Income tax twist: How April 2023 and July 2024 reshaped capital gains on mutual funds

Taxation of mutual funds has undergone dramatic shifts in recent years, thanks to key reforms on April 1, 2023, and July 23, 2024. These dates mark turning points in how mutual funds are taxed—making the rules far more complex for investors.

Until recently, mutual funds were broadly classified as equity or debt, with equity enjoying a clear tax edge. But successive Finance Acts—removing indexation benefits in 2023, revising holding periods and rates in 2024, and redefining “specified funds” in 2025—have rewritten the playbook. The result: investors and advisors must now rethink strategies not only on market performance but also on tax impact.

“Mutual funds are now taxed under three categories: equity-oriented mutual funds, specified/debt-oriented mutual funds, and other mutual funds. While equity taxation is straightforward, the rates on non-equity funds vary by scheme and even depend on both purchase and redemption dates,” says Niranjan Avasthi, Senior Vice President at Edelweiss Mutual Fund.

Let’s begin with equity schemes:

Equity schemes

If a fund invests at least 65% in Indian stocks, it qualifies as equity. This covers plain equity funds, ETFs, index funds tracking the Sensex or Nifty, thematic funds, and even hybrids like aggressive hybrid funds, arbitrage funds, and equity savings funds—provided they maintain the 65% equity threshold.

Equity funds have always been popular for both returns and tax perks. That changed in Budget 2018, when long-term gains on equity were made taxable at 10% after a 12-month holding period. Post the Finance (No. 2) Act, 2024, LTCG has been raised to 12.5%, while STCG (less than 12 months) is now taxed at 20% (up from 15%). The exemption limit for LTCG under section 112A was also increased from Rs 1 lakh to Rs 1.25 lakh annually, effective July 23, 2024.

Non-equity funds

Taxation here is trickier. “Before 2023, debt funds enjoyed indexation, making them more tax-efficient than fixed deposits. To bring parity, the Finance Act 2023 introduced Section 50AA, making capital gains on “specified funds” purchased after April 1, 2023, as short-term capital gains, taxable at slab rates,” says Ashish Karundia, a Delhi-based tax professional.

“Specified mutual funds” were defined as those investing no more than 35% in domestic equities. But this also pulled in gold funds, international funds, and gold ETFs—funds that were never debt-focused. To fix this, the Finance (No. 2) Act 2024 redefined “specified mutual funds.” From April 1, 2025, any fund investing more than 65% in debt and money market instruments will qualify as specifies/debt fund.

“The change in definition effective from FY 2025-26 will alter taxation of gold and international funds. Since they will not meet the 65% debt rule, and they will shift from the ‘specified’ category to the ‘other’ category,” says Balwant Jain, a Mumbai-based tax consultant.

The tax outcome of the specified fund also depends on the purchase date, as older schemes are grandfathered. For example:

Specified/Debt funds bought before April 1, 2023:

Redeemed before July 23, 2024: LTCG after 36 months, taxed at 20% with indexation; STCG at slab rate.
Redeemed on/after July 23, 2024: LTCG after 24 months, taxed at 12.5% without indexation; STCG at slab rate.

Specified/Debt funds bought on/after April 1, 2023: Always taxed at slab rate, with no benefit from redemption date.

Tax-efficient options

Some funds still offer smart tax advantages. Arbitrage funds, though debt-like in strategy, hold 65% equity and thus qualify for equity taxation—12.5% on LTCG and 20% on STCG. For those in high tax brackets, this may be a better option than paying a 30% slab rate.

Equity savings funds and aggressive hybrid funds also stay tax-friendly as long as equity holdings remain above 65%, offering investors some downside protection with equity tax treatment.

The lesson? Don’t just chase returns—evaluate the tax wrapper around your fund. Over time, what matters isn’t only how much you earn but how much you keep.

So next time someone boasts about their SIPs, debt, or a gold fund, ask: “But how is it taxed?” In the mutual fund game, knowledge isn’t just power. It’s money in your pocket.