Taxation quietly decides whether a fund's headline return is actually what lands in your bank account. Most investors compare returns and ignore this — then get surprised at ITR filing time. Here's the current rulebook, plainly.
| Holding period | Classification | Tax rate |
|---|---|---|
| Less than 12 months | Short-term (STCG) | 20% flat |
| 12 months or more | Long-term (LTCG) | 12.5% on gains above Rs 1.25 lakh/year |
"Equity fund" here means schemes with at least 65% average allocation to Indian equities — this includes most flexi-cap, large-cap, mid-cap, small-cap, ELSS and aggressive hybrid funds. Check the scheme's stated equity allocation if you're unsure, especially for hybrid or multi-asset funds sitting near that threshold.
| Purchase date | Holding period | Tax treatment |
|---|---|---|
| On or after 1 Apr 2023 | Any duration | Added to income, taxed at your slab rate |
| Before 1 Apr 2023 | Over 36 months | 20% with indexation (old rule, grandfathered) |
This is the change that surprises people most: debt funds bought today get zero LTCG benefit. There's no 12-month or 36-month magic number that unlocks a lower rate. A debt fund gain is treated exactly like bank FD interest — added to your total income and taxed at whatever slab you fall into. If you're in the 30% bracket, a debt fund gain and an FD gain are taxed identically.
This classification matters more than the fund's name suggests. A "balanced advantage" or "multi-asset" fund can sit on either side depending on its actual equity allocation — always check the scheme's category and equity percentage before assuming the tax treatment.
Say you invest Rs 5 lakh each in an equity fund and a debt fund, hold both for 3 years, and each grows to Rs 7 lakh — a gain of Rs 2 lakh on each. Assume you're in the 30% tax slab.
| Equity fund | Debt fund | |
|---|---|---|
| Gain | Rs 2,00,000 | Rs 2,00,000 |
| Taxable gain | Rs 75,000 (after Rs 1.25L exemption) | Rs 2,00,000 (no exemption) |
| Tax rate | 12.5% | 30% (slab) |
| Tax payable | Rs 9,375 | Rs 60,000 |
Same gain, same holding period — the debt fund investor pays roughly 6x more tax. This doesn't mean debt funds are a bad idea; they still serve stability and liquidity purposes. But it does mean you shouldn't hold debt funds for pure long-term growth when equity is available and appropriate for your goal.
For a broader look at how these numbers interact with real (inflation-adjusted) returns, see our piece on FD vs mutual fund. And if you're deciding what proportion of debt to hold in the first place, our article on asset allocation basics is a useful next read.
Tax rules shouldn't be the only reason you pick a fund category — your goal, time horizon and risk appetite come first. But once those are decided, tax efficiency is free money you shouldn't ignore. Equity funds reward patience with a lower rate; debt funds no longer reward patience at all. Plan redemptions accordingly, and don't let a big lump-sum exit push you into paying more tax than necessary in a single year.