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Debt funds bought after April 1, 2023 are taxed at slab rates regardless of holding period.
Mutual funds’ tax rules in FY 2026–27 depend on fund category and purchase date. (representative image)
The taxation of mutual funds in India has undergone significant changes in recent years, especially for debt-oriented schemes. For the financial year 2026–27, the tax treatment of gains will depend on three key factors: the type of investor, the fund’s asset allocation and the holding period of the investment. The purchase date of units, particularly in the case of debt funds, also plays a crucial role.
Taxation follows the underlying exposure of the scheme. Therefore, before investing in equity, debt, hybrid, gold or international funds, investors must understand how the portfolio is structured.
Equity Mutual Funds: Lower tax for long-term investors
Equity-oriented mutual funds and equity ETFs must invest at least 65 per cent of their corpus in listed domestic equities. If an investor holds these funds for more than 12 months, the gains are treated as long-term. Long-term capital gains (LTCGs) are taxed at 12.5 per cent on profits above Rs 1.25 lakh. If the holding period is 12 months or less, the gains are short-term and taxed at 20 per cent.
Investments made on or before January 31, 2018, continue to enjoy grandfathering benefits, meaning gains accrued up to that date remain exempt from tax.
ELSS: Tax Saving With Lock-In
Equity-linked savings schemes (ELSS) are equity-oriented funds with a mandatory three-year lock-in period. Since redemption is allowed only after three years, gains automatically qualify as long-term. Long-term gains are taxed at 12.5 per cent above Rs 1.25 lakh. Investments up to Rs 1.5 lakh qualify for deduction under Section 80C, but only under the old tax regime.
Debt mutual funds: Purchase date is key
Debt funds now follow a differentiated tax structure depending on when the investment was made.
Units purchased on or after April 1, 2023: All gains are treated as short-term, irrespective of holding period. Taxed at the investor’s applicable income-tax slab rate. No indexation or long-term capital gains benefit available.
Units purchased before April 1, 2023: Long-term gains (after 24 months for unlisted units and 12 months for listed units) are taxed at 12.5 per cent. Short-term gains are taxed at slab rates.
Hybrid funds: Equity allocation decides tax
Hybrid schemes are taxed according to their equity exposure. 65 per cent or more in equity are taxed as equity funds. If it is less than 35 per cent in equity, the scheme is taxed as a debt fund and classified as a specified mutual fund. When it is between 35 per cent and 65 per cent in equity, then long-term gains are taxed at 12.5 per cent and short-term gains are taxed at slab rates.
If a scheme invests more than 65 per cent in debt instruments directly or indirectly, it qualifies as a specified mutual fund and gains are deemed short-term, taxed at slab rates without long-term benefits.
Gold, International Funds And FoFs
Funds investing less than 65 percent in Indian equities, such as gold ETFs, international funds and most fund of funds, will follow taxation rules where long-term gains are taxed at 12.5 percent and short-term gains at slab rates.
If listed equity exposure exceeds 65 per cent, the scheme will qualify as an equity-oriented mutual fund and attract equity taxation.
REITs and InvITs: Similar to equity taxation
Listed Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), though classified as business trusts and not mutual funds, broadly follow equity-style capital gains taxation. Holding over 12 months are taxed at 12.5 per cent above Rs 1.25 lakh, while holding up to 12 months is short-term gains taxed at 20 per cent.
Given their exchange-traded and market-linked nature, REITs and InvITs are often evaluated alongside mutual funds from a taxation perspective.
Dividend Income
It is to be noted that the income received as dividends from mutual funds are added to the investor’s total income and taxed at the applicable slab rate.
Non-resident investors and domestic companies are subject to different tax provisions. Non-residents may also claim benefits under applicable tax treaties.
Why Fund Type And Holding Period Matter?
The same investment amount can face different tax liabilities depending on the fund category and duration of holding. Equity-oriented schemes reward long-term investing with concessional rates. In contrast, debt funds purchased after April 1, 2023, are taxed at slab rates regardless of how long they are held.
For investors planning their portfolios in FY2026–27, fund selection and investment horizon remain critical in determining post-tax returns.
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Delhi, India, India
February 21, 2026, 08:00 IST
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