The Income-tax Act, 1961 was repealed on 1 April 2026. Most pages explaining LTCG on mutual funds still quote it.
The rates have not moved this year, but one rule catches investors out. The 12.5% long term rate does not apply to every fund you own, and the ₹1.25 lakh exemption applies to fewer still.
What Is LTCG on Mutual Funds?
LTCG is long term capital gain, the profit you book when you sell units held beyond a set period. Sell earlier and the gain is short term instead.
Mutual funds LTCG rules changed twice in three years: once in 2023 for debt funds, again in July 2024 for rates. The period itself is not the same for every fund.
Units of an equity oriented fund turn long term after 12 months, while units of most other funds take 24 months. One category never turns long term at all, whatever you do.
What Is the Long Term Capital Gain Tax Rate on Mutual Funds?
The long term capital gain tax rate on mutual funds is 12.5%, with no indexation. That single rate replaced the older split rates for transfers made on or after 23 July 2024.
Two things decide what you actually pay. Equity oriented funds carry an exemption of ₹1,25,000 of long term gain in a tax year. Other funds carry none. The rate is identical, but the base it applies to is not.
LTCG Tax on Equity Mutual Funds
An equity oriented fund holds mostly listed Indian equity. Hold those units more than 12 months and the gain is long term.
You then pay 12.5% on the part of the gain above ₹1,25,000 in a tax year, and nothing at all below that line. Redeem inside 12 months and the gain is short term, taxed at 20%.
The clock runs from each purchase date, not from the day you first put money into the scheme.
LTCG Tax on Debt Mutual Funds
Here the headline rate stops applying. A specified mutual fund is one that puts more than 65% of its money into debt and money market instruments, measured on the annual average of daily closing figures.
If you bought units of such a fund on or after 1 April 2023, the gain counts as short term however long you hold it. It is added to your income and taxed at your slab rate. No 12.5%, no ₹1,25,000 exemption, no long term treatment at any point.
Units bought before that date still follow the 24 month rule and the 12.5% rate.
How Is LTCG Tax on Mutual Funds Calculated?
Gain is the redemption value minus your cost of acquisition and the cost of the transfer, and indexation no longer applies.
Say you redeem equity fund units for ₹6,00,000 that cost you ₹4,20,000, after 18 months. The gain is ₹1,80,000. Take off the ₹1,25,000 exemption and ₹55,000 is taxable. At 12.5%, the tax is ₹6,875.
Each SIP instalment counts as a separate purchase, so each one carries its own holding period.
Also Read: If you are investing through regular instalments, understanding SIP vs Lump Sum Investment can also help you see how the purchase timing affects each investment.
LTCG vs STCG on Mutual Funds
Equity oriented fund | Specified debt fund bought on or after 1 April 2023 | |
Turns long term after | 12 months | Never |
Long term rate | 12.5% above ₹1,25,000 | Not applicable |
Short term rate | 20% | Your slab rate |
The distance between 12.5% and a 30% slab is why the fund's category matters more than how patient you are.
Also Read: If you want to understand the broader difference between the two tax treatments, read our guide on Short Term vs Long Term Capital Gains.
Exemptions and Tax Saving Considerations for LTCG on Mutual Funds
The ₹1,25,000 exemption is per tax year and covers your total long term gain from equity oriented funds, not each fund separately. Splitting a large redemption across two tax years uses it twice.
A switch from one scheme to another is a redemption plus a fresh purchase. It is taxable even though no money reached your bank account. Goals you fund through mutual funds for life goals are usually held long enough for that distinction to cost real money.
Things to Consider Before Redeeming Mutual Funds
Three checks before you place the request.
• Which category the fund sits in, since that decides whether long term treatment exists at all.
• How much long term gain you have already booked in this tax year.
• Whether an exit load still applies, meaning the charge some schemes levy on early redemption.
Running that check across every scheme you hold, not just the one you are selling, is the point of any exercise to Evaluate a Mutual Fund Portfolio. These rates apply to tax year 2026-27 under the Income-tax Act, 2025.
Conclusion
Two numbers decide your tax, and only one of them is the rate. The other is the category your fund falls into, which is set by what the fund holds and when you bought it.
Before your next redemption, sort your schemes into three buckets: equity oriented, specified debt bought on or after 1 April 2023, and everything else. The tax outcome differs sharply across the three, and the fund factsheet tells you which bucket it is in.
Check that before you Invest in Mutual Funds, not after you redeem.
