How mutual fund gains are taxed when you sell

Selling mutual fund units is taxable, but only the profit is taxed, and only in the tax year you sell. The money you put in comes back untaxed. Nothing is taxed on growth units while you stay invested, even when the fund trades inside the scheme. IDCW payouts are different: they are taxed as income at your normal rates in the year they are paid. See growth vs IDCW.

No holding period makes a sale fully tax-free. The first ₹1,25,000 of long-term gains on equity-oriented funds in a tax year is not taxed; it is one allowance per person. An income under ₹12 lakh does not make your equity gains tax-free either. The ₹12 lakh rebate does not cancel the 20% tax on short-term equity gains or the 12.5% tax on long-term gains.

These rules are for tax year 2026-27 under the Income-tax Act, 2025, as amended by the Finance Act, 2026. "Tax year" is the Act's name for the year your income is counted in. They cover residents only; NRIs should read how NRIs are taxed on Indian mutual funds. See the Income-tax Act, 2025 for section numbers.

Is mutual fund redemption taxable?

Yes. Redemption means selling your units back to the fund house, and the profit is a capital gain. The tax depends on the fund's tax class and your holding period, the time from the day you bought a unit to the day you sell it.

How is the gain worked out?

The gain is the sale value minus what you paid for the units you sold. Expenses made wholly and exclusively for the sale can also be deducted.

If a fund charges an exit load, a fee for selling within a set time, the gain is worked out on what you receive after it. Securities transaction tax (STT), 0.001% of the sale value, is deducted when you redeem equity fund units, and you cannot deduct it. See hidden fees.

Each unit is short-term or long-term by its own holding period, and the oldest units are sold first. For SIP instalments, see the SIP tax article.

For equity fund units bought before 1 February 2018, the cost is the higher of what you paid and the NAV on 31 January 2018. NAV is the price of one unit. It counts only up to your sale price.

What are the tax rates on mutual fund gains?

How a gain is taxed depends on the fund's tax class and how long you held the units.

In this row, listed ETF units, such as gold ETFs, become long-term after 12 months, not 24. Your slab rate is the rate for the income slab your total income falls in. The 20% rate comes from section 196 (the old Section 111A) and the 12.5% rate on equity gains from section 198 (the old Section 112A). Cess, an extra 4% on the tax, is added to all of them.

International funds, overseas fund of funds and some other fund of funds do not qualify as equity-oriented. A fund of funds is a fund that invests in other funds. For hybrid, international and fund-of-funds schemes, the tax class depends on what the fund actually holds during the year. Check the latest scheme documents or ask a tax adviser.

A Specified Mutual Fund puts more than 65% of its money in debt and money market instruments, or 65% or more in units of such a fund. Specified Mutual Fund units bought earlier are different. Held 24 months or less, they pay slab rates; held longer, the gain is long-term at 12.5%. For what changed for debt funds in 2023 and 2024, read tax on debt mutual funds.

How does the ₹1,25,000 tax-free limit work?

It is one allowance per person in a tax year, against long-term gains on equity-oriented fund units and listed shares together. It is not per fund and not per fund house.

Anil bought units of an equity-oriented fund for ₹2,87,000 in August 2024 and sells them all in November 2026 for ₹4,80,000. Assume STT is paid, he has no other long-term equity gains, his total income is under ₹50 lakh, so no surcharge (an extra charge on the tax once total income passes ₹50 lakh) applies, and his other income is above the basic tax-free limit (₹4 lakh in the new regime).

• Gain: ₹1,93,000. The first ₹1,25,000 is not taxed.
• Tax on the other ₹68,000 at 12.5%: ₹8,500, plus ₹340 cess, so ₹8,840.

The allowance does not touch short-term gains. Take ₹1,00,000 put into an equity-oriented fund in March 2026 and sold in November 2026 for ₹1,22,000. With STT paid, the ₹22,000 gain is taxed at 20%: ₹4,400 plus ₹176 cess, so ₹4,576.

What if your other income is low?

For a resident individual, the unused part of the basic tax-free limit is taken off the gains first. A retired person in the new regime has ₹2.5 lakh of other income and ₹3 lakh of long-term equity gains, with STT paid. The ₹1.5 lakh shortfall comes off the gains. After the ₹1,25,000 allowance, tax applies to ₹25,000 only: ₹3,250 with cess.

Is TDS deducted when you redeem, and when do you pay the tax?

Not for a resident. TDS is tax deducted at source before money reaches you, and none is cut on a resident's redemption gains. You report the gain in your return, so no TDS is not the same as no tax.

If your total tax for the year, after TDS, is ₹10,000 or more, you pay it in advance, by 15 June, 15 September, 15 December and 15 March. You can pay the tax on a gain in the instalments left after you make it, or by 31 March, without interest for the earlier ones. A resident aged 60 or more with no business income pays when the return is filed.

What if you sell at a loss?

A capital loss can be set against capital gains only, never against salary or interest. A short-term loss can be set off against any other capital gain that year; a long-term loss only against long-term gains.

The loss is set off in the same year first, even against gains the ₹1,25,000 allowance would have covered. Only the rest is carried forward, for up to eight tax years, and only if you file your return by the due date. Losses carried forward under the Income-tax Act, 1961 still count, for up to eight years after the year they arose. See why filing on time matters.

A loss on Specified Mutual Fund units bought on or after 1 April 2023 is short-term, so it can be set off against equity gains too. A loss on units bought before that date and held over 24 months is long-term. It can be set off only against long-term gains.

Take the ₹22,000 short-term gain above, with no other capital gains that year. A ₹39,000 loss on Specified Mutual Fund units acquired on or after 1 April 2023, which counts as short-term, wipes it out. The ₹17,000 left can be carried forward for up to eight tax years if the return is filed by the due date.

Does the ₹12 lakh rebate cover mutual fund gains?

No, not the tax on gains taxed at special rates. The rebate under section 156 (the old Section 87A) in the new regime only cancels tax worked out at the normal slab rates. It does not cancel the 20% tax on short-term equity gains or the 12.5% tax on long-term gains.

Take a resident in the new regime with taxable salary of ₹9,00,000 and a short-term equity gain of ₹1,40,000, with STT paid. The slab tax on the salary is ₹30,000, and the rebate cancels it. The gain is taxed at 20%: ₹28,000 plus ₹1,120 cess, so ₹29,120 is payable.

How can you lower the tax on mutual fund gains?

The Act's own levers are the 12-month line, the yearly ₹1,25,000 allowance and loss set-off.

Selling units and buying them back is sometimes called tax harvesting. The sale is itself taxed: a long-term gain on equity-oriented units inside the ₹1,25,000 pays no tax, and above it 12.5%, with STT paid. No specific rule in the Income-tax Act, 2025 bars it. But the new units count as a fresh purchase:

• Their holding period starts again, with a new 12-month clock for equity-oriented units.
• An exit load may apply on the sale, and stamp duty on the new purchase.
• ELSS units, tax-saving equity fund units, bought again start a new three-year lock-in, a period when you cannot sell.

The Act also has a general anti-avoidance rule for arrangements made mainly to save tax.

Before you redeem in a sharp market fall, Koshex, as a distributor, talks it through with you.

How are switches, SWPs, IDCW, gifts and ELSS taxed?

• Switch: a sale of the old units and a purchase of new ones. See how to switch schemes.
• SWP: each withdrawal from a systematic withdrawal plan is taxed only on its gain part. See the SWP article.
• IDCW: taxed as income at your normal rates. Once a fund house's payouts to you pass ₹10,000 in a tax year, it deducts 10% TDS.
• Gift: not a transfer for the giver. The receiver generally takes over the giver's cost and holding period. See gifting units.
• Units after a death: receiving them is not taxed. Tax comes when you sell, on the original price and dates. See claiming investments after a death.
• ELSS after the lock-in: the three-year lock-in is longer than 12 months, so gains are long-term. See after the lock-in and ELSS funds.

Koshex customers can redeem (sell) units on Koshex; the selling guide has the steps.

Where do you find the figures for your return?

A consolidated account statement (CAS) shows what you hold and paid. For tax, you need a capital gains statement, which lists each redemption with its cost, sale value and gain, split into short-term and long-term. See the CAS article.

Koshex has a page for it: "Free for every mutual fund investor - you don't need a Koshex account. All it takes is your PAN and the email address registered with your investments."

The gains go in the capital gains section of your return. A resident salaried person whose only gains are equity long-term gains of ₹1,25,000 or less can use ITR-1, with total income up to ₹50 lakh and no losses carried. Anyone with short-term gains, or any gains on debt funds, needs ITR-2. The ITR guide covers filing.