Complete Guide to Mutual Fund Taxation in India (FY 2026-27)

The taxation of mutual funds in India underwent a massive overhaul starting with the Union Budget 2024. The government radically simplified the tax code, but this simplification came at the cost of higher base rates across almost all equity asset classes.

As we navigate FY 2026-27 (Assessment Year 2027-28), both Resident Indians and Non-Resident Indians (NRIs) must completely rethink their redemption strategies. Knowing your exact tax liability is critical before you execute a withdrawal or rebalance your portfolio.

In this comprehensive guide, V-Mint Capital breaks down the precise tax rates for Equity Mutual Funds, Debt Mutual Funds, and Hybrid structures—along with the rigid TDS rules that directly impact our NRI clientele.

1. Taxation of Equity Mutual Funds

A mutual fund is classified as an “Equity-Oriented Fund” if it invests a minimum of 65% of its total assets in domestic equity shares. This includes Large-cap, Mid-cap, Small-cap, ELSS, and aggressive hybrid funds.

Effective from July 23, 2024, the tax rates on equity mutual funds have been structurally elevated:

• Short-Term Capital Gains (STCG): If you sell your equity mutual fund units within 12 months of purchase, the gains are classified as Short-Term. The STCG tax rate was raised from 15% to 20% (plus applicable surcharge and cess).
• Long-Term Capital Gains (LTCG): If you hold your units for more than 12 months before selling, the gains are Long-Term. The LTCG tax rate was increased from 10% to 12.5%.
• The Tax-Free Exemption: There is a silver lining. The government increased the annual tax-free exemption limit. You do not pay any tax on the first ₹1.25 Lakh of Long-Term Capital Gains generated in a financial year.

2. Taxation of Debt Mutual Funds

Debt mutual funds (funds with less than 35% exposure to domestic equities, such as Liquid Funds, Corporate Bond Funds, and Target Maturity Funds) suffered the harshest tax blow in recent years.

For all debt mutual fund investments made on or after April 1, 2023, the concept of “Long-Term” has been entirely abolished.

• All gains from debt funds, regardless of whether you hold them for 1 month or 10 years, are deemed to be Short-Term Capital Gains (STCG).
• These gains are simply added to your total annual income and taxed at your applicable income tax slab rate (which can be up to 30%). There is zero indexation benefit available.

Note: If you have old debt mutual fund units purchased BEFORE April 1, 2023, they are grandfathered in. If held for more than 24 months, gains on those specific old units are taxed at 12.5%.

3. Taxation of Hybrid & Specified Mutual Funds (35% to 65% Equity)

There is a middle category of funds (like Conservative Hybrid Funds or certain Multi-Asset Funds) that invest between 35% and 65% in domestic equities.

• Holding Period: The defining line for Long-Term vs Short-Term for this category is 24 months.
• STCG (< 24 months): Taxed at your applicable income tax slab rate.
• LTCG (> 24 months): Taxed at a flat 12.5% without indexation. (The ₹1.25 Lakh exemption limit does NOT apply to this category).

4. Mutual Fund Taxation for NRIs (Non-Resident Indians)

If you are a Non-Resident Indian (NRI), your actual final tax liability is the exact same as a Resident Indian. However, the mechanical process of paying that tax is drastically different due to rigid Tax Deducted at Source (TDS) regulations.

As an NRI, whenever you sell your mutual fund units in India, the Asset Management Company (AMC) will forcibly deduct TDS before crediting the money to your NRO/NRE account.

NRI TDS Rates on Mutual Funds (FY 2026-27)

*For Equity LTCG, TDS is deducted at 12.5% on the gains above the ₹1.25 Lakh threshold. If your total tax liability for the year is lower than the TDS deducted, you must file an Income Tax Return (ITR) in India to claim a refund. NRIs may also utilize Double Taxation Avoidance Agreements (DTAA) to lower tax liabilities.