How debt mutual funds are taxed, and what happened to indexation

How are debt mutual funds taxed?

Specified Mutual Fund units bought on or after 1 April 2023 are taxed at your slab rate, however long you hold them. Your slab rate is the rate for the income bracket your total income falls in. Nothing is taxed while you hold the units. Tax arises when you sell.

A debt fund lends your money to governments, banks or companies, in the form of bonds and similar paper. The tax law has a name for most of them: a Specified Mutual Fund. It puts more than 65% of its money in debt and money market instruments, or 65% or more in units of such a fund. Most debt funds pass this test, liquid funds included. The same rules apply to them.

What counts is the date you bought the units, as the table shows. It is written for a resident individual, tax year 2026-27, under the Income-tax Act, 2025.

The holding period is the time between the day you bought and the day you sold. The law splits gains into short-term and long-term at a cut-off in that period. For Specified Mutual Fund units bought on or after 1 April 2023, the law treats the gain as short-term whatever the holding period. That is why the right-hand column has no 12.5% in the second row. The 24-month line is for unlisted units, such as those in your statement of account. A listed unit bought before 1 April 2023, such as a debt ETF unit, turns long-term after 12 months.

A resident investor has no TDS cut on the gain. TDS is tax deducted at source, before the money reaches you. Your capital gains statement shows the gains figures. A mutual fund's own trading inside the scheme creates no tax for you.

For the rates on equity, hybrid and gold funds, see tax on mutual fund redemption. This page covers debt funds only. IDCW payouts, which a fund makes from its income or gains, follow other rules, in our growth vs IDCW guide. Non-residents are treated separately: see mutual fund tax for NRIs.

What changed in April 2023 and July 2024?

April 2023 ended the long-term route for new purchases, and July 2024 shortened the holding period and cut the rate for older units.

From April 2023, gains on units of funds that held no more than 35% in Indian shares were taxed at your slab rate. The holding period did not matter. The test now is whether the fund holds more than 65% in debt and money market instruments. The 2025 Act uses that newer test.

On 23 July 2024 the rules for older units changed. Before 23 July 2024, debt fund units bought before April 2023 turned long-term after 36 months. The gain was taxed at 20% after adjusting the cost for inflation. For a sale on or after 23 July 2024, those older units, if unlisted, turn long-term after 24 months. The gain is taxed at 12.5% with no inflation adjustment. The government's own note on the change said the holding period for bonds, debentures and gold would come down from 36 months to 24.

The Finance Act 2026 did not change the holding periods, the Specified Mutual Fund rule or the capital gains rates. The Income-tax Act, 2025 carried them over as they were. If the new section numbers puzzle you, the Income-tax Act 2025 explainer maps old to new.

How much tax will you pay on a debt fund gain?

First work out the gain, which is the sale value minus what you paid. Then apply the rule for the purchase date. These examples assume a resident individual in tax year 2026-27 under the default regime, with total income above ₹16 lakh and not above ₹50 lakh. The gains are assumptions for illustration, not forecasts.

Bought after the cut-off. You put ₹2,50,000 into a debt fund (a Specified Mutual Fund) on 10 May 2024. You sell on 20 August 2026 for ₹2,82,000. The gain is ₹32,000. You held for over two years. But the units were bought on or after 1 April 2023, so the gain is short-term and taxed at your slab rate.

Cess is a further 4% charged on the tax itself. It is the Health and Education Cess.

• At a 20% slab: ₹6,400 tax plus 4% cess of ₹256, so ₹6,656.
• At a 30% slab: ₹9,600 tax plus cess of ₹384, so ₹9,984.

Bought before the cut-off. You put ₹1,00,000 into a Specified Mutual Fund on 1 March 2023 and sell on 20 August 2026 for ₹1,24,000. The gain is ₹24,000. You held for more than 24 months in your statement of account, so it is long-term: 12.5% is ₹3,000, plus cess of ₹120, so ₹3,120.

The same gain, one month later. Suppose that ₹1,00,000 had gone in on 1 April 2023 instead. The ₹24,000 gain is now short-term whatever the holding period. At a 30% slab, tax is ₹7,200 plus cess of ₹288, so ₹7,488.

One month between purchase dates changes the bill by ₹4,368 on the same gain.

If your total income passes ₹50 lakh, a surcharge is added. A surcharge is an extra charge on the tax, not on the income, and it starts at 10%. The 15% cap on surcharge covers equity and long-term gains, not debt fund gains taxed at your slab rate.

Is indexation still available on debt funds?

No. No debt fund sale today gets indexation, and no mutual fund unit does.

Indexation used to raise your purchase cost in line with inflation before the gain was worked out, which cut the taxable gain. It no longer applies to any mutual fund. The Income-tax Act, 2025 keeps it only as an option for a resident selling land or a building bought before 23 July 2024.

The regime does not matter either. Indexation is not available on mutual fund units in the old or the new tax regime. What decides your tax is the purchase and sale date. The example above, with two purchases a month apart, shows the effect of those dates without any inflation arithmetic.

Can you save tax on debt fund gains?

You cannot cut the tax with indexation, but a few rules still affect the bill.

• Under the default regime, a resident individual gets a rebate of 100% of the tax or ₹60,000, whichever is less. Total income, gains included, must be ₹12 lakh or less. Debt fund gains taxed at your slab rate count like salary.
• A loss on Specified Mutual Fund units bought on or after 1 April 2023 sets off against other capital gains. The loss section below covers older units too.
• In the old regime only, the deduction under section 123 (the old Section 80C) can be set against short-term gains taxed at your slab rate. Gains on Specified Mutual Fund units bought on or after 1 April 2023 are one example. It cannot be set against any long-term gain.

The rebate does not cover tax at special rates, such as the 12.5% on long-term gains. See tax on mutual fund redemption.

Debt fund or FD: does tax still differ?

For Specified Mutual Fund units bought on or after 1 April 2023, both are taxed at your slab rate. What differs is when. Bank FD interest is taxed as "Income from other sources". If you follow the accrual basis, FD interest is taxed every year as it is earned. This holds even if a cumulative FD pays out only at the end. A debt fund's gain is taxed only when you sell.

Our guides on debt funds against fixed deposits and liquid funds against fixed deposits compare them further. Koshex offers fixed deposits as well as mutual funds.

What if you sell a debt fund at a loss?

If you sell Specified Mutual Fund units bought on or after 1 April 2023 at a loss, the loss counts as a short-term capital loss. It can reduce other capital gains in the same year. Whatever is left can be carried forward for up to eight years, provided your return is filed on time. Salary cannot absorb it.

A loss on units bought before 1 April 2023 and held more than 24 months is long-term. A long-term loss may be set off only against long-term gains.

The set-off against the same year's capital gains comes first. You cannot keep the loss for later while paying tax on this year's gains. Filing by the due date matters, because a loss is carried forward only when it is determined from a return filed on time. Our piece on why filing your return matters explains the deadline.

Does switching or a SIP change the tax?

A switch can change the tax, because it counts as a sale of the old units and a purchase of new ones. A SIP buys units in lots, one per instalment.

Say you hold debt fund units bought on 1 March 2023 and switch them into another debt fund in 2026. The switch counts as a sale, so the gain on the old units is taxed that year. The new units count as bought in 2026, so any later gain on them is taxed at your slab rate. The switch gives up the 12.5% route. Read more about switching schemes.

Each SIP instalment buys units on its own date, so each lot has its own holding period and cost. For Specified Mutual Fund units bought on or after 1 April 2023 the rate does not change. Those gains are always taxed at your slab rate. The guide to SIP taxation works through lots in detail, and a SIP in a debt fund has its own page.

Koshex, as a distributor, helps you choose a fund that suits your goal and timeline.