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Long Term Capital Gain Tax on Mutual Funds

30 Oct, 2025

4 mins read

long term capital gain tax on mutual funds

Capital gains tax is a vital aspect of mutual fund investing that many investors tend to overlook until the moment of redemption. Understanding how long-term capital gain (LTCG) tax applies to mutual funds can help investors plan better, reduce tax liability, and make smarter decisions. In this article, we explain what LTCG is, the current tax rules in India, how to calculate the tax, and how you can legally avoid or reduce it.

What is Long-term Capital Gain (LTCG)?

Long-term capital gains arise when you sell a capital asset after holding it for a specified period. In the context of mutual funds, the definition of "long-term" varies based on the type of fund:

Equity-oriented funds: Holding period of more than 12 months
Debt-oriented funds: Holding period of more than 36 months

The gain is calculated as the difference between the sale price and the purchase price (after accounting for costs, if applicable).

Current LTCG Tax Rules & Rates in India

The tax treatment of LTCG depends on whether the mutual fund is equity-oriented or debt-oriented.

Equity Mutual Funds

Gains above ₹1 lakh in a financial year are taxed at 10%
No indexation benefit is allowed
Gains up to ₹1 lakh remain tax-free

Debt Mutual Funds

As per the Finance Act 2023, all capital gains on debt mutual funds (regardless of holding period) are now taxed as per the investor's income tax slab rate.
Earlier, LTCG on debt funds was taxed at 20% with indexation benefit.

Hybrid Funds

Taxed based on the equity exposure. If equity comprises 65% or more of the portfolio, it is treated as equity-oriented; otherwise, it is taxed as debt.

How to Calculate LTCG Tax on Mutual Funds

Let’s take an example:

You invest ₹50,000 in an equity mutual fund
After 18 months, you redeem it for ₹75,000
Your gain is ₹25,000
Assuming your total LTCG for the year is under ₹1 lakh, no tax is payable

Now suppose your total LTCG for the year is ₹1.25 lakh:

Taxable LTCG = ₹1.25 lakh – ₹1 lakh exemption = ₹25,000
LTCG tax = 10% of ₹25,000 = ₹2,500

Debt fund gains are simply added to your income and taxed as per your applicable slab.

How Mutual Funds Returns Are Taxed (Tax Rates)

Fund Type	Holding Period	Tax Treatment
Equity Mutual Funds	> 12 months	10% on gains above ₹1 lakh (no indexation)
Debt Mutual Funds	Any period	As per income slab (post-April 2023)
Hybrid Funds (equity-oriented)	> 12 months	Treated as equity funds
Hybrid Funds (debt-oriented)	Any period	Treated as debt funds

Tax‑Planning Tips for Investors in Mutual Funds

1. Utilise the ₹1 Lakh Exemption

Plan your redemptions across financial years to keep gains within the exempt limit.

2. Invest in ELSS Funds

Equity-Linked Savings Schemes (ELSS) offer tax deductions under Section 80C up to ₹1.5 lakh per year with a 3-year lock-in period.

3. Hold for the Long Term

Especially for equity funds, holding beyond a year qualifies gains as long-term and helps reduce tax liability.

4. Use Systematic Withdrawal Plans (SWP)

Instead of redeeming lump sums, use SWP to spread gains over time and stay under the exemption limit.

5. Offset Losses

Use short-term or long-term capital losses to offset taxable gains. This can significantly reduce your tax outgo.

How to Avoid LTCG Tax on Mutual Funds

While it’s not possible to completely avoid LTCG tax, you can minimise it through legal means:

Staggered Redemptions: Sell units gradually across financial years to utilise the annual exemption.
Gift Units to Family: Transfers to family members in lower tax brackets (e.g., parents or spouse) can reduce overall tax liability.
Tax-Loss Harvesting: Sell underperforming funds to realise losses and rebuy similar schemes to offset gains.
Rebalance Carefully: Avoid unnecessary rebalancing that triggers gains.
Use Joint Holding Strategically: Split investments between family members to maximise use of exemptions.

Conclusion

Understanding how LTCG tax works is essential for every mutual fund investor. Tax rules change, and staying updated helps optimise your post-tax returns. Equity mutual funds enjoy favourable tax treatment up to ₹1 lakh in gains, while debt funds are now taxed like fixed income products. With strategic planning, you can not only meet your financial goals but also reduce your tax burden efficiently.