Mutual Funds taxes 2025: Can booking a profit of Rs 1.5 lakh save you from paying taxes?

The government’s revised capital gains tax rules for mutual funds, effective from FY 2024-25, have introduced new layers of complexity for investors. While some categories retain their old tax treatment, others face significant changes. This has sparked widespread debate on whether investors can reduce their tax liability by strategically booking profits up to Rs 1.5 lakh each year.

The Rs 1.5 lakh question

Addressing the common belief that booking profits of Rs 1.5 lakh annually can save investors from tax, CA Neeraj Arora, in his podcast on YouTube, called this approach “stupidity.” He explained that while the exemption exists, equity funds are meant for long-term horizons of at least 5–7 years. Selling units prematurely to stay under the exemption cap can harm compounding benefits.

“If you invest in an equity-oriented fund for just 10 months and then withdraw, you’ll not only face short-term taxation but also compromise long-term wealth creation. Equity mutual funds should never be treated like short-term instruments,” Arora said.

Losses and set-offs

CA Arora also highlighted that investors can use capital losses to manage tax liability. Short-term losses can be set off against both STCG and LTCG, while long-term losses can only be adjusted against LTCG. Unused losses may be carried forward for up to eight years if the ITR is filed on time. “Losses are not always bad — they can be a useful tool to reduce future tax burdens,” he added.

How redemption triggers tax

According to Arora, mutual funds are treated as capital assets, and redemption is considered a transfer. Tax is triggered only when the units are redeemed, not when the fund itself buys or sells securities. He reminded investors that taxation follows the First-In-First-Out (FIFO) method, meaning the oldest units are considered sold first.

Investment strategy

Arora further noted that investors must track important cut-off dates. For instance, gains on units sold before July 23, 2024, attracted older tax rates — 10% for LTCG and 15% for STCG in some cases. For new investments, he suggested arbitrage funds as a potential short-term parking option, offering 6–8% returns with equity-like taxation.

Mutual funds remain tax-efficient, but the 2025 rules demand informed decision-making. Simply booking annual profits of Rs 1.5 lakh may not be a sound strategy unless aligned with long-term goals. Arora stressed the importance of understanding holding periods, using set-off provisions effectively, and consulting a qualified tax advisor. “At the end of the day, the tax department knows everything. It’s better to plan smartly than be caught off guard with a notice,” he cautioned.

Equity vs non-equity funds

For taxation purposes, mutual funds are classified as equity mutual funds or non-equity mutual funds. Equity mutual funds follow the same tax rules as listed shares. This means gains on units held for more than 12 months qualify as long-term capital gains (LTCG), taxed at 12.5%, with the first Rs 1.5 lakh exempt annually. Short-term capital gains (STCG), from holdings under 12 months, attract 20% tax.

Non-equity mutual funds — including debt, hybrid, international, and gold funds — are taxed differently. For debt funds, where equity exposure is under 35%, the entire gain is taxed at the investor’s income slab rate regardless of the holding period. Hybrid funds, with equity between 35–65%, have a 24-month cutoff: holdings beyond this period qualify for LTCG at 12.5%, while shorter holdings are taxed at slab rates.

Category                    Old Rule (Till July 22, 2024)                                                            New Rule (July 23, 2024)
Equity Mutual Funds            STCG: 15%                                                                                   STCG: 20% + cess
                                    LTCG: 10% (above ₹1.25L exemption)                                                          LTCG: 12.5% (above ₹1.25L exemption)

Debt Mutual Funds            Purchased on or before Mar 31, 2023:                                                      Purchased till Mar 31,                                                                                                                               2023 & sold on or after July 23, 2024:

                            • STCG: Slab rate (if
                            • LTCG: 20% with indexation (if > 36 months)                                              • LTCG: 12.5% without indexation (if > 2 years)
                            Purchased on or after Apr 1, 2023:                                                        Purchased on or after Apr 1, 2023:

                            • Taxed at slab rate regardless of holding period                                         • Same as before – slab rate regardless of holding

Hybrid Mutual Funds            

Equity ≥ 65%: Taxed like equity mutual funds                                             Same treatment based on equity %:
Equity
                                                                                                                    Equity

Gold Mutual Funds            Taxed as per income tax slabs                          Same as old – taxed as per slab rate

International Mutual Funds    Taxed as per income tax slabs                      Same as old – taxed as per slab rate

Fund of Funds (FoFs)            If taxed like equity: Use old equity rules        Same rule continues:
                            If taxed as slab: Apply slab rate                                                         Equity-like FoFs – use new equity rules
                                                                                                                    Others – slab rate

ETFs (non-equity based)        STCG: Slab rate (if sold ≤ 1 year)
STCG: Slab rate (if sold ≤ 1 year)
                                                                                                                      LTCG: 10% (if sold > 1 year, no indexation)  

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