Education Hub / Taxation

What is LTCG and STCG Tax on Mutual Funds in India?

Last Updated: 2026-06-27 7 min read

When building an investment portfolio, it is easy to focus entirely on gross returns. However, what matters is your net post-tax return. In India, returns from mutual funds are subject to Capital Gains Tax.

Depending on how long you hold your mutual fund units before selling, your profits will be classified as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG). Furthermore, the tax rates depend heavily on whether your fund is classified as an Equity Fund, a Debt Fund, or a Hybrid Fund.

This guide covers everything you need to know about LTCG and STCG taxes on mutual funds in India, updated with the current rates applicable for 2026.

1. Classification: Equity vs. Debt Mutual Funds

Before calculating taxes, we must determine the asset classification of your mutual fund. The tax laws in India distinguish between:

  • Equity-Oriented Funds: Mutual funds that invest at least 65% of their total assets in domestic equity shares of listed Indian companies (e.g., Large Cap, Mid Cap, Small Cap, and ELSS funds).
  • Debt-Oriented Funds: Mutual funds that invest in fixed-income securities like government bonds, corporate debentures, commercial paper, and money market instruments.
  • Specified Mutual Funds (Debt Funds bought after April 1, 2023): Any mutual fund where the equity allocation is 35% or less. These face separate rules that eliminate capital gains advantages entirely.

2. Equity Mutual Fund Taxation (2026 Rates)

For equity mutual funds, the holding period boundary is 12 months (1 year).

A. Short-Term Capital Gains (STCG) on Equity

If you redeem (sell) your equity mutual fund units within 12 months of purchase:

  • Tax Rate: 20% flat on your profits.
  • Note: This rate was revised upward from 15% to 20% in the Union Budget, reflecting the government’s aim to curb short-term speculation.

B. Long-Term Capital Gains (LTCG) on Equity

If you hold your equity mutual fund units for 12 months or longer before selling:

  • Tax Rate: 12.5% on profits.
  • Exemption Limit: The first ₹1.25 Lakhs of total equity LTCG across all mutual funds and direct stocks in a financial year is completely tax-free. You only pay the 12.5% rate on gains exceeding this limit.
  • Note: This limit was raised from ₹1 Lakh to ₹1.25 Lakhs, and the tax rate was revised from 10% to 12.5% under the latest budget provisions.

3. Debt Mutual Fund Taxation (2026 Rates)

For debt mutual funds, tax rules underwent a massive structural change that went into effect for units purchased on or after April 1, 2023.

For Units Purchased ON or AFTER April 1, 2023:

  • The Rule: There is no distinction between short-term and long-term gains.
  • Tax Rate: All capital gains are treated as short-term and added directly to your taxable income. They are taxed at your marginal Income Tax Slab Rate (which can be up to 30% or 39% depending on your regime and income level).
  • Indexation: Debt funds no longer receive indexation benefits (which historically allowed adjusting purchase price for inflation to lower tax liability).

For Legacy Units Purchased BEFORE April 1, 2023:

If you still hold older debt fund units and sell them now (after a holding period of 36 months or more):

  • Tax Rate: 20% with indexation benefits.

4. Hybrid Mutual Fund Taxation

Hybrid funds invest in a mixture of equity and debt. Their taxation depends on the exact allocation percentages:

  1. Equity-Heavy Hybrid Funds (Equity > 65%): Taxed exactly like Equity Mutual Funds (STCG @ 20%, LTCG @ 12.5% with ₹1.25L exemption).
  2. Debt-Heavy Hybrid Funds (Equity <= 35%): Taxed exactly like Debt Mutual Funds ( Slab rates, no capital gains concessions).
  3. Arbitrage Funds: Even though arbitrage funds are low-risk debt-like instruments, they maintain equity exposure > 65% for arbitrage operations, meaning they are taxed as Equity Funds, making them highly tax-efficient short-term options.

5. Calculation Example: Equity Capital Gains

Let’s see how equity LTCG is calculated in practice.

Suppose you invested ₹5,00,000 in an equity mutual fund on May 15, 2024. You sell all units on June 10, 2026 (a holding period of over 2 years, qualifying as LTCG) for a total value of ₹7,00,000.

  1. Purchase Value: ₹5,00,000
  2. Sale Value: ₹7,00,000
  3. Gross Profit (Capital Gain): ₹2,00,000
  4. Exemption Limit: ₹1,25,000
  5. Taxable LTCG: ₹2,00,000 - ₹1,25,000 = ₹75,000
  6. LTCG Tax Due (12.5%): 12.5% of ₹75,000 = ₹9,375

If you had sold these units in less than 12 months, your gains would be STCG, taxed at 20% on the entire ₹2,00,000 profit (no exemptions), resulting in a tax bill of ₹40,000. By holding the fund for more than a year, you saved ₹30,625 in taxes!

You can compare how this tax treatment stack up against traditional bank deposits using our Fixed Deposit vs. Mutual Funds Calculator or evaluate tax saver funds using our ELSS vs. PPF Calculator.

6. How to Optimize Your Mutual Fund Taxes

To minimize the impact of tax drag on your compounding wealth, consider these three strategies:

  1. Utilize the ₹1.25L Exemption (Tax Harvesting): You can sell equity mutual fund units every year to lock in gains up to ₹1.25 Lakhs tax-free, and immediately reinvest the proceeds. This raises your acquisition cost base over time.
  2. Hold for the Long Term: Avoid selling equity funds in under a year unless necessary, as the 20% STCG rate is significantly higher than the 12.5% LTCG rate.
  3. Consider EEE Schemes for Debt Allocation: Since debt mutual funds are now taxed at individual slab rates, use tax-free EEE vehicles like the Public Provident Fund (PPF) or Sukanya Samriddhi Yojana (SSY) for your long-term debt allocation to completely avoid tax drag.
← Back to Education Hub