Tax on Mutual Funds: Equity, Debt & Hybrid

The Basics: How Mutual Fund Taxation Works in India

Before diving into the specifics of each fund type, it helps to understand the overarching framework within which mutual fund taxation sits in India.

When you invest in a mutual fund, you are purchasing units of the fund at the applicable Net Asset Value (NAV). When you redeem - that is, sell back - those units, the difference between the redemption NAV and the purchase NAV represents your gain or loss. Under the Income Tax Act, 1961, this gain is classified as capital gains income, not business income (unless you are a trader who treats securities as stock-in-trade, which is a separate situation).

Capital gains are further divided into two sub-categories based on the holding period: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The holding period threshold that separates short-term from long-term differs across asset classes and fund types - which is one of the core complexities of mutual fund taxation.

The tax rates applicable to STCG and LTCG also differ. Broadly, short-term gains are taxed at higher rates than long-term gains, creating a built-in incentive in the tax code for patient, long-term investing. However, the exact rates depend on the fund category.

It is also important to note that mutual fund taxation is governed by the Income Tax Act, not directly by SEBI regulations. SEBI regulates the structure, disclosure, and conduct of mutual funds; the Income Tax Act (administered by the Central Board of Direct Taxes, or CBDT) determines how the gains are taxed. Investors must also note the role of Tax Deducted at Source (TDS) - in certain cases, the fund house or the broker deducts tax before crediting the redemption proceeds. Staying aware of TDS rules prevents double-counting at the time of return filing.

Another foundational concept is the distinction between Growth and Dividend (now called IDCW - Income Distribution cum Capital Withdrawal) options within the same fund. The Growth option reinvests all returns back into the fund, so you only pay tax when you actually redeem. The IDCW option pays out periodic distributions to unit holders, and these payouts carry their own separate tax consequences. The choice between Growth and IDCW therefore has a direct tax dimension, not just an investment preference dimension.

Finally, it is worth noting that the classification of a fund - whether it qualifies as an equity fund or a debt fund for tax purposes - is determined not by what the fund calls itself in its name or marketing material, but by a specific rule in the Income Tax Act relating to the minimum percentage of equity exposure in the portfolio. This rule is the gateway to preferential equity taxation, and understanding it is critical for investors looking at hybrid and international funds.

Equity-Oriented Funds: STCG and LTCG Rules

Equity-oriented funds are those where at least 65% of the total assets are invested in equity and equity-related instruments of Indian companies. This 65% threshold is the statutory definition - it applies regardless of the fund's marketing name. Plain vanilla large-cap, mid-cap, small-cap, flexi-cap, and ELSS (Equity Linked Savings Schemes) funds typically satisfy this criterion.

For equity-oriented funds, the holding period that separates short-term from long-term is 12 months (one year). If you redeem units that you have held for 12 months or less, the gain is STCG. If you redeem units held for more than 12 months, the gain qualifies as LTCG.

Short-Term Capital Gains on equity funds are taxed at a flat rate. Post the Union Budget 2024, the STCG rate on equity mutual funds (and listed equity shares, given the linkage through STT) was revised. Refer to the latest Finance Act for the precise current rate, as this has been a Budget-sensitive figure in recent years.

Long-Term Capital Gains on equity funds enjoy a favourable treatment: gains up to a specified threshold (again, refer to the current Finance Act for the exact annual exemption limit) are entirely tax-free, and gains beyond that threshold are taxed at a concessional flat rate without the benefit of indexation. Indexation - the process of adjusting the purchase price for inflation using the Cost Inflation Index (CII) - is not available for equity funds.

An important feature of equity fund taxation is the role of Securities Transaction Tax (STT). STT is levied on transactions in equity shares and equity mutual fund units. The concessional LTCG rate on equity funds is specifically available because STT is paid at the time of both purchase and redemption. The STCG concession similarly applies only where STT has been duly paid. For units redeemed through an exchange (like ETFs on NSE or BSE), STT is collected by the stock exchange. For direct redemptions with the AMC (Asset Management Company), the fund house collects STT.

ELSS (Equity Linked Savings Schemes) deserve a special mention. These are equity-oriented funds that come with a mandatory three-year lock-in period. Investments in ELSS qualify for a deduction under Section 80C of the Income Tax Act up to the specified limit. Because the lock-in is three years (which is more than the 12-month threshold), all ELSS gains at redemption will automatically qualify as LTCG. The Section 80C deduction makes ELSS a dual-benefit instrument - tax saving on the way in, and LTCG treatment on the way out.

Investors also need to track the purchase NAV and date for every SIP instalment separately. Each SIP instalment is treated as a separate investment for both holding period and cost purposes. So in a monthly SIP, the first instalment may already have crossed the 12-month mark and qualify for LTCG treatment, while the most recent instalment may still be in the STCG zone. Many mutual fund platforms and broker portals, including those integrated with exchanges like NSE, provide holding-period breakdowns to help with this tracking.

Debt-Oriented Funds: The Post-2023 Regime

Debt-oriented mutual funds are those that do not qualify as equity-oriented - broadly, funds where less than 65% of the portfolio is in domestic equity. This includes pure debt funds (liquid funds, money market funds, short-duration funds, gilt funds, dynamic bond funds, credit risk funds, etc.), as well as international funds and fund-of-funds that primarily invest in overseas equities or gold.

The taxation of debt funds underwent a dramatic transformation with the Finance Act 2023, effective from 1 April 2023. Prior to this change, debt fund investors enjoyed a significant advantage: if they held units for more than 36 months (3 years), the gains were classified as LTCG and taxed at 20% after indexation, or 10% without indexation, whichever was lower. Indexation could dramatically reduce taxable gains by adjusting the cost upward for inflation, making debt funds far more tax-efficient than traditional fixed deposits.

The Finance Act 2023 eliminated this benefit for funds where domestic equity exposure is less than 65%. From 1 April 2023 onwards, gains from these funds - regardless of the holding period - are added to the investor's total income and taxed at the applicable slab rate. In other words, there is no longer a distinction between STCG and LTCG for debt funds acquired on or after 1 April 2023. Whether you hold a debt fund for one month or five years, the gain is taxed like interest income.

This was a landmark policy change because it effectively levelled the playing field between debt mutual funds and bank fixed deposits, which had always been taxed at slab rates. Prior to 2023, a high-income investor in the 30% tax bracket could invest in a debt fund for three-plus years and pay only 20% (post-indexation), while a bank FD would attract 30% tax on interest. That arbitrage is now largely gone.

For debt fund units purchased before 1 April 2023 and held continuously, the pre-2023 rules (with indexation and concessional LTCG rate) continue to apply - but only until those units are redeemed. Once redeemed and reinvested, the new rules apply to fresh purchases.

There is a narrow category worth noting: debt funds that maintain between 35% and 65% domestic equity are sometimes referred to as having a hybrid character, but for tax purposes they are currently treated like debt (unless they meet the 65%+ equity threshold). Investors must always verify the portfolio's actual equity allocation, as funds can drift in allocation over time.

For TDS purposes on debt funds, if an investor is a resident individual, TDS is generally applicable on capital gains for redemptions above a certain threshold, as per current CBDT circulars. NRI investors face stricter TDS requirements. Both resident and NRI investors should track their actual tax liability separately, as TDS may not perfectly match the final tax due.

Finally, the indexation removal has a silver lining for some investors: those in the lower tax brackets (nil or 5% slab) may actually find the new regime more straightforward, since their slab rate is lower than the erstwhile 20% with indexation. For them, the post-2023 debt fund rules are not necessarily more burdensome.

Hybrid Funds: Navigating the Middle Ground

Hybrid mutual funds invest in a combination of equity and debt instruments - and sometimes gold or international equities as well. They span a wide spectrum, from aggressive hybrid funds (which maintain a high equity allocation) to conservative hybrid funds (which are predominantly debt). Because their equity-debt mix can fall anywhere on the spectrum, their tax treatment is not uniform - it depends entirely on where the fund's portfolio sits relative to the critical 65% domestic equity threshold.

Aggressive Hybrid Funds are mandated by SEBI to maintain 65–80% in domestic equity. Since they always maintain at least 65% equity, they consistently qualify as equity-oriented funds for tax purposes. Gains from aggressive hybrid funds are therefore taxed just like gains from pure equity funds: STCG for units held 12 months or less, LTCG for units held more than 12 months, with the respective rates applying.

Balanced Advantage Funds (also called Dynamic Asset Allocation Funds) are a popular category that dynamically shifts between equity and debt based on market valuations. Some of these funds maintain their gross equity exposure (including equity derivatives) above 65% at all times, thereby retaining equity fund tax status. Others may dip below 65% at certain times. Investors must examine the fund's portfolio carefully and check whether it has historically maintained the 65% threshold to predict its tax status. SEBI mandates full portfolio disclosure monthly, and AMCs typically publish the equity allocation percentage prominently.

Conservative Hybrid Funds maintain only 10–25% in equity, with the rest in debt. They clearly do not meet the 65% equity threshold, so they are taxed like debt funds - at slab rates on all gains, regardless of holding period (under the post-2023 rules).

Multi-Asset Allocation Funds invest in at least three asset classes (equity, debt, gold, or international equities). Their tax treatment again depends on their domestic equity allocation. If domestic equity is 65% or more, they are equity funds for tax. If not, they fall into the debt/slab-rate category.

Arbitrage Funds are technically equity-oriented funds because they maintain very high gross equity exposure (they buy stocks and simultaneously sell equivalent futures). Because of this, they qualify as equity funds for tax purposes, even though their return profile is very conservative (comparable to liquid funds). This makes arbitrage funds a tax-efficient alternative to liquid funds for investors in high tax brackets who want low-volatility, short-term parking of money. STCG applies if held for 12 months or less; LTCG applies beyond 12 months.

International Funds and Fund-of-Funds (FOFs) that invest in overseas equities are treated as debt funds for tax purposes, regardless of their equity character, because the 65% threshold specifically refers to domestic (Indian) equity. After the Finance Act 2023, these too are taxed at slab rates on all gains.

The key practical takeaway for hybrid fund investors is this: do not assume the tax treatment - verify the actual domestic equity allocation of the fund in question, and check whether it has consistently maintained the relevant threshold.

Dividend (IDCW) Option Taxation

Until the Finance Act 2020, dividends received from mutual funds were tax-free in the hands of investors (the fund paid a Dividend Distribution Tax, or DDT, before paying out). This changed dramatically from 1 April 2020. SEBI also mandated that the 'Dividend' option be renamed to 'IDCW' - Income Distribution cum Capital Withdrawal - to better reflect that payouts may include not just income but also the investor's own capital.

Under the current regime, IDCW payouts from mutual funds are fully taxable in the hands of the investor. The amount received is added to the investor's total income for the financial year and taxed at the applicable income tax slab rate. There is no separate concessional rate for IDCW income.

TDS is also applicable on IDCW payouts. For resident investors, TDS is currently deducted if the IDCW income from a particular fund exceeds a specified threshold in a financial year. The applicable TDS rate for resident individuals is set by the Income Tax Act - refer to the current provisions and CBDT notifications for the precise rate and threshold. For NRI investors, a higher TDS rate applies, and it is deducted at source regardless of amount.

There is also an important nuance: when the fund pays an IDCW, the NAV of the fund falls by an amount equal to the payout per unit. This means the investor's unit value drops, and if they eventually redeem the units, their capital gains will be lower (because the NAV at the time of redemption is reduced). In effect, the IDCW option converts what would have been capital gains (potentially LTCG at a lower rate for equity funds) into ordinary income taxed at slab rates. For equity fund investors in higher tax brackets, the Growth option is therefore generally more tax-efficient - though this is a tax observation, not investment advice.

For debt fund investors who previously chose the Dividend (now IDCW) option for regular cash flows, the tax equation remains broadly similar to the post-2023 world where all debt fund gains are taxed at slab rates anyway. However, the timing difference matters: IDCW is taxed in the year of receipt, while capital gains on the Growth option are taxed only on redemption. This timing flexibility is an advantage of the Growth option for those who do not need regular cash flows.

Fund houses are required to report IDCW payments to the Income Tax Department, and these amounts are typically pre-populated in Form 26AS and the Annual Information Statement (AIS) for resident investors. Investors should cross-check these figures carefully when filing their Income Tax Return (ITR) to ensure consistency.

Securities Transaction Tax and Its Role

Securities Transaction Tax (STT) is a transaction-level tax levied on the purchase and sale of securities in India. It was introduced in 2004 to improve tax compliance in securities markets and is collected at the time of the transaction - you do not need to separately compute or pay it, as it is deducted by the broker or exchange automatically.

For equity mutual fund units, STT is levied at the time of redemption (and, in some cases, purchase) of units. For units redeemed directly with the AMC, the fund house collects STT. For ETF units traded on NSE or BSE, the exchange collects STT just as it does for equity share trades.

STT is not deductible as a business expense for capital gains purposes. However, its significance lies in making the investor eligible for the concessional tax rates applicable to equity instruments. The law provides that the favourable STCG and LTCG rates for equity funds apply only to transactions where STT has been paid. If STT is not paid (which would be unusual for normal mutual fund redemptions but could arise in off-market transactions), the gains may be treated as ordinary income.

For investors who use equity ETFs (Exchange-Traded Funds) on NSE or BSE as a proxy for equity mutual fund investing, STT is paid on the exchange just like equity share trades. The tax treatment of ETF units - STCG versus LTCG, the 12-month holding period threshold - mirrors that of equity mutual funds, since ETFs are classified as equity-oriented funds when they track equity indices.

Gold ETFs and international ETFs, however, are treated differently. Since gold ETFs do not invest in domestic equity, they are classified as debt/non-equity for tax purposes, and post-2023, gains are taxed at slab rates. Similarly, an ETF that tracks, say, a US or Nasdaq index does not meet the domestic equity threshold and is taxed at slab rates.

STT rates themselves have been revised periodically through Finance Acts. The Union Budget 2024 revised STT rates on certain derivative contracts. For equity mutual funds, the relevant STT rates apply on redemptions. Investors should always refer to the latest Schedule of STT rates as notified under the Securities Transaction Tax Act, 2004.

While STT is relatively small in amount - fractions of a percent - it adds up over large redemptions and frequent trading. For long-term equity fund investors making occasional redemptions, STT is a minor cost. For traders who buy and sell ETF units frequently, STT is a meaningful expense that should be factored into the total cost of investing.

Setting Off Losses and Carry Forward Rules

One of the more advanced but highly practical aspects of mutual fund taxation is the ability to set off capital losses against capital gains, thereby reducing your overall tax liability. The rules governing set-off and carry-forward of capital losses are codified in Sections 70 to 74 of the Income Tax Act.

A Short-Term Capital Loss (STCL) - arising when you redeem mutual fund units at a loss within the short-term period - can be set off against both Short-Term Capital Gains and Long-Term Capital Gains from any asset class. This makes STCL highly versatile.

A Long-Term Capital Loss (LTCL) - arising when equity fund units held for more than 12 months are redeemed at a loss - can be set off only against Long-Term Capital Gains, not against STCG. Prior to the Finance Act 2018, LTCG on equity was tax-exempt, so LTCL was not recognised. Post-2018, since LTCG on equity is taxable (above the exemption threshold), LTCL is now recognised and can be used for set-off.

For debt fund losses under the post-2023 regime, since the gain is treated as ordinary income (added to total income), any loss from debt funds would be a capital loss - and there are restrictions on setting capital losses against ordinary income. This is an area where investors should take professional advice, as the interaction of the new debt fund rules with existing loss set-off provisions requires careful analysis.

Unused capital losses can be carried forward for up to 8 assessment years from the year in which the loss was incurred. However, to carry forward losses, the investor must file their Income Tax Return on or before the due date of filing. This is a critical compliance requirement - missing the ITR deadline means losing the ability to carry forward capital losses.

Tax-loss harvesting is a strategy where investors deliberately book losses (by redeeming loss-making investments) to offset gains elsewhere in the portfolio, thereby reducing the overall tax outgo. For example, if you have made significant LTCG from equity funds in a financial year, you might redeem other equity fund units that are currently at a loss to create an LTCL that offsets the LTCG. After booking the loss, you can reinvest in the same or similar fund (though you must be careful about the wash-sale concept, which applies in certain jurisdictions - India's income tax law does not have an explicit wash-sale rule, but the transaction must be genuine and at arm's length).

Investors must maintain detailed records of all mutual fund transactions: purchase dates, purchase NAVs, units purchased, redemption dates, redemption NAVs, and any IDCW received. This documentation is essential for accurate computation of capital gains and losses, and for substantiating claims made in the ITR. Most AMCs and broker portals provide annual capital gains statements that aggregate this data, which investors should download and verify carefully.

How SIPs Are Taxed: The FIFO Principle

Systematic Investment Plans (SIPs) are among the most popular investment methods for Indian retail investors. The beauty of a SIP lies in its simplicity - you invest a fixed amount every month, accumulate units over time, and benefit from rupee-cost averaging. However, when it comes to taxation, a SIP introduces a layer of complexity that investors must understand.

From a tax perspective, every SIP instalment is treated as a separate, independent investment. There is no averaging or blending of purchase dates. This means that for a monthly SIP, each of the 12 instalments in a year has its own distinct purchase date and therefore its own holding period clock.

When you redeem units from a SIP, the Income Tax Act applies the First-In, First-Out (FIFO) principle. This means the units purchased earliest are deemed to be redeemed first, followed by the next oldest batch, and so on. This is not a matter of choice - FIFO is mandated by tax law for the purpose of computing capital gains on mutual fund redemptions.

The FIFO principle has a practical implication: if you are a long-standing SIP investor and you redeem a partial amount, the tax computation will use the oldest purchase lots first. Older lots are more likely to qualify as long-term (held more than 12 months) and thus attract the lower LTCG rate. This is generally favourable for equity fund investors. However, for debt fund investors under the post-2023 regime, since all gains are taxed at slab rate regardless of holding period, the FIFO principle does not affect the tax rate - it only affects the cost basis computation.

For a practical illustration: suppose you started an equity fund SIP in January 2023. Each monthly instalment from January 2023 to December 2023 is a separate investment. In February 2024, you redeem some units. Under FIFO, the units purchased in January 2023 (held 13 months, qualifying as LTCG) are redeemed first. The units purchased in February 2023 (held 12 months exactly) may or may not qualify as LTCG depending on the precise date counting.

For accurate computation, most AMC platforms and broker portals generate a capital gains statement that applies FIFO automatically, broken down by each SIP instalment. Investors should use this statement as the primary input for their ITR, rather than trying to manually compute gains lot by lot.

Another nuance for SIP investors: when computing the LTCG exemption threshold (the annual tax-free LTCG limit for equity funds), all LTCG from all equity investments - both direct stocks and equity funds - must be aggregated. The exemption is per investor, not per fund or per investment. So SIP investors who also hold equity shares or ETFs should consolidate their LTCG calculation across all these instruments.

ITR Filing and Compliance for Mutual Fund Investors

Filing the correct Income Tax Return (ITR) form and accurately reporting mutual fund income are non-negotiable compliance obligations for every investor. Errors or omissions in reporting mutual fund capital gains can lead to notices from the Income Tax Department and potential penalties.

The choice of ITR form is the first decision. ITR-1 (Sahaj) is the simplest form but is available only to individuals with income from salary, one house property, and other sources - it does not accommodate capital gains from mutual funds. If you have redeemed mutual fund units and made capital gains (or losses), you must file ITR-2 (for individuals and HUFs without business income) or ITR-3 (for individuals with business income, including F&O traders). Investors who have only mutual fund capital gains and no business income should typically use ITR-2.

Capital gains from mutual fund redemptions must be reported in the Schedule CG (Capital Gains) section of the ITR. For equity funds, STCG and LTCG are reported in their respective sub-sections. For debt funds under the post-2023 rules, since gains are taxed at slab rates, they are reported differently - typically as income under the head "Capital Gains" but without a concessional rate. ITR forms are updated each year to reflect changes in tax law, so always use the form applicable for the relevant assessment year.

The Annual Information Statement (AIS) and the tax portal's pre-filled return feature pull data from multiple sources - AMCs, RTAs (Registrar and Transfer Agents like CAMS and KFintech), and stock exchanges. The pre-filled data is increasingly comprehensive, but it may not always be 100% accurate or complete. Investors should always cross-check the pre-filled capital gains figures against their AMC-issued capital gains statement, correct any discrepancies, and only then submit the ITR.

Form 26AS is another critical document - it shows TDS deducted from your mutual fund redemptions and IDCW payouts. If TDS has been deducted, it reduces your final tax payable, provided you claim credit for it in the ITR. Missing TDS credit means overpaying tax.

Advance Tax is relevant for mutual fund investors who expect significant capital gains during the year. If your total tax liability for the year (after TDS) exceeds a specified threshold, you are required to pay advance tax in four instalments: by 15 June, 15 September, 15 December, and 15 March of the financial year. Failure to pay advance tax on time attracts interest under Sections 234B and 234C of the Income Tax Act. This is often overlooked by investors who make large redemptions mid-year without planning for the advance tax obligation.

For investors who hold units in a joint account (where two holders are named), the first-named holder is typically treated as the investor for tax purposes. For minor investors (e.g., a parent investing in a child's name), the capital gains are clubbed with the parent's income under the clubbing provisions of the Income Tax Act, until the child turns 18.

Finally, maintaining a portfolio of all mutual fund investments - including purchase dates, NAVs, and units - over multiple years is both a legal requirement and a practical necessity. Digital account statements from AMCs and platforms like MF Central, NSE's mutual fund platform, or broker portals make this relatively straightforward, but the responsibility for accurate record-keeping ultimately lies with the investor.

Tax Planning Strategies for Mutual Fund Investors

Tax planning - which is entirely legal and distinct from tax evasion - is an important aspect of financial planning. For mutual fund investors, several strategies can legally minimise tax outgo while staying fully compliant with the Income Tax Act and SEBI regulations.

The first and most powerful strategy is the discipline of holding equity fund units for more than 12 months to qualify for the LTCG rate rather than the STCG rate. Given that the LTCG rate is significantly lower than the STCG rate for equity funds, and that gains up to a certain threshold are entirely exempt, every additional month of holding can make a meaningful difference to the post-tax return. This is not just investment common sense - it is codified in the tax law.

For investors approaching the end of a financial year, reviewing unrealised gains and losses is worthwhile. If equity fund units are at a loss, and the investor does not need the money, they might consider whether to book the loss before 31 March (to offset gains in that financial year) or wait. If equity fund units are at a gain, and the gain is close to or exceeding the LTCG exemption threshold, considering whether to spread redemptions across two financial years can keep annual gains within the exempt limit.

ELSS funds serve the dual purpose of tax saving under Section 80C and equity-oriented investment. Since the lock-in is 3 years, gains are always LTCG. Investors in the higher tax brackets who have room within the Section 80C limit should factor in the tax savings from ELSS contributions when calculating their overall returns.

For investors who need regular income, the choice between IDCW and Growth option has tax implications. In the current regime, IDCW is taxed at slab rates, whereas equity fund growth-option gains are taxed at the lower LTCG rate after 12 months. For investors in the 20% or 30% slab, the Growth option followed by planned partial redemptions (making use of the annual LTCG exemption) can be more efficient than the IDCW option.

For debt fund investors post-2023, the tax landscape is less differentiated - all gains are at slab rates. However, timing of redemptions can still matter for individuals whose income varies year to year. Booking gains in a year when total income is lower (and hence the slab rate is lower) can save tax. Retired investors with modest pension income, for example, may face lower slab rates than salaried individuals at peak earnings.

Arbitrage funds, as noted earlier, can serve as a tax-efficient parking avenue for money needed within one to two years, compared to debt funds, because they are classified as equity-oriented and thus attract the lower equity STCG/LTCG rates rather than slab-rate treatment.

A critical word of caution: all tax planning must be based on genuine investment decisions. Creating artificial transactions solely for tax benefits, without genuine economic substance, can attract scrutiny under the General Anti-Avoidance Rule (GAAR) provisions in the Income Tax Act. Investors should always make decisions in the context of their financial goals, risk appetite, and genuine investment needs, and consult a qualified chartered accountant or tax advisor for personalised guidance.

Example

Key benefits

How it works

1. 1
   Determine the Fund Category

   Identify whether the mutual fund qualifies as equity-oriented (65%+ domestic equity) or non-equity (debt, hybrid below threshold, international, gold, etc.), as this is the foundational step for determining the applicable tax rules.

2. 2
   Calculate the Holding Period

   For each batch of units purchased (including each SIP instalment), calculate the holding period from the date of purchase to the date of redemption; 12 months is the threshold for equity funds, and for debt funds the holding period no longer affects the rate under the post-2023 rules.

3. 3
   Apply FIFO for Partial Redemptions

   When redeeming a portion of your holdings (not all units), the Income Tax Act mandates applying the First-In, First-Out principle - the oldest units are deemed to be redeemed first for capital gains computation.

4. 4
   Compute Capital Gains (or Losses)

   Subtract the cost of acquisition (purchase NAV × units redeemed) from the redemption value (redemption NAV × units redeemed) to arrive at the capital gain or loss for each batch; for equity funds post-2018, no indexation is permitted.

5. 5
   Apply the Appropriate Tax Rate

   Apply the applicable STCG rate for short-term equity gains, the LTCG rate (after the exemption threshold) for long-term equity gains, and slab-rate treatment for debt fund gains under the post-2023 rules; refer to the latest Finance Act for current rates.

6. 6
   Set Off Losses and Claim Exemptions

   Offset any capital losses against gains as per the set-off rules (STCL can be set off against STCG and LTCG; LTCL can be set off only against LTCG), and apply the applicable LTCG annual exemption for equity fund gains.

7. 7
   Report in ITR and Pay Advance Tax

   Report all capital gains in the appropriate schedule of ITR-2 (or ITR-3), claim TDS credit from Form 26AS, and ensure advance tax instalments have been paid on time if your total tax liability exceeds the threshold.

Formula

Capital Gain = Redemption Value − Cost of Acquisition
= (Redemption NAV × Units Redeemed) − (Purchase NAV × Units Redeemed)

Key takeaways

Frequently asked questions

Related terms