Are Mutual Funds Taxed in India - Expert Answer

"I sold my mutual fund last month. How much tax do I owe?"

This question lands in our Belong WhatsApp community almost daily. And the answer is never simple because it depends on what type of fund you sold, how long you held it, and when you bought it.

Yes, mutual funds are taxed in India. But the rates vary dramatically based on fund category and holding period. 

Get this wrong, and you could pay 30% tax when you should have paid 12.5%.

This guide breaks down the current tax rules after the July 2024 Budget changes, with specific implications for NRIs investing from the UAE and UK.

The Two Factors That Decide Your Tax Rate

Mutual fund taxation in India depends on two things: what type of fund you own and how long you held it.

Fund Category: Is it equity-oriented (65%+ in Indian stocks) or debt-oriented (bonds, money market)? This classification determines which tax rules apply.

Holding Period: Did you hold for more or less than the threshold period? This determines whether gains are short-term (STCG) or long-term (LTCG).

The July 2024 Union Budget made some of the biggest changes to mutual fund taxation in recent years. 

If you invest in equity, debt, hybrid, or even gold mutual funds, the way your gains are taxed has shifted.

Equity Mutual Fund Taxation (FY 2025-26)

Equity-oriented funds are those investing 65% or more in Indian equities. This includes large-cap, mid-cap, small-cap, flexi-cap, ELSS, and most hybrid funds with high equity allocation.

Short-Term Capital Gains (STCG): If you sell equity fund units within 12 months of purchase, gains are taxed flat at 20%. This rate increased from 15% after July 23, 2024.

Long-Term Capital Gains (LTCG): If units are held for more than 12 months, gains are taxed at 12.5%. The first ₹1.25 lakh of LTCG across all equity investments (shares + equity funds) in a financial year is exempt.

👉 Tip: The ₹1.25 lakh LTCG exemption is per financial year, not per fund. Plan your redemptions across April-March to maximize this benefit.

Example: You invest ₹5 lakh in a large-cap fund. After 18 months, it grows to ₹7 lakh. Your LTCG is ₹2 lakh. Tax = 12.5% on (₹2 lakh - ₹1.25 lakh) = ₹9,375.

Learn more about equity fund taxation and strategies to minimize tax impact.

Debt Mutual Fund Taxation (The Big Change)

Debt fund taxation changed dramatically in April 2023. 

For debt mutual funds purchased on or after April 1, 2023, all gains are taxed as short-term capital gains at your income tax slab rate, regardless of how long you hold them.

This shift in debt funds taxation removes the earlier advantage of lower long-term rates. For someone in the 30% tax bracket, debt fund gains are now taxed the same as FD interest.

👉 Tip: Debt funds bought after April 2023 are less tax-efficient for high-bracket investors compared to equity or arbitrage funds.

Compare alternatives in our guide on debt funds vs fixed deposits.

Hybrid Fund Taxation

Hybrid funds fall into different tax buckets based on their equity allocation:

Equity-oriented hybrids (aggressive hybrid, equity savings with 65%+ equity): Taxed like equity funds. STCG at 20%, LTCG at 12.5%.

Balanced hybrids (35-65% equity): These "middle-lane" funds have a 24-month threshold for LTCG. Gains after 24 months are taxed at 12.5%.

Conservative hybrids (below 35% equity): Taxed like debt funds at slab rates.

Explore options through our mutual funds tool.

International Funds, Gold Funds, and FoFs

These categories don't meet the 65% Indian equity threshold, so they're treated as non-equity for tax purposes:

For investments made after April 2023 in specified mutual funds (those with over 65% in debt), gains are taxed at slab rates regardless of holding period.

How Dividends Are Taxed

Dividends are not part of capital gains. They're added to your total income and taxed at your slab rate.

AMCs deduct TDS at 10% on dividends exceeding ₹5,000 for resident investors. For NRIs, TDS applies at 20% plus applicable surcharge and cess.

👉 Tip: Growth option in equity funds is usually more tax-efficient than dividend option. You control when to book gains and can use the ₹1.25 lakh exemption.

NRI-Specific Tax Rules

NRIs face TDS on capital gains and dividends. The final liability may change after filing returns and applying DTAA benefits.

TDS Rates for NRIs:

Important: NRIs cannot adjust the basic exemption limit (₹2.5-3 lakh) against capital gains. A resident can use this exemption to reduce LTCG tax, but non-residents cannot.

If you're living in the UAE, USA, UK, or most other countries, India has a Double Taxation Avoidance Agreement (DTAA) with your country of residence. This ensures you don't pay tax twice on the same income.

The UAE has no personal income tax, so capital gains from Indian mutual funds are taxed only in India at the rates discussed above.

Understand treaty benefits in our DTAA guide for NRIs.

Tax Loss Harvesting: Using Losses to Save Tax

Losses can cushion the tax hit through set-off rules:

Short-term capital loss (STCL): Can be set off against both STCG and LTCG.

Long-term capital loss (LTCL): Can be set off only against LTCG, not against STCG.

If your capital loss can't be fully adjusted in the same year, you can carry it forward for up to 8 assessment years. 

To claim this benefit, you must file your Income Tax Return within the due date (July 31).

Example: You have ₹2 lakh STCL and ₹4 lakh LTCG. The STCL can offset LTCG, reducing taxable gain to ₹2 lakh. After the ₹1.25 lakh exemption, you pay tax on only ₹75,000.

👉 Tip: Even if your LTCG is below ₹1.25 lakh and fully exempt, file a nil return. It creates a clean record and preserves your ability to carry forward losses.

Learn more about tax filing for NRIs.

SIP Taxation: Each Installment Is Separate

For SIPs, each installment is treated as a separate investment with its own purchase date. This creates a FIFO (First In, First Out) situation when you redeem.

Example: You SIP ₹10,000/month for 24 months (total invested: ₹2.4 lakh). When you redeem after 14 months from start:

• First 2 installments: Held over 12 months = LTCG (12.5%)
• Remaining 12 installments: Held under 12 months = STCG (20%)

This complexity is why many NRIs prefer lump-sum investments for cleaner tax calculations.

Explore SIP strategies in our guide on SIP vs lump sum investing.

Switching Between Funds Triggers Tax

"Switching" from one mutual fund to another is treated as redemption plus fresh purchase. It triggers capital gains tax on the fund you're exiting.

This catches many investors off guard. Moving from a large-cap to a mid-cap fund within the same AMC isn't tax-free. You're effectively selling one and buying another.

👉 Tip: Before switching, calculate the tax impact. Sometimes staying invested is better than switching and paying 20% STCG.

Tax-Efficient Fund Choices

Some fund categories offer better tax efficiency:

Arbitrage Funds: Classified as equity (65%+ in arbitrage positions) but behave like liquid funds. STCG at 20%, LTCG at 12.5% after 12 months. Better than debt funds post-2023 for short-term parking.

Equity Savings Funds: Blend of equity, arbitrage, and debt. Equity taxation if equity+arbitrage exceeds 65%.

ELSS Funds: 3-year lock-in qualifies gains as LTCG automatically. Plus Section 80C deduction up to ₹1.5 lakh on investment.

Compare tax-efficient options using our NRI FD rates tool and GIFT City mutual funds.

GIFT City: The Tax-Free Alternative

For NRIs seeking tax efficiency, GIFT City investments offer a compelling alternative. Mutual funds and fixed deposits in GIFT City IFSC enjoy significant tax benefits:

• No capital gains tax for non-residents
• No dividend distribution tax
• No STT (Securities Transaction Tax)

This makes GIFT City particularly attractive for NRIs who want India exposure without the tax complexity.

Explore options through our GIFT City Alternative Investment Funds tool and track markets with Gift Nifty.

Filing Requirements for NRIs

Even if your income is below the taxable threshold, filing ITR is recommended for NRIs with mutual fund investments:

Mandatory if: You have capital gains above exemption limits or want to claim TDS refund.

Recommended if: You want to carry forward losses or create a clean compliance record.

Deadline: July 31 for the previous financial year. Belated returns accepted until December 31 but you lose the ability to carry forward losses.

Understand the complete process in our guide on NRI tax filing.

Quick Reference: 2025-26 Tax Rates

Key Takeaways

Yes, mutual funds are taxed in India, but rates vary significantly by fund type and holding period. 

Equity funds enjoy favorable treatment with 12.5% LTCG tax and ₹1.25 lakh annual exemption. 

Debt funds purchased after April 2023 lost their tax advantage and are now taxed at slab rates like FDs.

For NRIs, TDS is deducted at source, but DTAA benefits can prevent double taxation. UAE residents pay tax only in India since the UAE has no personal income tax.

The ₹1.25 lakh LTCG exemption, loss carry-forward rules, and timing of redemptions offer legitimate tax planning opportunities. 

GIFT City investments provide a tax-efficient alternative worth exploring.

Thousands of NRIs navigate these tax rules with guidance from our WhatsApp community. Join them for practical insights on tax-efficient investing.

Ready to invest tax-efficiently? The Belong app helps you explore mutual fund options, compare NRI FD rates, and access GIFT City investments with clear tax implications.