LTCG Tax on Mutual Funds Explained (FY 2026-27)

You pay tax on mutual funds only when you sell (or switch), and only on the gain. These rates have applied since 23 July 2024, and Budget 2026 left them unchanged.

How are mutual funds taxed?

Surcharge, where applicable, and 4% cess are added on top.

Can you show me an example?

You redeem an equity fund held for three years with a gain of ₹5 lakh.

• Exempt: ₹1.25 lakh
• Taxable: ₹3.75 lakh
• Tax at 12.5%: ₹46,875
• With 4% cess: ₹48,750

How does this work with a SIP?

Each instalment has its own purchase date, and units are treated as sold on a first-in, first-out basis. If you redeem everything, your most recent 12 months of instalments are short-term, even if the SIP has run for ten years.

Can I reduce this tax legally?

• Use the yearly exemption: realising up to ₹1.25 lakh of long-term gains each year and reinvesting, known as tax harvesting, can reset your purchase cost. Check exit loads first.
• Hold for over 12 months to avoid the higher short-term rate on equity.
• Offset losses: capital losses can be set off against eligible gains under the rules.
• Redeem over several years rather than all at once, where your goal allows it.

What about dividends?

Dividends from funds are added to your income and taxed at your slab rate, which is why growth options often suit long-term investors better.

This is general information as of November 2026. Tax rules change, and your situation may differ, so check with a tax professional and the Income Tax Department.