Mutual Fund Taxation

What are the mutual fund tax rates in India right now?

Add the 4% health and education cess to whatever tax comes out of that table, plus surcharge if your income attracts it. The rates above are the rate. The cess is on top.

Which funds count as equity funds for tax?

Not the ones with “equity” in the name. The Act applies a proportion test to what the scheme actually holds. In practice a conventional equity scheme qualifies by holding at least 65% of its proceeds in shares of domestic companies. AMFI’s own tax note describes a separate 90% test that applies to fund-of-fund structures. The two tests sit in different limbs of the same definition, and fund-of-funds are exactly where the difference bites.

This trips up real portfolios. An international fund holds foreign shares, so it is not an equity fund for Indian tax. Nor is a gold fund. Nor is an arbitrage fund’s debt-heavy cousin. Do not guess from the name. Every scheme information document states the scheme’s tax status, and that document is the answer.

Why hybrid funds are the hardest to read

A balanced advantage fund holding 65% or more in domestic equity is taxed as equity. A conservative hybrid fund holding mostly debt is not. Two funds from the same house, sold in the same app, can carry completely different tax. The equity savings category exists largely because holding 65% equity on paper wins the better rate.

What changed for debt funds after April 2023?

Indexation went, and with it the long-term rate. Units of a specified mutual fund bought on or after 1 April 2023 produce a gain taxed at your slab rate, however long you hold. For a 30% taxpayer, a debt fund now taxes worse than it did, and a bank fixed deposit taxes the same.

The honest conclusion follows from that. If you are in the 30% bracket and you were holding debt funds for the tax break, the tax break is gone. What remains is control over timing. A fixed deposit is taxed on accrual each year, with TDS. A debt fund is taxed only when you redeem. That deferral still has value, and so does the ability to redeem the exact amount you need. But it is a smaller advantage than the one it replaced.

The definition then moved again. From FY 2025-26, a specified mutual fund is one investing more than 65% of proceeds in debt and money market instruments, per AMFI’s summary of the 2024 amendment. That pulled gold funds and international fund-of-funds out of the slab bucket. They now fall into the third row of the table above — 12.5%, after the longer holding period. If you bought an international fund in 2023, check which rule applied when you bought.

How does the ₹1.25 lakh exemption actually work?

It is per person, per financial year, across all your long-term equity gains combined. Not per fund. Not per folio. If you book ₹1,80,000 of long-term equity gain in a year, ₹1,25,000 is exempt and ₹55,000 is taxed at 12.5%. The Income Tax Department’s own return guidance for AY 2026-27 confirms the ₹1,25,000 figure under section 112A.

That creates a legitimate annual move. If you hold equity funds with unrealised long-term gains, redeem enough each March to use the exemption, then buy back. You reset your cost base upward and pay nothing. Do the arithmetic first on the capital gains calculator, and remember the exit load and the four days out of the market.

Is IDCW worse than a systematic withdrawal plan?

For most taxpayers, yes, and by a wide margin. An IDCW payout is added to your income and taxed at your slab rate. The whole payout, not the gain inside it. A systematic withdrawal plan redeems units instead, so only the capital gain is taxed, and at capital gains rates.

A 30% taxpayer drawing income from a fund pays roughly 30% on an IDCW payout and 12.5% on the gain portion of an equivalent long-term equity SWP. That is not a marginal difference. IDCW is sold as an income option and it is, for a high-rate taxpayer, the expensive way to get the same money.

One caveat on numbers. AMFI’s tax page, aligned to FY 2024-25, states that no TDS is deducted where IDCW paid on mutual fund units is below ₹5,000 in a financial year. That threshold has since been revised upward, and we could not confirm the current figure against a primary source. Treat ₹5,000 as the last figure we can stand behind, and check your fund house’s statement.

What else triggers tax that people do not expect?

Have the section numbers changed?

Yes. The Income-tax Act, 2025 applies from 1 April 2026 and renumbers the capital gains provisions. Sections 111A, 112 and 112A of the 1961 Act become sections 196, 197 and 198. The reinvestment exemptions move into the 85–88 range. The rates and holding periods were carried across unchanged, so nothing in the table above moves. Only the citation does. The same renumbering runs through capital gains on property.