Mutual fund investments have become a go-to choice for many Indians looking to build wealth over time through systematic investment plans (SIPs), lump-sum entries, or goal-based strategies. According to the Association of Mutual Funds in India (AMFI), the industry’s assets under management (AUM) have grown from ₹27 lakh crore in February 2020 to over ₹64 lakh crore as of February 2025, reflecting a more than two-fold increase in five years.
With digital access, simplified KYC norms, and a growing appetite for returns, mutual funds have firmly secured their place in personal finance across income groups. That said, one part of the process often gets overlooked until it’s time to file returns – mutual fund taxation.
Whether you’re earning dividends or booking profits, the tax on mutual funds in India directly impacts your real returns. So, understanding how your investments are taxed is a core part of making informed decisions that actually pay off – and that’s what this post is all about.
Factors determining mutual fund taxation
Mutual fund taxation depends on a few key factors. Here’s what you should keep an eye on:
- Types of funds: Taxation varies depending on what kind of mutual fund investments you’re making. Each comes with different holding period rules and tax rates.
- Holding period: The longer you stay invested, the better it is for taxes. Long-term holdings usually have lower tax rates, so staying invested can actually help you keep more of your returns.
- Capital gains: If you sell your assets at a higher price than what you paid, then the profit earned is called the capital gain. This amount is taxable based on how long you held the investment.
- Dividends: You don’t need to sell your assets to get a dividend. It’s already a portion of the fund’s total profits that the mutual fund company shares with investors. While it feels like a bonus, it’s still taxable based on your income slab.
Types of mutual funds and their taxation
Let’s understand the tax implications for various types of mutual funds:
Equity funds
Equity funds are the most popular and preferred type of mutual fund investments in India. They invest most of your money (at least 65 percent) in shares of Indian companies – think of it as pooling your money with others to focus on large-cap or small-cap companies.
For example, say you invested ₹2 lakh in an equity mutual fund in April 2024.
- If you sell it before April 2025 (within 12 months) and you make a profit, that’s called a short-term capital gain (STCG). As per the latest regulation, if your sale happens before July 23, 2024, you’ll be taxed 15 percent on that gain. But if your sale is on or after this date, the STCG tax rate jumps to 20 percent.
- If you sell it in May 2025 for ₹2.6 lakh, you hold the fund for over a year. So your profit becomes a long-term capital gain (LTCG) of ₹60,000. And because your profit is less than ₹1.25 lakh per financial year, they’re tax-free. Anything over this amount will be taxed at 12.5 percent without indexation.
Debt funds
If you’re looking for lower-risk investment options, debt mutual funds might suit you. These funds invest in fixed-income assets like bonds and corporate securities, offering more stable but moderate returns. Timing your investment can make a big difference in your post-tax returns.
- If you bought assets before April 1, 2023 and held them for over three years, the profits are taxed at 20 percent with indexation benefits.
- If your mutual fund has less than 35 percent invested in Indian company shares, any profits you make will be treated as short-term capital gains, irrespective of the holding period.
Hybrid funds
Hybrid mutual funds are a mix of debt and equity, giving you a balanced approach to returns and risk. Their taxation depends on how much of the fund is invested in equity. If 65 percent or more is in equity, it’s taxed like an equity-oriented fund. If it’s less than 65 percent, it’s taxed like a debt-oriented fund. Capital gains are taxed when you redeem the investment, and dividends are also taxable with 10 percent TDS if they exceed ₹5,000 in a year.
Union Budget 2025-26 updates
The Union Budget 2025-26 announced updates for mutual fund taxation:
- The mutual fund investment industry expected the reintroduction of indexation benefits for debt funds, which were removed in Budget 2024. This would allow you to adjust gains for inflation, making funds more tax-efficient.
- Long-term capital gains (LTCG) on equity mutual funds are taxed at 12.5 percent (which was 10 percent before) if held for more than 12 months, while the short-term gains are taxed at 20 percent.
- While LTCG in debt mutual funds is taxed at 12.5 percent if held for over two years, short-term gains are taxed as per the income tax slab.
- The Budget 2025-26 offers a higher rebate under the new tax regime, which can benefit you with lower taxable income.
Taxation of dividends
If you’re wondering how to deal with dividend income while filing your tax return, here’s what you need to know:
Earlier, dividend income was tax-free because companies paid Dividend Distribution Tax (DDT), but that’s no longer the case. Now, any dividend income you receive is added to your total income and taxed at your applicable income tax slab rate.
Section 194 mandates 10 percent TDS on dividends if they exceed the threshold:
- For FY 2024-25, the threshold was ₹5,000.
- For FY 2025-26, the threshold increased to ₹10,000.
For example, if an employee earns ₹16,000 in dividends in FY 2025-26, ₹1,600 (10 percent) will be deducted as TDS, and they’ll receive ₹14,400.
If you’re an NRI investor, you’ll face 20 percent TDS. Still, you can benefit from lower treaty rates under DTAA (double taxation avoidance agreement), along with documents like form 10F, tax residency certificate, and declaration of beneficial ownership.
To file your taxes on mutual funds in India, visit the official Income Tax e-filing portal to file your ITR quickly and accurately. If the TDS is deducted, don’t forget to declare the full dividend income in your ITR and adjust TDS using your AIS and Form 26AS.
