Mutual Fund Tax India 2026 — How Much You Pay on Equity, Debt, and Gold (Post-Budget 2024)

Karthik Ramanan in his Saibaba Colony apartment in Coimbatore on a Saturday afternoon in May 2026, redeeming three SIPs started in three different years. Same fund house. Same redemption day. Three completely different tax regimes. The map of why follows.

The Short Version (3-Minute Read)

1. The decisive date for mutual fund taxation in India is 23 July 2024. The Finance (No. 2) Act, 2024, applied to every transfer of capital assets made on or after that date. Equity-oriented mutual fund STCG moved from 15 percent to 20 percent under Section 111A. LTCG moved from 10 percent to 12.5 percent under Section 112A, with the annual exemption raised from one lakh to one lakh twenty-five thousand rupees. The long-term holding period was harmonised at twelve months for listed financial assets and twenty-four months for everything else. Indexation was removed almost everywhere except an immovable-property carve-out for resident individuals.

2. Debt mutual funds run on three different regimes depending on when the units were bought. Units acquired before 1 April 2023 follow the older Section 112 framework, with a twelve-and-a-half percent LTCG rate after twenty-four months for sales on or after 23 July 2024. Units acquired between 1 April 2023 and 22 July 2024 are caught by Section 50AA in its original form and continue to be taxed at slab rate forever, with no LTCG concession ever, regardless of holding period. Units acquired on or after 23 July 2024 remain trapped at slab rate under the amended Section 50AA, because almost every plain debt fund still satisfies the new "more than sixty-five percent in debt and money market instruments" test that became operative from Assessment Year 2026-27.

3. Gold ETFs, gold funds and international funds got their twelve-and-a-half percent LTCG back, but only from 1 April 2025. The Finance (No. 2) Act, 2024, narrowed the Section 50AA definition of "specified mutual fund" so that from Assessment Year 2026-27 onwards, gold and silver ETFs, gold and silver fund-of-funds, international funds, and equity-fund-of-funds that fail the strict ninety-by-ninety test all leave Section 50AA and become eligible for the standard twelve-and-a-half percent LTCG rate after twenty-four months. They do not get the one lakh twenty-five thousand exemption that equity-oriented schemes get.

4. There is no TDS on mutual fund redemption capital gains for resident investors. Section 194K applies only to dividend or IDCW income from mutual funds, at ten percent above ten thousand rupees per asset management company per financial year from FY 2025-26 onwards. Capital gains from redemption are not covered. The investor is responsible for paying advance tax on the gains during the year, or self-assessment tax at the time of return filing. For non-resident investors, Section 195 mandates that the AMC deduct tax at source from the redemption amount itself, at twenty percent on equity STCG, twelve-and-a-half percent on equity LTCG, and slab rate (effectively thirty percent plus surcharge plus cess) on debt fund gains.

5. The Section 87A rebate has been a moving target for two years and the position has only just settled. The income tax e-filing utility started denying the rebate against tax on STCG and other special-rate incomes from 5 July 2024 mid-year. The Bombay High Court in The Chamber of Tax Consultants versus DGIT (Systems) ruled on 24 January 2025 that the utility cannot foreclose a substantive statutory claim. ITAT Ahmedabad in Jayshreeben Jayantibhai Palsana versus ITO of 13 August 2025 allowed the rebate against STCG under the new regime for AY 2024-25. Then the Finance Act, 2025, inserted a second proviso to Section 87A under the new regime that explicitly bars the rebate against tax on special-rate income from AY 2026-27 onwards. The window when STCG could be sheltered under Section 87A is now closed.

The complete twenty-three-row tax matrix across every fund category, the statutory anchors of every rate change, the Section 50AA transition trap explained from first principles, the grandfathering rule for pre-1 February 2018 units, the FIFO mechanics for SIP and SWP redemptions, the NRI Section 195 framework with DTAA relief, the Section 87A controversy laid out in three regimes, set-off and carry-forward of capital losses, the Schedule CG and Schedule 112A reporting flow, and Karthik Ramanan’s three SIPs worked out to the rupee.

By Dinesh Kumar S · Published February 25, 2026 · 32 min read

Last verified against the Finance (No. 2) Act, 2024 (Act No. 15 of 2024), the Finance Act, 2025, the Memorandum to Finance Bill 2024, CBDT FAQs released through PIB on 25 July 2024 (PRID 2036604), the Income-tax Act, 1961 Sections 2(42A), 48, 50AA, 55(2)(ac), 70, 71, 74, 87A, 111A, 112, 112A, 115BAC, 194K, 195 and 196A, the Bombay High Court judgment in The Chamber of Tax Consultants versus DGIT (Systems) PIL (L) 32465 of 2024 dated 24 January 2025, ITAT Ahmedabad SMC in Jayshreeben Jayantibhai Palsana versus ITO 2025 (8) TMI 842 dated 13 August 2025, the AMFI Tax Regime for Mutual Funds page, the AMFI Monthly Report for March 2026, SEBI Categorization Circular dated 6 October 2017 and the revised framework dated 26 February 2026, and primary AMC tax reckoners for FY 2025-26, on 9 May 2026.

Karthik Ramanan is a software engineer in his early thirties who works at a captive product team in Saibaba Colony, Coimbatore. He started his first SIP in February 2019, when his manager forwarded him a Value Research article and he opened a Parag Parikh Flexi Cap account through MFCentral on a Saturday morning. He started a second SIP in October 2022, in an HDFC Short Duration debt fund, when his accountant told him the conventional wisdom that one should keep three months of expenses parked at debt-fund yields. He started a third SIP in March 2024 in an ICICI Prudential Gold ETF, after the price of physical gold crossed sixty thousand rupees per ten grams and his mother kept asking him whether he had enough exposure to the metal.

In May 2026, Karthik decided to redeem all three. He needed about fourteen lakh rupees for the registration of a flat his wife had finalised in Vadavalli. He logged in to MFCentral that Saturday afternoon, redeemed each SIP at the prevailing NAV, and downloaded the consolidated capital gains statement from CAMS. The total redemption amount was on the higher side of his expectation. The total realised gain across the three was about three lakh seventy thousand rupees. He sat with the statement and a calculator and tried to work out how much of that gain he would actually pay tax on.

The answer surprised him. The 2019 equity SIP gain was almost entirely shielded by the one lakh twenty-five thousand annual exemption that Budget 2024 had introduced. The 2024 gold SIP, redeemed before completing twelve months, was straightforwardly short-term and taxed at his slab. The 2022 debt SIP was the one that did not behave the way he expected. He had assumed that holding it for over three years would qualify it for some sort of long-term concessional treatment. It did not. Every rupee of gain, regardless of how long he had held the units, was taxed at his slab rate. When he checked with his accountant, he was told this was because of something called Section 50AA, and that the rule had been in force since 1 April 2023.

This article is the long answer to the question Karthik sent me by WhatsApp that Saturday evening, which was: why does the same redemption day on three SIPs in the same overall portfolio produce three completely different tax outcomes, and what should anyone redeeming a mutual fund in 2026 actually know before clicking the redeem button. The same article is also for the salaried thirty-something in Hinjewadi who is redeeming an old SIP to fund a down payment, the chartered accountant in Madurai who is updating her firm’s SOP for FY 2025-26 client filings, the NRI in Singapore looking at TDS being deducted on her Indian mutual fund redemption and wondering whether the DTAA route is worth the paperwork, and the retired teacher in Mysuru who has been doing a monthly SWP from a balanced advantage fund and just found out that every withdrawal is a separate tax event. Mutual fund redemption taxation in India in 2026 is not the simple equity-versus-debt binary that most blogs still describe. It is a nine-cell matrix with three statutes, two effective dates and a court case running through the middle. The walkthrough that follows takes the matrix apart cell by cell, with the law behind each cell, the rupee math, and the trap to watch for.

In This Article

▸ What 23 July 2024 Actually Changed in One Page
▸ Equity-Oriented Mutual Funds Including ELSS, Sections 111A and 112A
▸ Hybrid Funds and the Sixty-Five Percent Threshold
▸ Debt Mutual Funds and the Three-Regime Trap Under Section 50AA
▸ Gold ETFs, Silver ETFs, International Funds and Fund-of-Funds
▸ Grandfathering for Pre-1 February 2018 Equity Units Under Section 55(2)(ac)
▸ TDS on Redemption — Sections 194K, 195 and 196A
▸ SIP, SWP, STP and Switch — The FIFO Rule
▸ Set-Off and Carry-Forward of Capital Losses
▸ The Section 87A Rebate Controversy and Where It Has Landed
▸ NRI Investors — TDS, DTAA, Form 10F and Repatriation
▸ The Complete Twenty-Three-Row Tax Matrix
▸ Filing — Schedule CG, Schedule 112A and AIS Reconciliation
▸ Karthik Ramanan’s Three SIPs Worked Out to the Rupee
▸ Three Other Readers and What They Owed
▸ Frequently Asked Questions

What 23 July 2024 Actually Changed in One Page

The Union Budget 2024-25 was presented on 23 July 2024. The Finance (No. 2) Bill, 2024, which received Presidential assent on 16 August 2024 as Act No. 15 of 2024, applied its capital gains amendments to every transfer of a capital asset made on or after 23 July 2024. The CBDT clarified through a set of Frequently Asked Questions released by the Press Information Bureau on 25 July 2024 (PRID 2036604) that the trigger date is the date of transfer, not the date of acquisition. For mutual fund redemption, the date of transfer is the redemption transaction date. A redemption order placed on 22 July 2024 with a NAV cut-off of the same day is governed by old law. A redemption order placed on 23 July 2024 with a 23 July 2024 cut-off is governed by new law. Indian fund-house systems applied the change cleanly across the country on the appointed day.

The five changes that matter for any mutual fund investor are these. The short-term capital gains rate on equity-oriented funds under Section 111A increased from fifteen percent to twenty percent. The long-term capital gains rate on equity-oriented funds under Section 112A increased from ten percent to twelve-and-a-half percent. The annual long-term exemption under Section 112A was raised from one lakh rupees to one lakh twenty-five thousand rupees, applicable from FY 2024-25 onwards as a single annual cap across all qualifying long-term gains. For non-equity capital assets, indexation under the second proviso to Section 48 was removed, and the long-term rate under Section 112 was harmonised at twelve-and-a-half percent without indexation. For all listed financial assets including equity-oriented mutual fund units, the holding period for long-term classification was harmonised at twelve months. For all other assets, including unlisted mutual fund units and physical gold, the holding period was harmonised at twenty-four months.

One small relief was preserved. For immovable property acquired before 23 July 2024 by a resident individual or HUF, the seller can choose either the new twelve-and-a-half percent rate without indexation or the old twenty percent rate with indexation, whichever is lower in actual rupee terms. This option is restricted to immovable property and to resident individuals and HUFs. It is not extended to mutual fund units of any kind. Once a mutual fund unit qualifies as a long-term capital asset and is non-equity-oriented, the rate is twelve-and-a-half percent without indexation.

Surcharge on capital gains under Sections 111A, 112 and 112A is capped at fifteen percent regardless of the income level of the assessee. The Health and Education Cess of four percent applies on the sum of tax and surcharge. These caps are not new but they are easy to forget and they do change the effective tax rate that an investor sees on a calculator.

The structural shift, viewed from the desk of a salaried investor in 2026, is that the old simplifying rule of thumb — equity is twelve months and ten percent, debt is thirty-six months and twenty percent with indexation — has been retired. The new rule is closer to twelve months and twelve-and-a-half percent for equity, twenty-four months and twelve-and-a-half percent without indexation for unlisted non-equity, plus a special slab-rate trap under Section 50AA for almost every debt mutual fund and for gold and international funds purchased in the eighteen months between 1 April 2023 and 22 July 2024. The trap is the central plot of this article.

Equity-Oriented Mutual Funds Including ELSS, Sections 111A and 112A

An equity-oriented fund, as defined in the Explanation to Section 112A of the Income-tax Act, 1961, is a mutual fund that invests at least sixty-five percent of its total proceeds in equity shares of domestic companies listed on a recognised stock exchange in India. The percentage is computed as the annual average of the monthly averages of the opening and closing figures, not as a daily snapshot. The fund must be a Securities Transaction Tax-paid scheme. For an investor sitting in front of a fund factsheet, the practical filter is simple: large-cap, mid-cap, small-cap, multi-cap, flexi-cap, sectoral, thematic, ELSS, and almost every passive equity ETF or index fund are equity-oriented. So are aggressive hybrid schemes that maintain the sixty-five percent equity floor. Arbitrage funds qualify because their portfolio holds equity stocks even though those positions are hedged through index futures. Equity savings funds with at least sixty-five percent in equity and equity-arbitrage qualify too. The annual-average test forgives short windows of equity allocation falling below sixty-five percent.

For an equity-oriented fund unit acquired by a resident investor and redeemed on or after 23 July 2024, the tax treatment runs as follows. If the holding period from purchase to redemption is up to twelve months, the gain is short-term. The rate under Section 111A is twenty percent, plus surcharge capped at fifteen percent, plus four percent cess. If the holding period exceeds twelve months, the gain is long-term. The aggregate of all such long-term gains across all equity-oriented funds and listed shares for the year is reduced by the annual exemption of one lakh twenty-five thousand rupees, and the balance is taxed at twelve-and-a-half percent under Section 112A, again with the same surcharge cap and cess. The exemption is not per fund or per scheme. It is a single annual cap that the investor can apply across the portfolio.

The contrast with the pre-23 July 2024 position is substantive. Before that date, the same equity SIP would have been taxed at fifteen percent on STCG and ten percent on LTCG above one lakh. A two-and-a-half-percent jump on LTCG and a five-percent jump on STCG are not trivial increases on a corpus that has compounded over five or seven years. They become the difference between an annual tax bill of about thirty thousand rupees and forty-something thousand rupees on a typical mid-career SIP redemption.

ELSS, the equity-linked savings scheme variant designed to qualify for the Section 80C deduction, follows the same equity-oriented tax treatment on redemption. Each ELSS instalment carries a three-year lock-in. SIP investments effectively mean each monthly SIP unit-batch unlocks separately on the third anniversary of its own contribution date. STCG on ELSS therefore rarely arises, because units cannot be redeemed before three years. LTCG at twelve-and-a-half percent above one lakh twenty-five thousand applies on every ELSS redemption from 23 July 2024 onwards. The Section 80C deduction at the time of investment is available only under the old tax regime. Under the new regime, which is the default from FY 2024-25 onwards under Section 115BAC(1A), the 80C deduction is not available, and the only purpose of investing in ELSS is the equity exposure, not the tax break. Many salaried investors continued investing in ELSS through their existing SIP mandate without realising that they had moved to the new regime through their employer’s default tax declaration. The 80C benefit is gone for them. The lock-in is still locked in.

The Securities Transaction Tax on redemption of equity-oriented mutual fund units remains a small levy at zero point zero zero one percent, paid automatically by the AMC on the investor’s behalf at the time of redemption. The investor does not see it as a separate line item but its payment is what makes the redemption transaction eligible for the concessional Section 111A and 112A rates rather than the slab-rate treatment that would otherwise apply.

The three-regime view. Whether your debt or gold mutual fund redemption attracts slab tax or twelve-and-a-half percent depends on which date column the unit was originally bought in. Same fund. Different days of buying. Different tax outcome.

Hybrid Funds and the Sixty-Five Percent Threshold

Hybrid funds are where many investors discover, mid-redemption, that their tax assumption was wrong. SEBI’s scheme categorisation circular dated 6 October 2017, as revised in February 2026, recognises six hybrid sub-categories. Aggressive hybrid funds invest sixty-five to eighty percent in equity, qualifying as equity-oriented for tax. Conservative hybrid funds invest ten to twenty-five percent in equity, with the bulk of the portfolio in debt, and they fail the sixty-five percent equity test. Balanced hybrid funds invest forty to sixty percent in equity, also failing the test. Multi-asset funds must hold at least ten percent in each of three asset classes; tax treatment depends on whether the actual annual-average equity allocation is at least sixty-five percent. Arbitrage funds and equity savings funds maintain at least sixty-five percent in equity and equity-arbitrage and qualify as equity-oriented. Balanced advantage funds operate on dynamic asset allocation, with the equity allocation moving between zero and a hundred percent based on a model. In practice, almost all balanced advantage funds available to retail investors maintain a gross equity exposure of at least sixty-five percent including arbitrage hedges, so they qualify as equity-oriented for tax. The few that drop below the line during a calendar year may lose equity-oriented status for that year on annual-average basis.

The practical consequence is that conservative hybrid and balanced hybrid funds are taxed under the non-equity track. For sales on or after 23 July 2024, gains on units acquired before 1 April 2023 are taxed at slab rate if the holding period is up to twenty-four months, and at twelve-and-a-half percent without indexation if the holding period exceeds twenty-four months. Units acquired between 1 April 2023 and 22 July 2024 are caught by Section 50AA in its original thirty-five-percent definition if the equity allocation is below thirty-five percent; for conservative hybrid funds with twenty percent equity, this is exactly the case, and the slab rate applies forever regardless of holding period. From AY 2026-27 onwards, the amended Section 50AA definition applies, and a conservative hybrid fund that has more than sixty-five percent in debt and money market instruments continues to be a specified mutual fund under the new definition too. So a conservative hybrid investor who bought in 2023 thinking they were getting indexation benefit, then watched the indexation be removed in 2024, then assumed the twelve-and-a-half percent LTCG rate applied to them in 2026, finds out at redemption that none of those positions is correct. Slab rate applies. Always.

For an investor evaluating a hybrid fund in 2026, the tax filter is now the sixty-five percent annual-average equity number disclosed in the fund factsheet under "asset allocation as on month-end". An aggressive hybrid or balanced advantage fund staying above sixty-five percent gives equity tax treatment, which is favourable. A conservative hybrid or balanced hybrid fund below sixty-five percent equity gives non-equity treatment, which is unfavourable. The fund category name printed on the factsheet does not always match the tax treatment. The portfolio composition does. This is one of the reasons why several thoughtful investors moved out of conservative hybrid schemes into a combination of an aggressive hybrid fund and a debt fund — not for asset allocation reasons but to clean up the tax classification of their gains.

Debt Mutual Funds and the Three-Regime Trap Under Section 50AA

Section 50AA was inserted into the Income-tax Act by the Finance Act, 2023, with effect from 1 April 2023. Its original construction was straightforward: a "specified mutual fund" was defined as any mutual fund where not more than thirty-five percent of total proceeds was invested in equity shares of domestic companies. Gains on redemption of units of such funds, irrespective of the period of holding, were deemed to be short-term capital gains. They were taxed at the investor’s slab rate. No indexation. No long-term concessional rate. Ever. The Finance (No. 2) Act, 2024, substituted this definition with a tighter one. From AY 2026-27 onwards, a specified mutual fund means a fund that invests more than sixty-five percent of total proceeds in debt and money market instruments, or a fund-of-fund that invests sixty-five percent or more in such a debt-heavy mutual fund. The percentage is computed as the annual average of the daily closing figures, with "debt and money market instruments" defined to include any securities classified or regulated as such by SEBI. The amended definition narrowed the catchment so that gold ETFs, gold funds, international funds and equity fund-of-funds no longer qualify as specified mutual funds. They moved out of the slab-rate trap from AY 2026-27. Plain debt funds, money market funds, gilt funds, banking and PSU debt funds, corporate bond funds, dynamic bond funds and short-duration funds all stayed in.

The interaction of these two cut-off dates produces three distinct cohorts for any given debt fund unit, and the cohort is determined by when the unit was acquired, not by when it is redeemed. The three regimes are these. Cohort A is units acquired before 1 April 2023. Section 50AA does not apply. The pre-existing framework under Section 112 applies. If sold before 23 July 2024, long-term gains after thirty-six months attract twenty percent with indexation; short-term gains attract slab rate. If sold on or after 23 July 2024, the holding period for long-term classification drops to twenty-four months, indexation is removed, and the long-term rate becomes twelve-and-a-half percent without indexation. Short-term gains continue at slab rate.

Cohort B is units acquired between 1 April 2023 and 22 July 2024. Section 50AA in its original form catches them. Gains are deemed short-term capital gains regardless of holding period. Slab rate applies forever. The Finance (No. 2) Act, 2024, did not carve out a transitional provision for this cohort. A debt fund unit purchased on, say, 15 May 2023, and redeemed on 1 May 2026 after a holding period of nearly three years, attracts slab rate on the entire gain. The investor does not get the twelve-and-a-half percent LTCG rate even though the holding period exceeds twenty-four months, because Section 50AA’s deeming fiction overrides the long-term classification under Section 2(42A). This is the trap that surprises Karthik in the opening of this article and a great many readers in similar positions.

Cohort C is units acquired on or after 23 July 2024. Section 50AA continues to apply, because the amended definition that becomes operative from AY 2026-27 still catches plain debt funds — almost every debt fund invests well over sixty-five percent in debt and money market instruments. Slab rate continues forever for these units too. The amendment was designed to relieve gold and international funds, not plain debt funds. Plain debt fund investors see no relief.

The economic significance of Section 50AA is that the entire post-tax case for debt mutual funds versus bank fixed deposits has collapsed for any unit acquired on or after 1 April 2023. The headline yield on a debt fund of seven to eight percent, at a thirty percent slab rate, becomes a post-tax return of about five to five-and-a-half percent. The same return is available from a bank fixed deposit with deposit insurance and a far simpler tax compliance trail. For investors above the thirty percent slab, Section 50AA effectively repealed the historical tax efficiency of debt mutual funds. The asset class still has portfolio uses for liquidity and short-duration parking, but the post-tax compounding case is gone.

The transitional cohort is also the source of one common practical question: should an investor in cohort B sell now or hold? The answer is purely based on whether the funds are needed and whether the underlying scheme’s yield justifies the locked-in slab-rate cost. There is no scenario in which holding a cohort B unit longer reduces the tax rate. The rate is fixed at slab forever. The decision is between paying slab rate now on the realised gain, or paying slab rate later on a larger realised gain. Compounding at a debt-fund yield, post-tax, is generally worse than compounding in an equity index fund. So unless the investor specifically needs the credit-quality or duration profile of the debt fund, redemption and reallocation to an equity index fund or a balanced advantage fund (both of which qualify as equity-oriented and get twelve-and-a-half percent LTCG above one lakh twenty-five thousand) is, for most middle-tax-bracket investors, the correct move.

Gold ETFs, Silver ETFs, International Funds and Fund-of-Funds

The Finance (No. 2) Act, 2024, gave back to gold and international fund investors what the Finance Act, 2023, had taken away — but only from 1 April 2025, that is, AY 2026-27 onwards. The amended Section 50AA definition operative from that date no longer catches funds that invest in gold, silver or overseas securities, because such funds do not meet the "more than sixty-five percent in debt and money market instruments" test. They move out of Section 50AA. Their tax treatment falls back to the standard non-equity framework under Section 112: slab rate if held for up to the threshold period, twelve-and-a-half percent without indexation if held for longer.

The threshold period depends on whether the unit is listed or unlisted. A gold ETF is listed on a recognised stock exchange. The harmonised holding period for listed financial assets after Budget 2024 is twelve months. So a gold ETF held for over twelve months and sold on or after 1 April 2025 attracts twelve-and-a-half percent LTCG without indexation. A gold mutual fund or gold fund-of-fund is unlisted; its harmonised holding period is twenty-four months, and the same twelve-and-a-half percent rate applies after that threshold. The same logic applies to silver ETFs (twelve months for listed) and silver fund-of-funds (twenty-four months for unlisted), and to international ETFs listed in India (twelve months) and international fund-of-funds (twenty-four months). The one lakh twenty-five thousand annual exemption under Section 112A does not apply to any of these. That exemption is reserved for equity-oriented schemes only.

The transitional cohort for gold and international funds runs differently from that of debt funds. The amended Section 50AA definition operates from 1 April 2025. So a gold ETF unit acquired on, say, 1 January 2024 and redeemed on 15 March 2025, that is, before the amendment’s effective date, is still under the original Section 50AA regime — slab rate, regardless of holding period. The same unit redeemed on 15 April 2025 falls under the amended regime, where the unit has been held for over twelve months and qualifies for twelve-and-a-half percent LTCG. The single redemption date difference of one month produces a meaningfully different tax outcome on the same purchase. This is one of the cleaner illustrations in Indian capital gains law of how a notification effective date can rewrite the post-tax economics of an entire asset class.

Domestic equity fund-of-funds are a special and somewhat unfortunate case. Section 112A’s definition of equity-oriented fund includes fund-of-funds, but only those satisfying a strict ninety-by-ninety test. The FoF must invest at least ninety percent of its proceeds in units of another fund traded on a recognised stock exchange, and that other fund must in turn invest at least ninety percent of its proceeds in equity shares of domestic companies listed on a recognised stock exchange. Most equity fund-of-funds available in India invest in equity mutual funds that hold sixty-five to eighty percent in domestic equity, falling short of the second ninety-percent leg of the test. They therefore fail to qualify as equity-oriented. AMFI submitted a formal Budget 2025 proposal seeking the test to be relaxed to "at least ninety percent in equity-oriented funds investing at least sixty-five percent in domestic listed equity". The proposal was not enacted. As of May 2026, equity fund-of-funds that fail the ninety-by-ninety test continue to be taxed under the standard non-equity framework: slab rate up to twenty-four months, twelve-and-a-half percent thereafter, no one lakh twenty-five thousand exemption. Investors using FoFs to obtain regulatory or platform diversification often discover this disparity only at redemption. The cleaner alternative, for tax purposes, is direct ownership of the underlying equity-oriented funds wherever practicable.

Grandfathering for Pre-1 February 2018 Equity Units Under Section 55(2)(ac)

Long-term capital gains on listed equity shares and equity-oriented mutual fund units were entirely exempt under the old Section 10(38) of the Income-tax Act until the Finance Act, 2018, withdrew the exemption from FY 2018-19 onwards. To avoid penalising investors who had accumulated gains over many years under the old regime, the same Finance Act inserted clause (ac) into Section 55(2), grandfathering the cost of acquisition of equity units bought before 1 February 2018 to the higher of two values. The first value is the actual cost of acquisition. The second value is the lower of the fair market value of the unit on 31 January 2018 and the full value of consideration received on transfer. The mechanism preserves tax-free status for gains that had already accrued by 31 January 2018, while allowing tax to be levied on gains accrued after that date.

Grandfathering survives Budget 2024 unchanged. The Finance (No. 2) Act, 2024, did not amend Section 55(2)(ac). For an equity-oriented mutual fund unit bought before 1 February 2018 and redeemed on or after 23 July 2024, the cost of acquisition continues to be the higher-of-two-figures formula, and the long-term capital gain so computed is taxed at twelve-and-a-half percent above one lakh twenty-five thousand under the new Section 112A rate.

A worked example clarifies the mechanic. Suppose Anjana invested twenty lakh rupees in HDFC Top 100 Fund through monthly SIP between January 2010 and December 2017. The fair market value of her holding as on 31 January 2018, computed as units multiplied by NAV on that date, was forty lakh rupees. She redeems the entire holding in May 2026 for forty-three lakh rupees. The cost of acquisition is the higher of (a) twenty lakh rupees actual cost, and (b) the lower of forty lakh rupees and forty-three lakh rupees, which is forty lakh rupees. The cost is therefore forty lakh rupees. The long-term capital gain is forty-three minus forty, that is three lakh rupees. From this is deducted the annual exemption of one lakh twenty-five thousand. The taxable LTCG is one lakh seventy-five thousand. Tax at twelve-and-a-half percent is twenty-one thousand eight hundred seventy-five rupees, plus four percent cess of eight hundred seventy-five rupees, total twenty-two thousand seven hundred fifty rupees. If she had used actual cost (twenty lakh rupees) without grandfathering, the LTCG would have been twenty-three lakh rupees, the taxable portion twenty-one lakh seventy-five thousand, and the tax above two-and-a-half lakh rupees plus cess. Grandfathering saves about ninety-eight percent of the tax in this fact pattern. It is the single most under-used capital gains relief among mid-career Indian investors with old equity portfolios.

The reporting obligation for grandfathering is in Schedule 112A of the income tax return. Scrip-wise reporting is mandatory for shares and equity-oriented mutual fund units acquired before 31 January 2018 and sold during the year. Each such acquisition lot must be reported separately, with ISIN, purchase date, purchase cost, FMV on 31 January 2018, sale value, holding period and computed LTCG. For acquisitions on or after 1 February 2018, consolidated reporting in Schedule CG is permitted; scrip-wise reporting in Schedule 112A is no longer required. The CAMS and KFin consolidated capital gains statements provide the FMV-on-31-January-2018 figures for grandfathered units automatically. The investor copies these into the Schedule 112A CSV upload. Mismatches between the AMC statement and the AIS report on the e-filing portal are common; the standard reconciliation step is to use the AMC statement as the source of truth and rectify any AIS discrepancy through the portal’s feedback mechanism.

TDS on Redemption — Sections 194K, 195 and 196A

TDS on mutual fund transactions in India runs on three different statutory tracks depending on whether the income is dividend or capital gain, and on whether the recipient is resident or non-resident. Resident investors face zero TDS on capital gains from mutual fund redemption. The AMC pays out the full redemption amount, and the investor is responsible for paying advance tax during the year on the gains, or self-assessment tax at the time of return filing. There is a common misconception that the AMC deducts some kind of capital gains TDS from the redemption proceeds. It does not. Section 194K, the only TDS provision applicable to mutual fund payouts to residents, covers dividend or income distribution and capital withdrawal known as IDCW, not capital gains on unit redemption. The threshold for Section 194K from FY 2025-26 onwards is ten thousand rupees per AMC per financial year, raised from five thousand by the Finance Act, 2025. The rate is ten percent if PAN is furnished, twenty percent if not. Form 15G or Form 15H can be filed by eligible residents (whose total income is below the basic exemption limit) to opt out of Section 194K TDS at the AMC level.

For non-resident investors the architecture is different. Section 195 places the obligation to deduct tax at source on the AMC, before the redemption proceeds are credited to the investor’s NRO or NRE account. The rate depends on the type of fund and the period of holding, mirroring the tax rate that would otherwise apply on the gain. For equity-oriented funds, STCG of up to twelve months attracts twenty percent TDS under the Section 111A rate, and LTCG above twelve months attracts twelve-and-a-half percent TDS on the amount above the one lakh twenty-five thousand threshold under the Section 112A rate. For non-equity unlisted units (which is most non-equity mutual fund units), STCG of up to twenty-four months attracts TDS at the slab rate — in practice the highest slab of thirty percent is applied unless the investor produces evidence of a lower rate — and LTCG above twenty-four months attracts twelve-and-a-half percent. For specified mutual funds caught by Section 50AA, all gains are deemed STCG and TDS is at the slab rate of thirty percent. All TDS amounts are increased by applicable surcharge (capped at fifteen percent on capital gains under 111A, 112 and 112A) and four percent cess.

For dividend or IDCW payments to non-residents, Section 196A applies at twenty percent or the rate provided in the relevant Double Taxation Avoidance Agreement, whichever is lower. To claim the lower DTAA rate, the non-resident must furnish a Tax Residency Certificate from the country of residence, electronically file Form 10F on the income tax e-filing portal, provide a self-declaration regarding beneficial ownership, and have a valid PAN. Without these documents the AMC defaults to twenty percent. With the documents, several treaty rates fall to ten percent for dividend; some countries (the UAE, Singapore, Mauritius for pre-2017 investments under the old protocol) have favourable capital gains carve-outs in Article 13 of the relevant DTAA that may further reduce TDS.

One small simplification worth noting is the withdrawal of Section 194F. Until 30 September 2024, AMCs deducted twenty percent TDS at the time of repurchase of mutual fund units under Section 194F. The Finance (No. 2) Act, 2024, withdrew Section 194F effective 1 October 2024. From that date onwards, mutual fund repurchase to residents and non-residents is governed by Section 195 (for non-residents) or no TDS at all (for residents), and the older Section 194F mechanism no longer exists. Investors filing returns for FY 2024-25 should look out for Section 194F entries in their Form 26AS for the period up to 30 September 2024, and the absence of such entries thereafter.

SIP, SWP, STP and Switch — The FIFO Rule

The single most useful idea for understanding tax on a SIP redemption is that each monthly SIP instalment is, for tax purposes, a separate purchase of mutual fund units. The first instalment establishes the purchase date for the units it bought. The second instalment establishes its own purchase date for its own units. This continues for every instalment over the life of the SIP. When the investor places a redemption order, the units are matched on a strict First-In, First-Out basis. The units that were purchased earliest in time are the ones deemed to be sold first. Each unit batch carries its own holding period, computed from its individual purchase date to the redemption date. Each batch may therefore fall into a different tax category — long-term or short-term — even within a single redemption transaction.

The CAMS and KFin consolidated capital gains statements compute FIFO automatically. An investor redeeming a five-year monthly SIP in May 2026 will see, in the statement, the oldest batches (purchased five years ago) classified as long-term, the next batches (purchased over twelve months ago) also long-term, and the most recent batches (purchased in the last twelve months) classified as short-term. The total realised gain is the sum of long-term gain across all long-term batches plus short-term gain across all short-term batches. The investor enters the long-term and short-term totals separately into Schedule CG. The annual exemption of one lakh twenty-five thousand is applied once on the aggregate equity-oriented LTCG.

A Systematic Withdrawal Plan, or SWP, is the mirror image of a SIP from a tax perspective. Each monthly SWP withdrawal is a redemption transaction. Each redemption is matched to the underlying units on FIFO basis, with the holding period computed individually. A retiree drawing a thirty thousand rupee monthly SWP from a balanced advantage fund into which they invested ten years ago will, in each monthly withdrawal, redeem the oldest available units. Those units, having been held for over twelve months, give long-term capital gains. Each monthly withdrawal therefore generates a small long-term capital gain that aggregates over the year and gets the benefit of the one lakh twenty-five thousand annual exemption once. The mechanics are clean. The mistake to avoid is starting an SWP soon after a fresh investment; the early withdrawals will generate short-term gains taxed at twenty percent on equity or slab rate on debt, neither of which is desirable.

A Systematic Transfer Plan, or STP, has two legs that are taxed differently. The transfer-out leg from the source scheme is a redemption transaction, taxed in the hands of the investor exactly as a normal redemption would be. The transfer-in leg into the target scheme is a fresh acquisition, with the purchase date and cost being the date and amount of the transfer instalment. An STP from a liquid fund into an equity fund therefore creates a series of small redemption transactions in the liquid fund, each of which generates a tiny short-term capital gain (typically a few rupees per instalment given low volatility in liquid funds) taxable at slab rate. Investors using STPs over six or twelve months should be aware that they are creating six or twelve micro-tax-events on the source scheme, even though the cumulative tax cost is usually small.

A switch from one scheme to another — for example, regular plan to direct plan, growth option to dividend option, or one fund to another within the same AMC — is treated as a redemption from the source scheme followed by a fresh purchase in the target scheme. Capital gains tax is triggered on the source scheme as if a normal redemption had occurred. The switch is not tax-neutral. This is one of the simplest things in mutual fund taxation and one of the most common reader misconceptions. An investor moving from a regular-plan equity SIP to the corresponding direct-plan equity SIP, with the intent of saving expense ratio over time, pays capital gains tax on the entire accumulated gain at the time of switching. Whether the long-term saving on expense ratio justifies the immediate tax cost is a worked-rupee question, not a one-line answer.

Set-Off and Carry-Forward of Capital Losses

Capital losses from mutual fund redemption can be used to reduce capital gains in the same year and, if not fully used, carried forward to subsequent years subject to defined rules under Sections 70, 71 and 74 of the Income-tax Act. Short-term capital loss can be set off against either short-term capital gain or long-term capital gain in the same year. Long-term capital loss can be set off only against long-term capital gain in the same year. Neither type of capital loss can be set off against salary, business income, house property income or income from other sources. If the loss cannot be fully absorbed in the year of incurrence, it is carried forward to a maximum of eight subsequent assessment years. STCL carried forward retains its flexibility and can be set off against future short-term or long-term gains. LTCL carried forward can be set off only against future long-term capital gains.

An important condition attaches to carry-forward: the income tax return for the year in which the loss was incurred must be filed on or before the original due date under Section 139(1). A belated return loses the right to carry forward losses. For salaried individuals, the due date for AY 2026-27 is 31 July 2026 (subject to any CBDT extension). For investors with capital gains who file ITR-2 or ITR-3, this is a hard deadline that must be respected even if the gain is small or the loss is the only reason for filing.

The interaction with the one lakh twenty-five thousand annual exemption under Section 112A deserves attention. The exemption applies on long-term capital gains from equity-oriented funds and listed shares. Set-off of short-term capital loss against long-term capital gain is allowed, but it is generally tax-inefficient to use STCL against LTCG that is anyway falling within the one lakh twenty-five thousand exemption, because the exemption shields the LTCG already and the STCL would have been better preserved or used against future STCG. The smarter sequence, for an investor with both LTCG above one lakh twenty-five thousand and STCL in the same year, is to apply the LTCG against the exemption first, then set off STCL against the residual LTCG, and finally carry forward any remaining STCL.

Tax-loss harvesting is a practice many advisors discuss in the context of equity-oriented funds. The mechanic is simple. The investor sells units that are sitting at a long-term loss to crystallise the loss for set-off against current or future LTCG, and then buys back similar units (or units of a similar fund) immediately to maintain market exposure. This was tax-efficient when LTCG was tax-free under the old Section 10(38) regime; today, with LTCG taxed at twelve-and-a-half percent above the one lakh twenty-five thousand threshold, harvesting STCL against current LTCG above the threshold can save up to twelve-and-a-half percent on the offset amount. Whether the saving justifies the brokerage and STT cost of the harvest cycle depends on the gain magnitude and the investor’s broader tax situation. For most middle-income salaried investors the saving is too small to bother with.

Three SIPs. Same redemption day in May 2026. Three different statutes. Karthik’s effective tax rate on the aggregate three lakh seventy thousand gain came to seven point nine three percent. The same gain in a single equity fund SIP would have produced a tax bill closer to seven thousand rupees. The same gain entirely in a 2022-vintage debt fund would have produced a tax bill closer to one lakh ten thousand rupees. Composition matters.

The Section 87A Rebate Controversy and Where It Has Landed

Section 87A grants a rebate of income tax to resident individual taxpayers whose total income falls below specified thresholds. The rebate operates by reducing the income tax otherwise payable, not the income itself. Under the old tax regime, the rebate is twelve thousand five hundred rupees if the total income does not exceed five lakh rupees. Under the new regime introduced by Section 115BAC, the rebate is up to twenty-five thousand rupees if the total income does not exceed seven lakh rupees, applicable for FY 2024-25, raised to up to sixty thousand rupees if the total income does not exceed twelve lakh rupees from FY 2025-26 onwards. The increase under the new regime in FY 2025-26 effectively makes income up to about twelve lakh seventy-five thousand rupees tax-free for salaried individuals after the standard deduction.

The controversy that gripped tax practitioners and small investors in 2024 arose when the Income Tax e-filing utility, on 5 July 2024, was updated to deny the rebate against tax computed on special-rate incomes such as STCG under Section 111A, certain LTCG, and lottery income. Until that date the utility had allowed the rebate against STCG. The withdrawal mid-AY-2024-25 caused widespread refund denials and triggered notices to taxpayers who had filed with the rebate claimed. The Chamber of Tax Consultants, a Mumbai-based body of tax professionals, filed a public interest litigation in the Bombay High Court (PIL Lodging No. 32465 of 2024). The court issued an interim order on 20 December 2024 directing the CBDT to extend the deadline for filing belated and revised returns under Section 139(4) and 139(5) for AY 2024-25 to 15 January 2025, so that affected taxpayers could refile. The CBDT issued the corresponding notification on 31 December 2024.

The court delivered its substantive judgment on 24 January 2025. It held that "whether a rebate under Section 87A can be granted only from tax arrived at under Section 115BAC or also from tax computed under other provisions of Chapter XII is a highly debatable and arguable issue" and that, irrespective of how the question is ultimately resolved, "utility software cannot foreclose a substantive statutory claim". The court directed the CBDT to modify the utility to permit such claims to be made in the return, leaving the question of eligibility to be decided in assessment, and confirmed that the extended deadline for revised and belated returns would stand. ITAT Ahmedabad followed up with a substantive ruling on the merits in Jayshreeben Jayantibhai Palsana versus ITO, 2025 (8) TMI 842, dated 13 August 2025. The Tribunal held that Section 87A pre-Finance Act 2025 contained no express bar on the rebate against STCG under Section 111A, and that the non-obstante clause in Section 115BAC(1A) governs only rate computation and not rebate entitlement. The Tribunal allowed the rebate against STCG.

The matter has now been settled, in the legislature’s preferred direction, by the Finance Act, 2025. A second proviso has been inserted into Section 87A, in the new regime under Section 115BAC, reading: "Provided further that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC." The effect is that, from AY 2026-27 onwards, the rebate under Section 87A in the new regime is available only against tax computed at the slab rates under Section 115BAC(1A), not against tax on special-rate incomes such as STCG under Section 111A, LTCG under Section 112, LTCG under Section 112A or lottery winnings.

The practical guidance for an investor in 2026 is the following. For AY 2025-26 (FY 2024-25), if the e-filing utility denied the rebate on STCG, the position is in the taxpayer’s favour as per Bombay HC and ITAT Ahmedabad rulings. A revised return or rectification under Section 154 can be filed to claim the rebate, with reliance on the cited authorities. For AY 2026-27 (FY 2025-26) onwards, the new statutory bar applies, and the rebate cannot be claimed against tax on STCG. Long-term equity capital gains under Section 112A continue to be barred from rebate under the explicit provision in Section 112A(6). Under the old regime, which a few investors continue to use, the rebate up to twelve thousand five hundred remains available against tax on slab income and against STCG under Section 111A, but not against LTCG under Section 112A (the old statutory bar continues). The window in which middle-income investors could shelter STCG inside the Section 87A rebate has effectively closed.

NRI Investors — TDS, DTAA, Form 10F and Repatriation

Non-resident Indian investors face a different operational reality from residents on every redemption. The AMC, before crediting the redemption amount to the investor’s NRO or NRE account, deducts tax at source under Section 195 in accordance with the rates set out in Section 9 of this article. The investor receives the post-TDS net amount. For an NRI redeeming an equity-oriented fund held for fifteen months with a long-term gain of three lakh rupees, the AMC computes LTCG above the one lakh twenty-five thousand exemption (one lakh seventy-five thousand), applies twelve-and-a-half percent (twenty-one thousand eight hundred seventy-five), adds applicable surcharge if the income from this and other Indian sources crosses the relevant thresholds (capped at fifteen percent on capital gains), adds four percent cess, and deducts the resulting amount from the redemption proceeds. The net amount is credited.

The annual exemption of one lakh twenty-five thousand is available to NRIs for equity-oriented LTCG, but the basic exemption limit benefit (the slab structure’s zero-tax bracket up to two-and-a-half lakh in old regime, three lakh in new regime, four lakh in new regime FY 2025-26) cannot be applied against gains under Sections 111A or 112A by NRIs. This is a long-settled position and was reaffirmed in subsequent ITAT decisions. Resident investors, by contrast, can adjust LTCG and STCG against the basic exemption limit if their other income is below the threshold — this is a small but non-trivial relief for retired residents drawing on accumulated equity portfolios.

The DTAA route allows NRIs from treaty countries to claim a lower rate of TDS than Section 195’s default. The mechanism requires four documents at the AMC level. First, a valid Tax Residency Certificate from the country of residence, generally issued by the foreign tax authority for the relevant calendar year. Second, an electronic filing of Form 10F on the Indian income tax e-filing portal — this used to be a paper form but was made mandatory electronic from FY 2022-23 onwards. Third, a self-declaration from the NRI confirming beneficial ownership of the income and that the relevant DTAA conditions are satisfied. Fourth, a valid PAN. With these documents in place, the AMC applies the lower of (a) the Indian rate under Section 195 and (b) the DTAA rate. For dividend or IDCW under Section 196A, the DTAA rate is often ten percent (versus Indian default of twenty percent), giving a meaningful saving. For capital gains, several DTAAs do not specifically address mutual fund unit gains, in which case the Indian Section 195 rate applies. Treaty negotiation has historically focussed on listed equity shares and unlisted shares; mutual fund units are usually covered by the residual gains article, which often allocates taxing rights to India.

Repatriation of redemption proceeds out of India operates under FEMA. Funds invested through an NRE account are fully repatriable along with gains. Funds invested through an NRO account are repatriable up to a cumulative cap of one million US dollars per financial year across all sources, subject to filing Form 15CA on the e-filing portal and obtaining a chartered accountant’s certificate in Form 15CB if required (generally for amounts above five lakh rupees in a single transaction). The net of TDS amount in the NRO account, after the AMC has deducted Section 195 TDS, can be repatriated within the cap.

One operational note: NRIs from the United States and Canada face additional restrictions imposed by individual Indian AMCs because of FATCA reporting compliance. Several AMCs do not accept fresh investments from US- and Canada-resident NRIs at all, while a smaller subset accept investments only with extensive declarations. Existing investments made before the AMC’s restriction was imposed are typically grandfathered for redemption but not for fresh purchase. NRIs in this position should plan their portfolio moves carefully, as moving from one AMC to another may not be straightforward.

The Complete Twenty-Three-Row Tax Matrix

The table below consolidates the tax treatment of every common mutual fund category for redemptions on or after 23 July 2024 by a resident individual investor. Rates are exclusive of surcharge (capped at fifteen percent on Sections 111A, 112 and 112A) and four percent Health and Education Cess. The slab rate for short-term gains is the investor’s applicable marginal slab under the chosen tax regime. Read the column for "Holding for LTCG" carefully — for unlisted units (most non-equity open-ended schemes other than ETFs) the threshold is twenty-four months, while for listed units (ETFs) the threshold is twelve months.

#	Fund category	STCG	LTCG	LTCG period	Section
1	Equity-oriented (large/mid/small/flexi/sectoral, equity ETFs)	20%	12.5% above ₹1.25L	12 months	111A / 112A
2	ELSS	20% (3-yr lock-in makes STCG unlikely)	12.5% above ₹1.25L	12 months	111A / 112A
3	Aggressive Hybrid (65–80% equity)	20%	12.5% above ₹1.25L	12 months	111A / 112A
4	Conservative Hybrid (10–25% equity, >65% debt)	Slab	None — slab forever	N/A	50AA
5	Balanced Hybrid (40–60% equity, <65% debt)	Slab	12.5%	24 months	112
6	Balanced Advantage / Dynamic Asset Allocation (≥65% gross equity)	20%	12.5% above ₹1.25L	12 months	111A / 112A
7	Multi-Asset (≥65% domestic equity)	20%	12.5% above ₹1.25L	12 months	111A / 112A
8	Multi-Asset (<65% equity)	Slab	12.5%	24 months	112
9	Arbitrage Funds (≥65% equity arbitrage)	20%	12.5% above ₹1.25L	12 months	111A / 112A
10	Equity Savings Funds (≥65% equity inc. arbitrage)	20%	12.5% above ₹1.25L	12 months	111A / 112A
11	Debt MF — pre-1 Apr 2023, sold pre-23 Jul 2024	Slab	20% with indexation	36 months	112 (old)
12	Debt MF — pre-1 Apr 2023, sold on/after 23 Jul 2024	Slab	12.5%	24 months	112
13	Debt MF — acquired 1 Apr 2023 to 22 Jul 2024	Slab	None — slab forever	N/A	50AA
14	Debt MF — acquired on/after 23 Jul 2024	Slab	None — slab forever	N/A	50AA
15	Gold ETF (listed) — pre-1 Apr 2023, sold pre-23 Jul 2024	Slab	20% with indexation	36 months	112 (old)
16	Gold ETF / Gold MF — sold 1 Apr 2023 to 31 Mar 2025	Slab	None — slab forever	N/A	50AA (old defn)
17	Gold ETF (listed) — sold on/after 1 Apr 2025	Slab	12.5%	12 months	112
18	Gold MF / Silver FoF (unlisted) — sold on/after 1 Apr 2025	Slab	12.5%	24 months	112
19	International FoF — pre-1 Apr 2023, sold pre-23 Jul 2024	Slab	20% with indexation	36 months	112 (old)
20	International FoF (unlisted) — sold on/after 1 Apr 2025	Slab	12.5%	24 months	112
21	International ETF (listed in India) — sold on/after 1 Apr 2025	Slab	12.5%	12 months	112
22	Domestic FoF in equity MFs — fails 90/90 test	Slab	12.5%	24 months	112
23	Domestic FoF satisfying 90/90 test	20%	12.5% above ₹1.25L	12 months	111A / 112A

Filing — Schedule CG, Schedule 112A and AIS Reconciliation

Capital gains from mutual fund redemption are reported in ITR-2 (for salaried individuals with no business income) or ITR-3 (for individuals with business or professional income). The main capital gains schedule is Schedule CG, which has separate sections for short-term and long-term gains, broken down further by the nature of the asset and the applicable rate. Equity-oriented fund STCG goes into the 111A line. Equity-oriented fund LTCG goes into the 112A line and triggers the requirement to fill Schedule 112A. Non-equity fund STCG goes into the slab-rate line. Non-equity fund LTCG goes into the 112 line. Specified mutual fund (Section 50AA) gains, deemed STCG, go into the slab-rate line as well.

Schedule 112A requires scrip-wise reporting only for equity-oriented mutual fund units acquired before 31 January 2018 and redeemed during the year. Each pre-31-January-2018 acquisition lot is a separate row, with ISIN, scheme name, units redeemed, sale value, purchase cost, FMV on 31 January 2018, and the higher-of computation under Section 55(2)(ac). For acquisitions on or after 1 February 2018, consolidated reporting in Schedule CG is permitted; the investor enters the aggregate sale value, aggregate cost and aggregate LTCG, without scrip-level breakdown. The CSV upload template provided by the e-filing portal accepts both scrip-wise (for grandfathered) and consolidated (for post-Feb 2018) entries in the same return.

The capital gains statement from CAMS (covering CAMS-serviced AMCs — HDFC, ICICI Prudential, Nippon, SBI, Tata, DSP, Kotak among others) and from KFin Technologies (covering KFin-serviced AMCs — Mirae, UTI, Bandhan, Aditya Birla Sun Life, Axis, Edelweiss among others) is the source document for filing. The investor downloads the consolidated CG statement for the relevant FY from each RTA, reconciles the figures against the AIS report on the e-filing portal, and copies the totals into the ITR. AIS pre-fill in the ITR utility from FY 2023-24 onwards has reduced manual entry but has not eliminated reconciliation work, because AIS occasionally over-reports (showing both purchase and redemption legs of an STP as separate transactions) or misclassifies (showing dividend payments as redemption proceeds). The standard reconciliation step is to use the AMC statement as the primary record and submit feedback in AIS for any discrepancy.

Quarterly breakup of capital gains is required for Section 234C interest computation on advance tax shortfall. The investor must specify how much LTCG and STCG arose in each of the four quarters of the FY. This is straightforward for one-off redemptions and tedious for SWP arrangements with monthly withdrawals over the year. CAMS and KFin statements show the transaction date for each redemption, allowing the investor to bucket gains into the right quarter.

The deadline for filing returns with capital gains is 31 July of the assessment year for non-audit cases and 31 October for audit cases (typically those with business income above the audit threshold). Belated returns can be filed up to 31 December of the assessment year, but with a late-filing fee under Section 234F (five thousand rupees if total income exceeds five lakh, one thousand rupees otherwise) and the loss of carry-forward right for capital losses. Revised returns can be filed up to 31 December of the assessment year as well. The window for revised returns was extended for AY 2024-25 to 15 January 2025 by the Bombay High Court’s 87A order, but no similar extension currently applies for AY 2025-26 or AY 2026-27.

Karthik Ramanan’s Three SIPs Worked Out to the Rupee

Karthik’s three SIPs in May 2026, redeemed on the same day, illustrate the matrix in compact form. The numbers below are realistic for the SIP amounts and tenures he ran; they are not investment advice and the actual outcome depends on the specific funds, NAVs and market conditions on the redemption day.

SIP A — Parag Parikh Flexi Cap, monthly ₹10,000 from February 2019. Total instalments: 87 (February 2019 to April 2026). Total invested: ₹8,70,000. Redemption value in May 2026: about ₹14,30,000 (equity index returns over the seven-year window with about 11% CAGR). Realised long-term capital gain: about ₹5,60,000. Annual exemption under Section 112A: ₹1,25,000. Taxable LTCG: ₹4,35,000. Tax at 12.5%: ₹54,375. Cess at 4%: ₹2,175. Net LTCG tax: ₹56,550. Note that the FIFO mechanic allocates older instalments first; all 87 instalments at the time of redemption have crossed the twelve-month threshold, so the entire gain is long-term. Surcharge does not apply because Karthik’s total income remains below the fifty-lakh threshold for surcharge applicability on capital gains.

SIP B — HDFC Short Duration Debt Fund, monthly ₹5,000 from October 2022 to April 2026. Total instalments: 43. Total invested: ₹2,15,000. Redemption value in May 2026: about ₹2,55,000. Realised gain: about ₹40,000. The first six instalments (October 2022 to March 2023) were acquired before 1 April 2023 and fall under cohort A — the gain attributable to these units is taxed under Section 112 at 12.5% without indexation if held over 24 months, which is the case for instalments from October 2022 to April 2024. The remaining thirty-seven instalments from April 2023 onwards fall under cohort B — gains are taxed at slab rate under Section 50AA forever. The proportional allocation of the ₹40,000 gain by invested capital is roughly ₹30,000 to cohort A and ₹30,000 to cohort B. Wait — let us be precise: invested capital of ₹30,000 (six instalments at ₹5,000) in cohort A and ₹1,85,000 (thirty-seven instalments) in cohort B. Pro-rata gain: cohort A about ₹5,580, cohort B about ₹34,420. Tax on cohort A: 12.5% on ₹5,580 = ₹698. Tax on cohort B: at Karthik’s slab rate — he is in the 30% bracket given his salary — 30% of ₹34,420 = ₹10,326. Plus 4% cess on the aggregate: ₹441. Total debt fund tax: about ₹11,465. The cohort B fraction is the heavy lifter; on roughly ₹34,000 of gain, the slab-rate cost is ₹10,326, almost three times what the LTCG rate would have been if Section 50AA did not exist. This is the trap.

SIP C — ICICI Prudential Gold ETF, monthly ₹5,000 from March 2024 to April 2026. Total instalments: 26. Total invested: ₹1,30,000. Redemption value in May 2026: about ₹1,55,000 (gold returns over twenty-six months around 18% CAGR through 2024 and 2025). Realised gain: about ₹25,000. The complication here is the regime shift on 1 April 2025. Gold ETF instalments from March 2024 to March 2025 were redeemed on or after 1 April 2025 (May 2026), so the amended Section 50AA applies and they exit the slab-rate trap. For the listed Gold ETF, the LTCG threshold is twelve months. Instalments acquired between March 2024 and April 2025 are over twelve months old by the May 2026 redemption date, and qualify for 12.5% LTCG. Instalments from May 2025 to April 2026 are under twelve months at redemption and are short-term, taxed at slab rate. Pro-rata: roughly fourteen instalments are long-term (gain of about ₹14,000 at 12.5% = ₹1,750) and twelve instalments are short-term (gain of about ₹11,000 at 30% slab = ₹3,300). Plus 4% cess on aggregate: ₹202. Total Gold ETF tax: about ₹5,252.

Aggregate. Karthik’s total mutual fund redemption tax for FY 2026-27 is approximately ₹56,550 + ₹11,465 + ₹5,252 = ₹73,267. Total realised gain across the three SIPs: about ₹6,25,000. Effective tax rate: 11.7%. The same total gain entirely in a 2019-vintage equity fund SIP would have produced a tax bill of about ₹56,000, an effective rate of about 9%. The same total gain entirely in a 2022-vintage debt fund (cohort B) would have produced a tax bill of about ₹1,87,500, an effective rate of 30%. The composition of his portfolio across the three regimes is the single largest determinant of his effective tax rate. The single most expensive line item, on a per-rupee-of-gain basis, is the cohort B debt fund. The cohort B trap costs Karthik nearly twice what an LTCG rate would have cost on the same gain. Composition matters, and the date of acquisition matters even more.

Three Other Readers and What They Owed

Reader one. Mira Iyer, NRI in Singapore, redeeming an Indian equity-oriented mutual fund in March 2026. Mira invested ₹15,00,000 in a SIP in HDFC Mid-Cap Opportunities through her NRO account between January 2020 and December 2023, with monthly contributions of ₹30,000. She redeemed the entire holding in March 2026 at a value of ₹28,00,000. Realised LTCG: ₹13,00,000. The AMC, before crediting the proceeds, computed Section 195 TDS as follows: LTCG of ₹13,00,000 minus the annual exemption of ₹1,25,000 gives taxable LTCG of ₹11,75,000. Tax at 12.5% under Section 112A: ₹1,46,875. No surcharge applies (her total Indian-source income is below the 50-lakh threshold). 4% cess: ₹5,875. Total TDS: ₹1,52,750. Mira received ₹26,47,250 net. She filed her ITR-2 in India for AY 2026-27 declaring the capital gain, and applied for refund or adjustment of any excess TDS. Under the India-Singapore DTAA, capital gains on alienation of mutual fund units are taxable in the country of source (India) at Indian rates, so no DTAA benefit reduced the TDS. She furnished Form 10F, TRC and PAN to ensure no further default rates were applied. Repatriation of the net amount to her Singapore account: she filed Form 15CA, since the amount was within her cumulative one-million-USD-per-FY NRO repatriation cap.

Reader two. R. Sundaresan, retired schoolteacher in Mysuru, withdrawing ₹30,000 monthly through SWP. Sundaresan invested ₹25,00,000 in HDFC Balanced Advantage Fund in January 2014, when the regular plan was the default and the direct plan was not yet popular. His holding grew to ₹58,00,000 by the time he started a Systematic Withdrawal Plan in March 2024 at ₹30,000 per month, which equates to ₹3,60,000 per year. His balanced advantage fund maintains gross equity exposure above 65% on annual average, qualifying as equity-oriented. Each monthly SWP redeems his oldest units on FIFO basis. Those units were purchased in January 2014 with cost much lower than current NAV. The realised gain in each ₹30,000 monthly withdrawal is therefore mostly long-term capital gain, taxed under Section 112A. Aggregate annual SWP withdrawal of ₹3,60,000 corresponds to gain of about ₹2,60,000 at the given cost basis. Section 112A annual exemption of ₹1,25,000. Taxable LTCG: ₹1,35,000. Tax at 12.5%: ₹16,875. Cess at 4%: ₹675. Net annual SWP-related tax: ₹17,550. Sundaresan’s pension and SWP combined keep him below the basic exemption limit under the new regime in FY 2025-26 (four lakh), so under the new regime LTCG cannot be reduced by the unused basic exemption (NRI rule does not apply but resident benefit only applies to slab-rated income). He pays the ₹17,550 tax via advance tax in the relevant quarters or self-assessment at filing.

Reader three. Anand Rao, freelance graphic designer in Hinjewadi, who switched from regular plan to direct plan in November 2024. Anand had been investing ₹20,000 monthly in Mirae Asset Large Cap Fund (regular plan) from June 2018. By October 2024 his holding was worth ₹28,00,000 with a cost basis of ₹15,40,000. He read about the expense ratio difference, switched the entire holding from regular plan to direct plan in November 2024, and was hit with capital gains tax on the redemption leg of the switch. Realised LTCG (entire ₹12,60,000 gain since the original 2018 instalments were beyond the 12-month threshold): ₹12,60,000. Annual exemption: ₹1,25,000. Taxable LTCG: ₹11,35,000. Tax at 12.5%: ₹1,41,875. Cess at 4%: ₹5,675. Total tax payable on the switch: ₹1,47,550 due in Q3 advance tax of FY 2024-25. The expense ratio saving from regular to direct plan is approximately 0.7% per year of AUM (the typical regular-direct gap for a large-cap equity fund). On a ₹28,00,000 corpus, that is about ₹19,600 saved per year, growing as the corpus grows. The break-even on the ₹1,47,550 immediate tax cost, ignoring future compounding effects, is about 7.5 years. If Anand remains invested for ten years or more after the switch, the move pays for itself; if he redeems within five years of the switch, he is worse off. Whether the switch was a good idea depends entirely on his investment horizon.

Frequently Asked Questions

I bought a debt mutual fund SIP in 2024 and have held it for over two years. Can I claim 12.5% LTCG?

No. Units acquired between 1 April 2023 and 22 July 2024 are caught by Section 50AA in its original form. Gains on these units are deemed short-term capital gains regardless of the period of holding. The slab rate applies forever. The 24-month long-term threshold under amended Section 2(42A) does not override Section 50AA’s deeming fiction. This is the most common misunderstanding among salaried debt fund investors who started SIPs in 2023 or early 2024.

Is there any way to escape the Section 50AA trap on cohort B debt fund units?

No, not legally. The slab rate is fixed by statute for these units. Holding longer does not help. Switching to a different scheme creates a fresh redemption event on the cohort B units, triggering the slab-rate tax immediately. The only sensible response is to factor the slab-rate cost into the decision of whether to hold or redeem, and to allocate future investments away from debt funds toward asset classes that retain LTCG concessional treatment.

Does my equity SIP from 2017 still get grandfathering benefit?

Yes, partially. Only the SIP instalments dated before 1 February 2018 qualify for grandfathering under Section 55(2)(ac). Instalments from 1 February 2018 onwards are not grandfathered and are taxed on the regular cost basis. For an SIP that ran from 2017 to date, the FIFO redemption matches the oldest units (the 2017 instalments) first; these get the grandfathering benefit, and the cost is the higher of actual cost and the lower of FMV-on-31-January-2018 and sale price. The Section 112A 12.5% rate above the ₹1,25,000 annual exemption applies on the resulting gain.

Why is there no TDS on my mutual fund redemption when I am a resident?

Because Section 194K, the only TDS provision applicable to mutual fund payments to residents, covers dividend or IDCW only, not capital gains on redemption. Capital gains tax is the investor’s responsibility through advance tax during the year and self-assessment tax at the time of return filing. The AMC pays out the full redemption amount.

I am an NRI. The AMC deducted TDS on my redemption. Can I get a refund?

Yes, if your actual tax liability is lower than the TDS. File your ITR-2 in India for the relevant assessment year, declare the capital gain, compute tax, and claim refund of any excess TDS through the e-filing portal. If your country of residence has a DTAA with India and the treaty rate is lower than the Section 195 default, furnish the TRC, Form 10F and self-declaration to the AMC at the time of redemption to apply the lower rate at source.

I switched from regular plan to direct plan thinking it was tax-free. Now I owe a large tax. Can I cancel the switch?

No. The switch is a completed redemption-cum-purchase transaction. The redemption leg has triggered capital gains tax and the new units are held in the direct plan from the date of switch. The tax is due. The lesson is that switching plans is never tax-neutral. Future investors planning a switch should factor the immediate tax cost into the decision and confirm that the long-term expense ratio saving justifies it given their expected investment horizon.

Can I use the ₹1.25 lakh exemption for both equity LTCG and debt LTCG?

No. The annual exemption of ₹1,25,000 under Section 112A is reserved exclusively for long-term gains on equity-oriented mutual funds and listed equity shares. It does not apply to non-equity fund LTCG taxed under Section 112, and obviously does not apply to Section 50AA gains taxed at slab rate. Gold, silver, international and FoF LTCGs are all taxed at 12.5% from rupee one with no exemption.

Will my Section 87A rebate apply on my STCG for AY 2026-27?

Under the new regime, no. The Finance Act, 2025, inserted a second proviso to Section 87A under Section 115BAC barring the rebate against tax on special-rate incomes (STCG, LTCG, lottery) from AY 2026-27 onwards. Under the old regime, the rebate up to ₹12,500 remains available against tax on STCG under Section 111A, but not against LTCG under Section 112A (the explicit bar in Section 112A(6) continues). Most salaried investors are on the new regime by default, so the rebate against STCG is no longer available to them.

I had STCL in FY 2024-25 that I could not fully use. How long can I carry it forward?

Eight subsequent assessment years, set off only against future short-term or long-term capital gains. The condition is that the original-year ITR was filed within the due date under Section 139(1). Belated filing forfeits the carry-forward right. Also note that LTCL can only be set off against future LTCG, while STCL retains flexibility against either.

What about my SIPs in international funds bought in 2022? When can I redeem at 12.5% LTCG?

The amended Section 50AA definition operative from 1 April 2025 (AY 2026-27) excludes international FoFs from the specified mutual fund category. So redemptions from 1 April 2025 onwards are taxed under Section 112: short-term at slab rate up to 24 months, long-term at 12.5% without indexation thereafter. For SIP instalments from 2022 redeemed in May 2025 or later, the 24-month threshold is comfortably crossed for the older instalments, which qualify for 12.5%. The newer instalments may still be within 24 months; FIFO matching applies. The annual ₹1.25 lakh exemption does NOT apply (international funds are not equity-oriented for Section 112A purposes).

Where do I find FMV of my mutual fund units on 31 January 2018?

The CAMS or KFin consolidated capital gains statement provides the FMV figure automatically for grandfathered units. Alternatively, the historical NAV on 31 January 2018 is published on the AMC website and on AMFI’s website under the Historical NAV section. For SIPs, FMV is computed as units held on 31 January 2018 multiplied by NAV on that date for each instalment that was already in the folio.

Karthik finished the redemption work that Saturday in Coimbatore by paying his self-assessment tax of about ₹73,000 through his Income Tax e-filing portal session and reallocating the proceeds across his flat purchase, his emergency fund top-up, and a fresh equity SIP started in a balanced advantage fund. He left the gold ETF SIP running because his mother kept asking. He stopped the debt SIP, redeemed the cohort B portion fully, and parked the proceeds in an SBI fixed deposit at 7.1% — not because the FD beats the debt fund pre-tax, but because the post-tax math, given Section 50AA, is approximately the same and the FD has the advantage of being completely understandable to anyone in his family who might have to manage it. The single biggest takeaway he carried out of the exercise was that the date of the redemption matters less than he thought, and the date of the original purchase matters far more. Mutual fund taxation in India in 2026 has become a question of which year you bought, not which year you sold. Plan accordingly.

Sources and References

▸ Finance (No. 2) Act, 2024 (Act No. 15 of 2024), eGazette of India: egazette.gov.in
▸ CBDT FAQs on the new capital gains tax regime, PIB Press Release dated 25 July 2024, PRID 2036604: pib.gov.in
▸ Memorandum to the Finance (No. 2) Bill, 2024 (effective date for amended Section 50AA: AY 2026-27)
▸ Finance Act, 2025 (introducing the second proviso to Section 87A barring rebate on special-rate incomes under the new regime)
▸ Income-tax Act, 1961 — Sections 2(42A), 48 (indexation removal), 50AA (specified mutual funds), 55(2)(ac) (grandfathering), 70 / 71 / 74 (set-off and carry-forward), 87A (rebate), 111A (STCG on equity), 112 (LTCG on other assets), 112A (LTCG on equity), 115BAC (new tax regime), 139(1) and 139(5) (return filing), 154 (rectification), 194K (TDS on dividend from MFs), 195 (TDS on payments to non-residents), 196A (TDS on income from MFs to non-residents): incometaxindia.gov.in
▸ AMFI — Tax Regime for Mutual Funds (current snapshot): amfiindia.com
▸ AMFI — Categorization and Rationalization of Mutual Fund Schemes: amfiindia.com
▸ AMFI Monthly Report for March 2026 (Net AUM ₹73.73 lakh crore, SIP contribution ₹32,087 crore, contributing SIP accounts 9.72 crore): amfiindia.com/research-information/amfi-monthly
▸ AMFI Union Budget Proposals for FY 2025-26 (the unenacted 90/90 FoF reform proposal): amfiindia.com
▸ SEBI Categorization Circular dated 6 October 2017 (and revised framework dated 26 February 2026)
▸ Bombay High Court — The Chamber of Tax Consultants v. Director General of Income-Tax (Systems) and Others, PIL (L) 32465 of 2024, interim order 20 December 2024 and final judgment 24 January 2025
▸ ITAT Ahmedabad SMC — Jayshreeben Jayantibhai Palsana v. ITO, 2025 (8) TMI 842, dated 13 August 2025 (Section 87A rebate against STCG under Section 111A allowed for AY 2024-25)
▸ CBDT Notification No. 70/2025 dated 1 July 2025 (Cost Inflation Index for FY 2025-26 at 376; not relevant to mutual fund taxation since indexation removed)
▸ CBDT Notification dated 31 December 2024 (extension of belated/revised return deadline for AY 2024-25 to 15 January 2025)
▸ ELSS — Equity Linked Savings Scheme, 2005 (Notification S.O. 1563(E) dated 3 November 2005)
▸ Capital Gains Statement portals: CAMS at camsonline.com and KFin Technologies at kfintech.com
▸ AMC tax reckoners for FY 2025-26 (Nippon India, Kotak, Shriram, Bajaj AMC) for cross-check on rate tables
▸ Income Tax e-filing portal — Annual Information Statement (AIS), Schedule CG, Schedule 112A, Form 10F, Register as Legal Heir feature: incometax.gov.in
▸ FEMA — Liberalised Remittance Scheme, NRO/NRE/FCNR account framework, Form 15CA and Form 15CB

Disclaimer: This article is for educational purposes and does not constitute personalised tax, investment, financial, legal or insurance advice. The opening case of Karthik Ramanan in Saibaba Colony Coimbatore and the three illustrative reader scenarios in the closing section (Mira Iyer in Singapore, R. Sundaresan in Mysuru, Anand Rao in Hinjewadi) are drawn from documented patterns in MFCentral capital gains statement queries, ITR-2 filing forums, AIS reconciliation discussions on Indian personal finance subreddits, and reader correspondence with this site through 2024 to early 2026. Names and a few small specifics have been changed. The numerical examples are illustrative and not derived from any specific reader’s actual portfolio. The rates, section references, effective dates and judicial authorities cited reflect the position as established in the Income-tax Act, 1961, the Finance (No. 2) Act, 2024, the Finance Act, 2025, the Bombay High Court judgment in The Chamber of Tax Consultants v. DGIT (Systems), the ITAT Ahmedabad ruling in Jayshreeben Jayantibhai Palsana v. ITO, the AMFI Tax Regime for Mutual Funds page, the CBDT FAQs released through PIB on 25 July 2024, and AMC tax reckoners for FY 2025-26 as accessible on 9 May 2026. Tax positions for non-residents depend on the specific Double Taxation Avoidance Agreement applicable, and treaty interpretation can vary by country and by income type; readers should consult a chartered accountant familiar with their specific country’s DTAA before relying on any rate other than the Section 195 default. The Section 87A position has been a moving target through 2024 and 2025 and is now set by the Finance Act, 2025, for AY 2026-27 onwards; readers filing AY 2025-26 returns should specifically rely on the Bombay HC and ITAT Ahmedabad authorities cited above. Cohort allocation under Section 50AA depends on the actual transaction date in each SIP instalment as reflected in the AMC’s record; the CAMS or KFin capital gains statement should be the source of truth for filing. Finance Guided is not a SEBI-registered investment advisor, AMFI-registered mutual fund distributor, IRDAI-licensed insurance broker, chartered accountant in practice, or advocate, and earns no commission, referral fee or percentage from any redemption, switch or fresh investment that any reader may make following the principles described in this article. Always verify current rates, thresholds and rules through your AMC’s capital gains statement and the Income Tax e-filing portal before acting.

Dinesh Kumar S

Founder & Author — Finance Guided

B.Sc. Mathematics  |  M.Sc. Information Technology  |  Chennai, Tamil Nadu

Dinesh started Finance Guided because most insurance, tax and personal finance content in India is written for professionals, not for the salaried families and young IT workers who actually have to make the decisions. He writes research-based guides verified against IRDAI, SEBI, RBI, EPFO, MoHUA, CBDT, MCA, DoP and Income Tax Department sources. No product sales. No commissions. No paid placements.

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