Taxation of Mutual Funds in India [2025 Guide]
If you’re investing in mutual funds in India-whether via SIPs, lump sum, or index funds-understanding the tax implications is crucial. Taxation of mutual funds depends on:
– Type of mutual fund: Equity or Debt
– Holding period: Short-term or Long-term
– Nature of gains: Capital gains or dividends
This guide breaks down how mutual funds are taxed in FY 2024–25 (AY 2025–26) under the latest rules, including recent changes in the Long-Term Capital Gain (LTCG) rate and exemption limit.
Equity Mutual Funds
These are funds where at least 65% is invested in Indian equities.
| Holding Period | Tax Type | Rate |
| Up to 12 months | Short-Term Capital Gain | 15% + cess & surcharge |
| More than 12 months | Long-Term Capital Gain | 12.5% on gains > ₹1.25 lakh/year |
Debt Mutual Funds
These include overnight funds, liquid funds, gilt funds, etc., with less than 65% equity exposure.
| Holding Period | Tax Type | Rate |
| Any duration | Taxed as per slab rate | As per your income slab |
What About SIPs?
Each SIP installment is considered a fresh investment, so capital gains are calculated installment-wise.
What About Dividend from Mutual Funds?
As per the Finance Act, 2020:
– Dividends are taxable in the hands of investors
– Taxed as per your slab rate
– TDS @10% applies if dividend income > ₹5,000 per year
Example: Tax on Mutual Fund Redemption
Investment: ₹5 lakh in Jan 2023, redeemed in Feb 2025 for ₹7.5 lakh
Gain: ₹2.5 lakh
Exempt: ₹1.25 lakh
Taxable: ₹1.25 lakh @12.5% = ₹15,625 + cess
Common Mistakes to Avoid
– Using ITR-1 when you have capital gains → Use ITR-2
– Ignoring small capital gains
– Missing SIP-wise holding period tracking
– Not checking TDS on dividends
Where to Report in ITR?
| Type of Gain | ITR Form | Schedule |
| STCG | ITR-2 | Schedule CG |
| LTCG | ITR-2 | Schedule 112A |
| Dividend | ITR-1/2 | Income from Other Sources |
Conclusion: Plan Smart, File Right
Mutual funds are one of the best tax-efficient wealth creation tools—only if you understand how they’re taxed. With recent changes like 12.5% LTCG on equity funds and slab-based taxation for debt funds, it’s time to revisit your strategy.
