Capital Gain on Mutual Fund: What Changed in FY 24-25?

Capital gain refers to the profit earned when an investor sells mutual fund units at a price higher than the purchase price.

Such gains are treated as Capital Gains under the Income Tax Act and are taxable based on the type of mutual fund and the holding period.

This article explains the concept in a structured, step-by-step manner for better clarity.

What are Mutual Funds?

Mutual funds are a type of investment vehicles that pool money from several investors and invests that combined amount into various financial assets like shares, bonds, government securities, gold or other money market instruments.

Mutual funds help small investors to access diversified portfolios without directly buying individual securities.

Types of Mutual Funds

Type	Invests In	Risk
Equity Funds	Shares/Stock Market	High
Debt Funds	Bonds, Debentures	Low to Medium
Hybrid Funds	Mix of Equity & Debt	Moderate

Classification of Capital Gains on Mutual Funds

For taxation purposes, capital gains from mutual funds are classified into two types based on the holding period of investment:

Short-Term Capital Gain (STCG)

Applies when mutual fund units are sold within a short holding period.

• Equity Mutual Funds–Sold within 12 months
• Debt Mutual Funds – Sold within 36 months

Long-Term Capital Gain (LTCG)

Applies when mutual fund units are sold after a specified holding period.

• Equity Mutual Funds – Held for more than 12 months.
• Debt Mutual Funds – Held for more than 36 months.

Tax Rates on Capital Gains from Mutual Fund:

(It is important to note that tax rates on Mutual Funds have not been changed directly in FY 2024-25.

However a detailed explanation of specific changes applicable from FY 2024-25 has been covered separately under a dedicated heading below).

Type	Holding Period	Tax Rate
Equity MF – LTCG	more than 12 months	10% (above ₹1 lakh)
Equity MF – STCG	up to 12 months	15%
Debt MF – LTCG	more than 36 months	20% with Indexation(Old)
Debt MF – STCG	up to 36 months	Slab Rate

Old Tax Provisions for Capital Gain on Mutual Funds (Before FY 24-25)

Under the earlier tax provisions, the taxation of mutual fund capital gains was based on the type of fund and holding period, as follows:

Equity Mutual Funds

• Short Term (Held ≤ 12 months) – Tax @15%
• Long Term (Held > 12 months) – Tax @10% (Exempt up to INR 1 lakh per year)

Debt Mutual Funds

• Short Term (Held ≤ 36 months) – Tax as per individual slab rate.
• Long Term (Held >36 months) – Tax @20% with indexation benefit.

The indexation benefit on long term debt mutual funds helped investors reduce taxable gains by adjusting the cost of investment with inflation, resulting in lower tax liability.

Latest Changes in Taxation of Mutual funds – Applicable from FY 2024-25

From 1st April 2023 (i.e., AY 2024-25 onwards), the government has made a significant change in the taxation of Debt Mutual Funds through amendments made to the Income Tax Act.

What Changed?

The indexation benefit on LTCG from Debt Mutual Funds has been removed.

Now, if a mutual fund invests less than 35% of its assets in equity shares of domestic companies, then:

1. The entire gain – irrespective of holding period, will be treated as STCG.
2. Taxed as per individual slab rate of the investor.
3. No indexation benefits will be available.

Affected v/s Unaffected Funds

Funds Affected	Funds Not Affected
Debt Mutual Funds	Equity Mutual Funds (≥ 65% equity)
Gold Funds	Equity-Linked Saving Schemes (ELSS)
International Funds	Hybrid Funds with ≥ 65% equity
Conservative Hybrid Funds (< 35% equity)	Arbitrage Funds
Fund of Funds (non-equity)	Equity-oriented Balanced Funds

Comparison: Old vs New Tax Provisions on Mutual Funds (Effective FY 2024-25)

Particulars	Old Provisions (Before 01.04.2023)	New Provisions (From 01.04.2023)
Equity Mutual Funds	LTCG (>12 months) – 10%(above ₹1 lakh) STCG (≤12 months) – 15%	LTCG (>12 months) – 12.5%(above ₹1.25 lakh) STCG (≤12 months) – 20%
Debt Mutual Funds	LTCG (>36 months) – 20% with indexation STCG (≤36 months) – Tax as per slab	All gains taxed as per slab rate. No indexation benefit
Gold / International / Other Non-Equity Funds	Same as Debt MFs	Same as Debt MFs – Slab rate
Hybrid Funds (Equity <35%)	Treated as Debt Funds	Slab rate – No indexation
Hybrid Funds (Equity 35%–65%)	LTCG – 20% with indexation	Still eligible for indexation

Key Takeaway

1. Only Debt-oriented and non-equity funds have seen a major change.
2. Equity mutual funds remain unaffected by this amendment.

Conclusion

With the withdrawal of indexation benefits, Debt Mutual Funds have lost a key tax advantage, making them less attractive from a long-term tax planning perspective.

Investors should now evaluate fund types carefully and consider equity-oriented or hybrid funds for better post-tax returns, based on their risk appetite and financial goals.