Mutual Fund Taxation in India: A complete guide for residents & NRIs

Capital gains, dividends, SIPs, and TDS — everything you need to know about how your mutual fund returns are taxed in FY 2025–26.

Mutual funds earn returns in two ways — capital appreciation when you sell units at a profit, and dividends. Both are taxable in India. Understanding how the rules work can make a meaningful difference to what you actually take home.

India's mutual fund tax framework has undergone major changes in recent years. Budget 2024 revised LTCG tax rates and holding period thresholds, and April 2023 brought an overhaul of debt fund taxation. This guide covers it all — clearly and completely — for FY 2025–26.

How Funds Are Classified for Tax

Before anything else, the tax on your mutual fund depends on what it invests in. The key question is: how much of the fund's portfolio is in Indian equities?

Category	Equity-Oriented	Hybrid (Middle Ground)	Debt / Non-Equity
Equity Allocation	≥ 65% in Indian Equities	35% – 65% Equities	≤ 35% Equities
Fund Types	Equity funds, ELSS, aggressive hybrids, equity index funds	Balanced hybrid and dynamic asset allocation funds	Debt, liquid, gilt, gold ETFs, international funds
Tax Treatment	Taxed most favourably	LTCG status after 24 months	Post-April 2023: all gains at slab rate
Holding Period (Long Term)	> 12 months	> 24 months	No LTCG benefit (post April 2023)

Equity Mutual Funds

Equity-oriented funds — those investing at least 65% in domestic equities — get the most favourable capital gains treatment. This covers pure equity funds (large-cap, mid-cap, flexi-cap), ELSS, aggressive hybrid funds, and equity index funds.

Tax Rates for Resident Investors

Type	Holding Period	Tax Rate	Exemption
Short-Term Capital Gain (STCG)	≤ 12 months	20% + cess	Nil
Long-Term Capital Gain (LTCG)	> 12 months	12.5% + cess	First ₹1.25 lakh per year exempt

ELSS (Tax-Saving Funds): ELSS has a 3-year lock-in period, so redemptions always result in LTCG — never STCG. Investments up to ₹1.5 lakh per year qualify for a deduction under Section 80C for residents on the old tax regime.

Debt Mutual Funds

From 1 April 2023, debt fund taxation changed fundamentally. Any fund with equity exposure of 35% or less is now treated as non-equity — and all gains are short-term capital gains regardless of how long you've held them. No indexation, no LTCG rate, no lock-in strategy helps.

This covers: pure debt funds, liquid funds, ultra-short duration funds, gilt funds, Fixed Maturity Plans, gold ETFs/funds, international equity funds (since foreign equities don't count as domestic equity), and conservative hybrid funds.

Tax Rate: Slab Rate for All Gains

Gains simply add to your total annual income and are taxed at your applicable slab rate — the same as your salary or FD interest. For most investors in the 30% bracket, this means an effective tax of 30%+ on all debt fund gains.

Pre-April 2023 investments: Funds purchased before 1 April 2023 may be governed by earlier rules in certain cases. Consult a tax advisor for your specific investments.

Hybrid Funds: The Middle Category

Funds maintaining equity between 35% and 65% occupy a distinct middle ground. After Budget 2024, these funds qualify for LTCG treatment if held for more than 24 months, with gains taxed at a flat 12.5% (without indexation). Short-term gains (held ≤ 24 months) are taxed at slab rate.

Key rule: Any fund with >35% equity is allowed LTCG treatment after 24 months. Only funds with ≤35% equity (pure debt category) get no LTCG benefit at all for post-April 2023 purchases.

Dividend Taxation

Since the Finance Act 2020 abolished Dividend Distribution Tax (DDT), dividends land directly in your hands — and are taxed at your income slab rate, just like salary or interest income. There's no special rate for mutual fund dividends.

Remember: TDS is not your final tax. If your actual slab rate is lower, you can file an ITR to claim a refund. If higher, pay the balance. Always report dividends in your return — even if they were reinvested — as they are taxable the moment they are credited.

Tax Rates at a Glance (FY 2025–26)

Fund Category	Investment Date	Holding Period	Tax on Gains (FY 2025–26)
Equity-Oriented Funds ≥65% equity e.g. equity funds, aggressive hybrids, ELSS	Any (before or after 1 Apr 2023)	≤ 12 months (Short Term)	STCG @ 20% + cess
Equity-Oriented Funds ≥65% equity e.g. equity funds, aggressive hybrids, ELSS	Any (before or after 1 Apr 2023)	> 12 months (Long Term)	LTCG @ 12.5% + cess on gains above ₹1.25 lakh (exempt up to ₹1.25L)
Balanced / Hybrid Funds >35% but <65% equity e.g. balanced hybrid, some multi-asset funds	Purchased on/after 1 Apr 2023	≤ 24 months (Short Term)	Slab rate (no LTCG benefit)
Balanced / Hybrid Funds >35% but <65% equity e.g. balanced hybrid, some multi-asset funds	Purchased on/after 1 Apr 2023	> 24 months (Long Term)	LTCG @ 12.5% (no indexation)
Debt & Other Non-Equity Funds ≤35% equity e.g. debt funds, gold funds, international funds, conservative hybrids	Purchased on/after 1 Apr 2023	Any holding period (treated as Short Term)	Slab rate — no LTCG classification

Taxation/TDS for NRI Investors

NRIs pay the same capital gains tax rates as residents. The key difference: TDS is deducted automatically at source on every redemption. You don't manage advance tax — the fund house withholds it. But since TDS is a provisional deduction, you must file an Indian ITR to reconcile your actual liability and claim any refund.

DTAA Relief: NRIs from countries with a Double Taxation Avoidance Agreement with India may be eligible for lower rates on certain income. Residents in the UAE and other applicable countries should specifically explore DTAA benefits — reach out to our advisors for guidance.

Key Points to Remember

• Tax is not annual. You only pay capital gains tax when you sell. Holding does not trigger a tax event.

• SIPs are not taxed differently. Each SIP instalment has its own holding period. STCG vs LTCG is assessed per instalment at the time of redemption.

• Switching funds triggers capital gains. A switch is treated as a full redemption of the source fund — capital gains tax applies on any profits at that point.

• No TDS for residents on redemptions. Only NRIs face TDS on mutual fund redemptions. Resident investors pay via advance tax or self-assessment.

• ₹1.25L LTCG exemption is for equity only. It does not apply to debt or hybrid funds in the 35–65% bracket.

• Dividends are fully taxable. Even reinvested dividends are taxable in the year they are declared — always report them in your ITR.

Frequently Asked Questions

Is tax on mutual funds paid every year, even without selling?+

No. Capital gains tax is only triggered on redemption (selling units) or when dividends are received. Simply holding a mutual fund investment — even for many years — does not create any tax liability.

Does switching between two mutual fund schemes attract tax?+

Yes. A switch from one scheme to another is treated as a full redemption followed by a fresh purchase. Capital gains tax applies on any profit in the source fund at the time of switching, based on the fund type and holding period. Can NRIs claim the ₹1.25 lakh LTCG exemption?+

Yes. NRIs are technically eligible for the ₹1.25 lakh annual LTCG exemption on equity-oriented funds. However, TDS may be deducted on the full gain upfront. NRIs must file an Indian income tax return to claim any excess TDS as a refund. Are SIPs taxed differently from a lump-sum investment?+ No — the same tax rules apply. The only practical difference is that each SIP instalment has a separate purchase date, so its holding period (and therefore STCG vs LTCG classification) is calculated independently when you redeem.

Does AssetPlus help NRIs with tax filing and TDS refund process?+ Yes — AssetPlus offers complimentary guidance on applying for the TDS refund process. We help you evaluate feasibility and net benefit of applying for TDS refund, guide you to obtain relevant documents and put you in touch with a qualified Chartered Accountant who can help file your returns for a discounted additional fee.

Disclaimer: This article is for general informational and educational purposes only and does not constitute investment, tax, or legal advice. Mutual Fund investments are subject to market risks — read all scheme-related documents carefully. Tax rules are based on publicly available information for FY 2025–26 and may change. Consult a qualified tax professional for advice specific to your situation. AssetPlus (ValuePlus Technologies Private Limited) is an AMFI-registered Mutual Fund Distributor (ARN-114376). Past performance is not indicative of future returns.