Long-Term Capital Gain (LTCG) Tax on Mutual Funds 2025-26

Mutual funds have become one of the most popular investment choices among Indians, reaching almost ₹80 lakh crore worth of assets under management as of October 2025. while the popularity of mutual funds is growing, know that they attract 12.5% tax (without indexation).

Understanding the long-term capital gain tax on mutual funds is important. Taxes play a significant role in shaping your final returns and can directly affect how much wealth you build over time. Let us delve deeper into the LTCG on mutual funds in 2025-26.

Quick Synopsys 

• Long-term capital gain tax on a mutual fund applies when you sell after a defined holding period.
• The long-term capital gain tax rate on mutual funds is 12.5% (without indexation) from FY 2024–25.
• Gains up to ₹1.25 lakh from equity mutual funds are exempt each financial year.
• The long-term capital gain tax on debt mutual funds and equity mutual funds now follows the same rate.

What is Long-Term Capital Gain (LTCG)?

When you hold an asset like a mutual fund for a certain period before selling it, the profit you earn is called a capital gain. If this holding period exceeds the threshold defined by the Income Tax Act, it becomes a long-term capital gain. 

For equity-oriented funds, this period is 12 months, and for debt-oriented funds, it is 24 months.

Understanding LTCG Tax on Mutual Funds in India

The tax on long-term capital gain on mutual fund determines how much of your earnings from mutual fund investments go to the government. It depends on the type of mutual fund and how long you hold it.

In the Union Budget 2024, the government announced key changes to simplify the taxation system. The new long-term capital gain tax rate on mutual fund is 12.5% without indexation benefits for both equity and debt mutual funds. This replaced the earlier system, where different rates and indexation rules applied depending on the type of fund.

LTCG Tax on Equity Mutual Funds

The long term capital gain tax on equity mutual fund applies to schemes that invest more than 65% of their corpus in equities or equity-related instruments.

From FY 2024-25, these gains are taxed at 12.5% without indexation. However, the government provides relief to small investors. Any long-term gains up to ₹1.25 lakh per financial year are tax-free. Only the amount exceeding this limit is taxed.

For example, if your total long-term capital gain from an equity mutual fund in a financial year is ₹2 lakh, you will pay tax only on ₹75,000 at 12.5%.

If you are comparing investment options, consider exploring the best performing mutual funds before deciding where to invest. 

However, even if mutual funds offer attractive long-term returns, they also carry market risks. Fixed Deposits, on the other hand, provide guaranteed returns and safety of capital. Book your FD now! 

LTCG Tax on Debt Mutual Funds

Earlier, the long term capital gain tax on debt mutual fund was charged at 20% with indexation benefits. However, under the new rules effective from July 23, 2024, the rate is now 12.5% without indexation.

This means that inflation adjustment is no longer allowed when calculating your gains. While this simplifies taxation, it also reduces the tax advantage that debt funds once had.

Example:

If you invest ₹5 lakh in a debt mutual fund and redeem it after 3 years for ₹6 lakh, your gain of ₹1 lakh will be taxed at 12.5%, resulting in a tax of ₹12,500.

Debt funds continue to be suitable for investors seeking steady, moderate returns,  but if your goal is assured returns, FDs may be a more stable choice.

Exemptions and Deductions under LTCG

There are certain exemptions available under the Income Tax Act that can help reduce your tax on long term capital gain on mutual fund:

• Equity mutual fund exemption: Gains up to ₹1.25 lakh in a financial year are exempt from LTCG tax.
• Investment in bonds (Section 54EC): Capital gains up to ₹50 lakh can be exempted if you reinvest the proceeds within six months in specified bonds such as NHAI or REC.
• Capital Gains Account Scheme: If you cannot reinvest immediately, you can deposit the amount in a Capital Gains Account before the return filing due date.

Understanding these exemptions helps you plan your redemptions efficiently and reduce your tax liability.

How to Calculate LTCG Tax on Mutual Funds?

You can calculate your long term capital gain tax on mutual fund by following a few simple steps:

1. Determine the sale value: The amount you receive from selling your mutual fund units.
2. Subtract the purchase cost: The amount you initially invested.
3. Subtract transfer expenses (if any): Brokerage or transaction costs.
4. Apply exemptions: Deduct eligible exemptions such as ₹1.25 lakh (for equity mutual funds).
5. Apply tax rate: The balance gain amount is taxed at 12.5%.

Here is a simplified table:

How to Reduce LTCG Tax Legally

You can reduce your long term capital gain tax on mutual fund by following some smart strategies:

• Time your withdrawals: Redeem in different financial years to utilise the ₹1.25 lakh exemption more than once.
• Invest under Section 54EC: Use your capital gains to buy eligible bonds.
• Choose tax-efficient products: Combine mutual fund investments with FDs for balanced returns.

Conclusion

Understanding the long term capital gain tax on mutual fund helps investors avoid unnecessary tax outgo, and optimise post-tax returns. While mutual funds are excellent for wealth creation, combining them with secure products like Fixed Deposits on Stable Money ensures a balanced portfolio: one that grows consistently and safely.