Tax on Debt Mutual Funds in India: Rules, Rates & Calculation 2025-26

According to AMFI’s data, the total AUM of debt mutual funds reached ₹15.21 lakh crore in March 2025 from ₹12.62 lakh crore in March 2024. 

If you are an investor in any type of debt mutual fund or are looking to invest, you must be aware of the tax on debt mutual funds. 

This blog is to give you a comprehensive idea of applicable taxes in different scenarios. 

Quick Overview 

• Investments before 1.04.2023 are taxed at 20% LTCG with indexation after 3 years.
• Short-term gains on pre-April 2023 investments are taxed at the investor’s slab rate.
• Investments on or after April 1, 2023, fall under short-term capital gains.
• Debt fund taxation new rules eliminated the LTCG benefit for recent investments.

Factors Affecting Tax on Debt Mutual Funds 

• Capital Gains: The profit you earn by selling a debt mutual fund at a higher NAV than its purchase NAV is the capital gain and becomes taxable.
• Dividend: Mutual fund companies share a part of their profits with investors in the form of dividends, which are taxable at the investor’s slab rate.
• Holding Period: The duration between purchase and redemption of units determines tax liability; longer holding periods reduce tax liability, whereas short-term investments attract higher taxes on profits.

Tax on Debt Mutual Funds Purchased Before 1 April 2023 

If you have invested in debt mutual funds before 1st April, 2023, your investments follow the previous tax rules, which are more favourable. 

• Short-Term Capital Gains (STCG): If you sell those units within 36 months, the short-term capital gains apply according to your income tax slab. 
• Long-Term Capital Gains (LTCG): If you sell after 36 months, the long-term capital gain tax on debt mutual funds is applicable at 20%, but with indexation. 

The indexation benefit adjusts the inflation with the purchase price, which reduces the taxable amount. This older tax system helps lower the tax on long-term debt fund investments when redeemed.

Tax on Debt Mutual Funds Purchased After 1 April 2023 

For debt mutual funds purchased on or after April 1, 2023, the tax rules have changed, and you no longer get the usual benefits. 

• There are no different taxes for STCG and LTCG.
• You have to pay taxes at your tax slab for both short and long-term gains.
• There is no indexation benefit or the lower tax rate for long-term capital gains. 

In short, investing in debt funds after 2023 can cost you more in taxes.

Tax on Debt Mutual Funds in India Sold Before July 23, 2024 

For debt mutual fund investments made on or before March 31, 2023, and redeemed before July 23, 2024, the tax depends on the holding period:

• If you redeem within 36 months, the profits are STCG, and you have to pay taxes according to your income tax slab.
• If you redeem after 36 months, the gains qualify as LTCG and are taxed at 20%. 

Additionally, you are eligible to benefit from indexation, which adjusts the purchase price for inflation. Therefore, your tax payable amount reduces.

Tax on Debt Mutual Funds Sold on or After July 22, 2024 

Tax on debt mutual funds sold on or after July 22, 2024, follows new rules:

• Short-Term Capital Gains Tax: If you sell your debt fund investments within two years, STCG applies. For this, you have to pay taxes according to your income tax slab.
• Long-Term Capital Gains Tax: This is applicable on funds kept for more than two years and is now taxed at a flat rate of 12.5%. However, you will not get the indexation benefit.

This change eliminates the earlier advantage of indexation and may affect investors who rely on long-term debt fund investments for better tax efficiency.

Final Word 

Understanding tax on debt mutual funds in 2025-26 is crucial for effective investment planning. Though the removal of indexation raises tax liability on debt mutual funds, they remain attractive for set-off and carry-forward of losses. 

With proper planning and expert guidance, you can still optimise post-tax returns.

Want to get higher returns through debt investment? Start investing in bonds through the Stable Money platform and get up to 12% fixed returns every year.