Capital Gains Tax on Mutual Funds in India — FY 2025-26 Complete Guide

If you redeemed mutual funds during FY 2025-26, you have capital gains that must be reported in your ITR. The tax rates changed significantly with Budget 2024 and remain the same for FY 2025-26 and FY 2026-27. Here is the complete guide.

Capital Gains Tax Rates — FY 2025-26

Equity Mutual Funds (65%+ in Indian equities)

Key point: The first ₹1,25,000 of LTCG from equity funds is exempt every financial year. Gains above ₹1,25,000 are taxed at 12.5% flat — no indexation benefit.

Debt Mutual Funds (less than 65% in equities)

For investments made after April 1, 2023:

• All gains (regardless of holding period) are taxed at slab rate
• No LTCG benefit, no indexation

For investments made before April 1, 2023:

• Held > 2 years: LTCG at 12.5% (no indexation)
• Held ≤ 2 years: STCG at slab rate

Hybrid / Balanced Funds

Depends on equity allocation:

• Equity-oriented (65%+ equity): Same as equity funds
• Debt-oriented (less than 65% equity): Same as debt funds

International / Overseas Funds

• All gains taxed at slab rate (treated as debt funds)
• No LTCG benefit regardless of holding period

The ₹1.25 Lakh LTCG Exemption — How It Works

Every financial year, you get a ₹1,25,000 exemption on LTCG from equity funds and listed stocks combined.

Example:

• LTCG from equity MF: ₹80,000
• LTCG from stocks: ₹60,000
• Total LTCG: ₹1,40,000
• Exempt: ₹1,25,000
• Taxable LTCG: ₹15,000
• Tax at 12.5%: ₹1,875

Tax harvesting tip: If your LTCG is approaching ₹1.25L, consider redeeming and reinvesting before March 31 to reset the cost basis and use the annual exemption.

Section 87A Rebate — Does It Apply to Capital Gains?

No. From FY 2025-26, the Section 87A rebate (which makes tax zero for income ≤ ₹12L under new regime) does not apply to STCG under Section 111A or LTCG under Section 112A.

This means even if your total income is below ₹12L, you must pay 20% STCG tax on equity fund gains.

How to Report Capital Gains in ITR

Capital gains must be reported in ITR-2 (not ITR-1). You need:

• Capital gains statement from your broker (Zerodha, Groww, etc.) or mutual fund house
• CAMS or Karvy consolidated statement for mutual funds

The statement shows:

• Date of purchase and redemption
• Cost of acquisition
• Sale proceeds
• Gain/loss per transaction

SIP Redemptions — FIFO Method

When you redeem SIP units, the FIFO (First In, First Out) method applies. The oldest units are considered sold first.

Example: You started a SIP in January 2024 and redeemed in February 2026.

• Units purchased in Jan 2024 → held 25 months → LTCG (> 12 months)
• Units purchased in Jan 2026 → held 1 month → STCG (< 12 months)

Each SIP instalment is treated as a separate purchase with its own holding period.

Tax Loss Harvesting

If you have capital losses, you can set them off against gains:

• STCG loss can be set off against STCG or LTCG
• LTCG loss can only be set off against LTCG
• Unabsorbed losses can be carried forward for 8 years (must file ITR before due date)

Frequently Asked Questions

Do I need to pay tax on mutual fund dividends?

Yes. Dividends from mutual funds are taxed at your slab rate (added to income). The fund house deducts 10% TDS on dividends above ₹5,000.

Is LTCG from mutual funds taxed in the new regime?

Yes. Capital gains at special rates (STCG 20%, LTCG 12.5%) apply in both old and new regimes. The regime choice doesn't affect capital gains tax.

What if I have both gains and losses in the same year?

You can set off losses against gains. STCG loss can offset both STCG and LTCG. LTCG loss can only offset LTCG. Net gains are taxed.

Do I need to file ITR-2 just for mutual fund redemptions?

Yes. Any capital gains transaction — profit or loss — requires ITR-2. You cannot file ITR-1 if you have redeemed mutual funds.

What is the tax on ELSS redemption?

ELSS has a 3-year lock-in. After 3 years, gains are LTCG — taxed at 12.5% above ₹1.25L. The 3-year lock-in ensures all ELSS gains are LTCG.

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Have mutual fund redemptions to report? I handle ITR-2 with capital gains schedules starting at ₹699. Message me on WhatsApp.