Capital Gains Tax on Mutual Funds After 2025: What Changed

Mutual fund taxation has undergone significant restructuring over the past two financial years. The Finance Act 2023 removed indexation benefits and the concessional long-term capital gains rate for debt funds held after 1 April 2023. The Finance (No. 2) Act 2024 then restructured equity fund rates, changed holding periods for certain assets, and grandfathered some pre-July 2024 gains. Finance Act 2025 brought further rationalisation.

For CAs handling ITR filings for clients with investment portfolios, a clear understanding of what changed and when is essential. The rates you apply depend on the date of acquisition, the date of sale, and the fund category, making this one area where a single wrong assumption can materially affect tax liability.

What Changed in 2025

Finance Act 2025 (Union Budget presented in February 2025) continued the rationalisation begun in 2024. The key changes applicable for AY 2026-27 (FY 2025-26) are:

• The LTCG exemption threshold for equity-oriented funds remained at Rs. 1.25 lakh per year (introduced in FY 2024-25). Gains up to this amount in a financial year are exempt; gains above it are taxed at 12.5% without indexation.
• STCG for equity-oriented funds is taxed at 20% (increased from 15% effective 23 July 2024 by the Finance (No. 2) Act 2024).
• Debt funds acquired on or after 1 April 2023 continue to be taxed at slab rates regardless of holding period, with no indexation and no LTCG benefit. This provision introduced by the Finance Act 2023 has not been reversed.
• The holding period for listed securities (including equity mutual funds) to qualify as long-term remains 12 months.
• For specified mutual funds (defined as funds where domestic equity exposure is less than 35%, essentially debt funds and most international funds), the holding period for LTCG classification was reset to 24 months for units acquired on or after 23 July 2024, but since these funds are now taxed at slab rates regardless of holding period, this classification is less relevant in practice.

Equity Funds: New Rates and Holding Periods

For equity-oriented mutual funds (where at least 65% of assets are invested in domestic equity shares):

Short-term capital gains (STCG): Units held for 12 months or less. Tax rate is 20% under Section 111A. There is no exemption threshold for STCG. The 20% rate applies regardless of the taxpayer's income level.

Long-term capital gains (LTCG): Units held for more than 12 months. Tax rate is 12.5% under Section 112A, without indexation. The first Rs. 1.25 lakh of LTCG per financial year is exempt. Gains beyond this threshold are taxed at 12.5%, plus applicable surcharge and cess.

The LTCG rate was increased from 10% to 12.5% effective 23 July 2024. Gains accrued on units sold on or after 23 July 2024 (regardless of when they were acquired) are taxed at 12.5%.

Grandfathering: Units acquired before 31 January 2018 have their cost of acquisition determined by the higher of actual cost and the fair market value as on 31 January 2018 (for the purpose of computing LTCG under Section 112A). This grandfathering provision remains in place.

Systematic Withdrawal Plans (SWPs): Each instalment of an SWP is treated as a separate redemption. The holding period is calculated from the date of the unit's acquisition to the date of each redemption instalment. For SWP clients, the gains calculation requires a FIFO-based unit-wise calculation, which mutual fund platforms provide via capital gains statements.

Debt Funds: The Big Shift

The Finance Act 2023 made a structural change to debt fund taxation that took effect from 1 April 2023. For debt-oriented funds (where domestic equity exposure is less than 35%):

Units acquired before 1 April 2023: Old rules apply. LTCG (held more than 36 months) taxed at 20% with indexation benefit. STCG (held 36 months or less) taxed at slab rates.

Units acquired on or after 1 April 2023: All gains are taxed at the taxpayer's applicable slab rate, regardless of the holding period. There is no distinction between short-term and long-term for taxation purposes. No indexation benefit is available.

This change significantly affected the tax efficiency of debt funds for investors in higher tax brackets, for whom the effective tax rate on debt fund gains went from 20% (with indexation often reducing the taxable base substantially) to 30% plus surcharge and cess.

For clients who have both pre-2023 and post-2023 units in the same debt fund (via SIPs), the units are tracked on a FIFO basis. Gains from earlier units (acquired before 1 April 2023) retain the old treatment, while gains from later units are taxed at slab rates. Capital gains statements from mutual fund platforms separate these correctly for most platforms, but verify before using the figures.

Hybrid and International Funds

Hybrid funds present the most complexity because the equity:debt ratio determines the applicable tax regime.

• Equity-oriented hybrid funds (65% or more in domestic equity): treated as equity funds for capital gains purposes. 12.5% LTCG above Rs. 1.25 lakh; 20% STCG.
• Debt-oriented hybrid funds (less than 35% in domestic equity): treated as debt funds for capital gains. Gains on units acquired after 1 April 2023 taxed at slab rates.
• Balanced advantage funds and dynamic asset allocation funds: these move between equity and debt. The tax treatment depends on the actual equity allocation at the time of redemption, or more precisely, the average equity allocation maintained by the fund. Most BAFs maintain above 65% equity to retain equity fund tax treatment, but this must be verified fund-by-fund.

International funds and Fund of Funds (FoF): Funds investing primarily in foreign equities (or FoFs investing in foreign-equity-oriented schemes) are not classified as equity-oriented for tax purposes, since their underlying exposure is not to domestic equity. They fall in the specified mutual fund category, and units acquired on or after 1 April 2023 are taxed at slab rates. For units acquired before 1 April 2023 in international FoFs, the old 20% with indexation treatment applied for holdings beyond 36 months.

FoFs that invest in domestic equity funds may or may not qualify as equity-oriented depending on the fund structure. Check the fund's AMFI classification.

Impact on HUF and Trust Holdings

Hindu Undivided Families holding mutual fund units are subject to the same capital gains tax rates as individual taxpayers. The Rs. 1.25 lakh LTCG exemption under Section 112A applies at the HUF level, not per individual member. For families who have moved investments from individual to HUF ownership to multiply exemptions, this needs to be clearly communicated.

For a detailed discussion of HUF taxation including how capital gains interact with clubbing provisions, see HUF Taxation Guide.

Trusts, including private family trusts, are taxed on capital gains based on the beneficiary status and the nature of the trust. Representative assessees for trusts with beneficiary interests in mutual funds need to apply the individual tax rates (including the Section 112A regime) if the beneficiaries are individuals. Trusts with non-individual beneficiaries may face different rate structures. Legal advice and careful structuring are advisable before any significant redemption from trust-held portfolios.

What CAs Should Tell Clients Now

Start harvesting LTCG annually. With the exemption limited to Rs. 1.25 lakh per year, clients who have significant unrealised equity gains should consider systematic redemption and reinvestment to utilise the annual exemption and step up the cost of acquisition. This is sometimes called tax harvesting or tax-loss harvesting. Done annually near the end of the financial year, it can meaningfully reduce future tax liability.

Debt fund SIP investors need a cost-basis audit. Clients with long-running SIPs in debt funds have units across multiple purchase dates. Some may retain the pre-2023 LTCG-with-indexation benefit. Before recommending redemptions, generate a detailed capital gains estimate that separates the two tranches.

Shift in product selection. Many CAs advise clients on whether to hold FDs or debt funds for non-equity allocation. The removal of the tax efficiency of debt funds makes the comparison more straightforward now: for clients in the 30% bracket, FDs and debt funds attract roughly similar effective rates. The fund's return net of expense ratio and liquidity advantages determine the choice.

Equity taxation is still favourable, but less so than before July 2024. The increase from 10% to 12.5% LTCG, combined with the increase in STCG from 15% to 20%, reduces but does not eliminate the tax advantage of equity funds over other asset classes for long-term investors.

Reconcile capital gains with AIS before filing. Mutual fund platforms and RTAs report redemption proceeds to the Income Tax Department, which populates AIS. The AIS figures reflect gross proceeds, not net gains. Clients often see large numbers in AIS and worry. Explain that the ITR reports the computed capital gain (proceeds minus indexed or actual cost, as applicable), not the gross proceeds. For the full reconciliation process, see Form 16 vs 26AS vs AIS: A CA's Reconciliation Checklist.

For clients who actively trade across fund categories or have both pre-2023 and post-2023 holdings, building a simple portfolio register at the start of the year, tracking units, acquisition dates, and NAVs, prevents the scramble to reconstruct capital gains data during the filing season.