Taxation on Indian mutual funds is categorized based on asset allocation (equity vs debt vs hybrid) and the holding duration before redemption. Following statutory amendments under the Finance Act 2024, equity LTCG is taxed at 12.5% above ₹1.25 Lakh, while STCG stands at 20%.
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For equity-oriented mutual funds (allocating >= 65% in domestic equities), investments redeemed within 12 months incur Short-Term Capital Gains (STCG) tax at 20% (plus applicable surcharge and cess). For units held beyond 12 months, Long-Term Capital Gains (LTCG) are taxed at 12.5% on aggregate net long-term gains exceeding ₹1,25,000 in a financial year. Tax rules are governed by the Income Tax Act, 1961, and defaults should be verified against prevailing statutory notifications.
Under amendments introduced in Finance Act 2023, capital gains on specified debt mutual funds (holding not more than 35% in domestic equities) acquired on or after April 1, 2023, are treated as short-term capital gains regardless of the holding period. They are taxed at the investor's applicable marginal income tax slab rates, with indexation benefits no longer available for newly purchased debt units.
Equity Linked Savings Schemes (ELSS) are diversified equity mutual funds eligible for a tax deduction of up to ₹1,50,000 under Section 80C of the Income Tax Act (Old Tax Regime). ELSS investments are subject to a mandatory 3-year statutory lock-in period from the date of allotment—the shortest among 80C instruments. If investing via monthly SIP, each installment has an independent 3-year lock-in cycle before becoming redeemable.
Tax-loss harvesting involves strategically selling underperforming mutual fund units at an unrealized loss before the end of the financial year to offset realized taxable capital gains. Under the Income Tax Act, Short-Term Capital Losses (STCL) can be set off against both STCG and LTCG, while Long-Term Capital Losses (LTCL) can only be set off against LTCG. Unadjusted losses can be carried forward for up to 8 assessment years provided the tax return is filed within statutory due dates.