakh, with no losses to carry forward, you can now file the simpler ITR-1 (Sahaj) instead of ITR-2. Dividend/IDCW income is disclosed separately under income from other sources.

To work out capital gains tax on mutual funds, you need to answer two questions: what kind of fund is it, and how long did you hold it? Get those right, and the rest follows.

Also Read: How to Claim Income Tax Refund Online?