NISM-Series-V-A: Mutual Fund Distributors · Taxation

Capital Gains Tax on Mutual Fund Units: Rates and Holding Periods

Updated 11 October 2026 · Fact-checked

Capital gain is the profit on redeeming units: sale value minus cost. Tax depends on fund type and holding period. Equity-oriented funds: short-term gain (12 months or less) is taxed at 20%; long-term gain is taxed at 12.5% above ₹1,25,000 a year. Specified mutual funds, such as debt funds, are taxed at slab rates on transfers from 1 April 2025.

Understand Capital Gains Taxation on Mutual Fund Units

A capital gain arises when you redeem or switch out units for more than you paid. The gain is taxed in the year of redemption, not while you hold the units. Gains are split into short-term and long-term based on how long you held the units. Long-term usually gets a lower rate.

The holding period needed for long-term status depends on the type of fund. An equity-oriented fund invests at least 65% of its assets in domestic equity shares. Its units are long-term if held for more than 12 months. Other funds are those with more than 35% but under 65% in domestic equity, such as balanced hybrid funds. Unlisted units need more than 24 months for long-term status. Listed units need more than 12 months.

A specified mutual fund is treated differently under Section 50AA. Under the earlier test (Finance Act 2023), it was a fund that invests more than 65% of its assets in debt and money market instruments, and the section covered units bought on or after 1 April 2023. The Finance Act 2024 revised the definition, from 1 April 2025 (AY 2026-27), to a fund that invests 35% or less in domestic equity shares. Under the revised definition, the section applies to transfers on or after 1 April 2025, whatever the purchase date. So the definition that applies depends on the date of transfer. For a specified mutual fund, any gain is deemed short-term, whatever the holding period. It is taxed at your income tax slab rate. Under the revised definition, gold funds and international funds with 35% or less in domestic equity are specified mutual funds. Under the old test they were not covered, so they were treated as non-equity funds and taxed under the other provisions. The workbook may cover older rules or the earlier definition, so read the question for the purchase date and the redemption date.

Indexation adjusted the cost of purchase for inflation using the Cost Inflation Index. For units transferred on or after 23 July 2024, long-term gains are taxed without indexation. If a question asks about indexation, check which rule it follows.

The rates above exclude surcharge and health and education cess, which are added on top. Equity-oriented funds also attract Securities Transaction Tax on redemption. Dividends (IDCW) are a separate matter, taxed as income at slab rates.

Key formulas to remember

Capital gain: Capital gain = Sale value (units × redemption NAV) − Cost of acquisition; A negative result is a capital loss. Deduct any transfer expenses if the question gives them.
Equity-oriented fund: holding period: Long-term if held > 12 months; short-term if held ≤ 12 months; Applies to funds with at least 65% in domestic equity.
Equity-oriented fund: tax rates: STCG = 20%; LTCG = 12.5% on gains above ₹1,25,000 in a financial year; The ₹1,25,000 is an exemption limit on total LTCG from such assets in the year. Surcharge and cess extra.
Specified mutual fund (Section 50AA): Transfer on or after 1 April 2025 of units of a fund with 35% or less in domestic equity: gain is deemed short-term, taxed at slab rate, whatever the purchase date; No long-term benefit, whatever the holding period. Earlier test (Finance Act 2023): more than 65% in debt and money market instruments, covering units bought on or after 1 April 2023. Revised test (Finance Act 2024): 35% or less in domestic equity, for transfers from 1 April 2025, with no purchase-date condition. Under the revised test, gold and international funds with 35% or less in domestic equity are specified mutual funds. Under the old test they were not covered and were taxed as non-equity funds under the other provisions.
Other funds (not equity-oriented and not specified; e.g. balanced hybrids with more than 35% but under 65% domestic equity): Unlisted units: long-term if held > 24 months, LTCG = 12.5% without indexation; listed units: long-term if held > 12 months, LTCG = 12.5%; short-term gain taxed at slab rate; Apply the Section 50AA test first, and check the fund's domestic equity exposure and classification. Check whether the units are listed or unlisted.
Indexed cost (older rule): Indexed cost = Cost × CII of year of sale ÷ CII of year of purchase; Not available for transfers on or after 23 July 2024.
Set-off of capital losses: Short-term loss: set off against short-term or long-term gain. Long-term loss: set off only against long-term gain. Capital losses cannot be set off against income under other heads. Unabsorbed loss carried forward 8 years; Capital losses can be set off only against capital gains, never against salary, business or other income. Carry-forward requires the return to be filed on time.
Cost for equity units bought before 1 February 2018 (grandfathering): Cost = higher of (actual cost) and (lower of FMV on 31 January 2018 and sale value); Prevents tax on gains made up to 31 January 2018.

How to solve Capital Gains Taxation on Mutual Fund Units questions

Use the same sequence for every capital gains question. Most marks are lost by skipping step 1 or 2.

1Identify the fund type by its portfolio: equity-oriented (at least 65% domestic equity), specified mutual fund under Section 50AA (35% or less in domestic equity for transfers from 1 April 2025; under the earlier test, more than 65% in debt and money market instruments), or other (not equity-oriented and not specified, such as balanced hybrids with more than 35% but under 65% domestic equity).
2Note the purchase date and the redemption date. The applicable definition depends on the date of transfer. For transfers on or after 1 April 2025, a specified mutual fund's gain is short-term whatever the purchase date. For earlier transfers, the earlier test applied to units bought on or after 1 April 2023.
3Work out the holding period and classify the gain as short-term or long-term using the 12-month test for equity-oriented funds and listed units of other funds, or the 24-month test for unlisted units of other funds.
4Calculate the gain: units × redemption NAV − purchase cost. Use FIFO if units were bought in several lots.
5Apply the exemption if any: for equity-oriented LTCG, subtract ₹1,25,000 (or whatever remains of it this year).
6Apply the correct rate: 20% STCG or 12.5% LTCG for equity; slab rate for specified mutual fund gains; for other funds, 12.5% LTCG without indexation (after 24 months if unlisted, after 12 months if listed) and slab rate for short-term gain.
7Check whether the question asks for tax before or after surcharge and cess, and whether any loss can be set off. Remember that capital losses can be set off only against capital gains.
8Match your answer to the options. Check it is not the 20% or 12.5% figure applied to the wrong base.

Quickest way: Three-question shortcut

When to use it: Use this for MCQs where you have under a minute per question.

Ask 1: Is it equity-oriented (at least 65% domestic equity)? If yes, 12 months is the dividing line and rates are 20% short-term, 12.5% long-term above ₹1,25,000.
Ask 2: Is it a specified mutual fund (35% or less domestic equity, such as a debt, gold or international fund) transferred on or after 1 April 2025? If yes, slab rate and no long-term gain, whatever the purchase date. Stop. For earlier transfers, the old test applied: more than 65% in debt and money market instruments, units bought on or after 1 April 2023.
Ask 3: Otherwise it is an 'other' fund with more than 35% but under 65% domestic equity. The dividing line is 24 months for unlisted units and 12 months for listed units. Long-term is 12.5%, short-term is slab.
Compute gain, deduct the ₹1,25,000 only for equity LTCG, then apply the rate.

Common mistakes in Capital Gains Taxation on Mutual Fund Units

Using 36 months as the long-term period for debt funds
Older material used 36 months for debt funds, and many sources still show it.
Fix: Treat specified mutual fund units (such as debt funds) as always short-term for transfers on or after 1 April 2025, whatever the purchase date. For 'other' funds, use 24 months for unlisted units and 12 months for listed units.
Taxing the whole equity LTCG at 12.5%
Students forget the exemption on the first ₹1,25,000 of long-term gains in a year.
Fix: Subtract ₹1,25,000 first, then apply 12.5% to the balance. The exemption is for the whole year, not per fund.
Treating a hybrid fund as equity-oriented without checking equity exposure
The word 'hybrid' sounds like equity.
Fix: Check for at least 65% domestic equity. Aggressive hybrid funds usually qualify. Balanced hybrids with more than 35% but under 65% domestic equity are 'other' funds (24 months if unlisted, 12 months if listed). Funds with 35% or less are specified mutual funds.
Applying indexation to a current question
Old workbook examples and quiz banks include indexation.
Fix: For transfers on or after 23 July 2024, LTCG is taxed without indexation. Use indexation only if the question clearly follows the older rule.
Taxing gains when the investor switches nothing and only holds
Students confuse unrealised gain with realised gain.
Fix: Tax arises only on redemption or transfer, including a switch to another scheme. Rising NAV alone is not taxable.
Setting off a long-term loss against a short-term gain, or a capital loss against other income
Students assume all losses are interchangeable.
Fix: A long-term loss can be set off only against long-term gains. A short-term loss can be set off against both. Neither can be set off against income under other heads, such as salary.

Worked examples

Example 1

Ravi bought units of an equity-oriented fund for ₹5,00,000 and redeemed them after 18 months for ₹6,50,000. He has no other long-term gains this year. Ignoring surcharge and cess, his tax is: (a) ₹3,125 (b) ₹18,750 (c) ₹30,000 (d) ₹0

Show the solution

The fund is equity-oriented and the holding period of 18 months is more than 12 months, so the gain is long-term.
Gain = ₹6,50,000 − ₹5,00,000 = ₹1,50,000.
Deduct the exemption: ₹1,50,000 − ₹1,25,000 = ₹25,000 taxable.
Tax = 12.5% × ₹25,000 = ₹3,125.
Trap options: ₹18,750 applies 12.5% to the full gain, and ₹30,000 applies 20% to the full gain.

Answer: (a) ₹3,125

Example 2

Meena, in the 30% slab, bought units of a debt-oriented fund (investing 35% or less in domestic equity) in June 2023 and redeemed them in June 2026, after 3 years, with a gain of ₹1,00,000. Ignoring surcharge and cess, her tax is: (a) ₹12,500 (b) ₹20,000 (c) ₹30,000 (d) ₹10,000

Show the solution

The redemption is after 1 April 2025, so the revised definition applies. The fund invests 35% or less in domestic equity, so it is a specified mutual fund.
Under the revised definition the purchase date does not matter, so the gain is deemed short-term, whatever the 3-year holding period.
Short-term gain is taxed at her slab rate of 30%.
Tax = 30% × ₹1,00,000 = ₹30,000.
Trap options: ₹12,500 is the LTCG rate and ₹20,000 is the equity STCG rate. Neither applies here.

Answer: (c) ₹30,000

Exam tips

Always read the fund type before the holding period. The same 14 months gives a long-term gain in an equity fund and a slab-taxed gain in a specified fund, such as a debt fund transferred on or after 1 April 2025.
Memorise the pairs: equity is 12 months with 20% and 12.5%; other funds (more than 35% but under 65% equity) are 24 months if unlisted and 12 months if listed, with slab for short-term and 12.5% for long-term; specified mutual funds transferred on or after 1 April 2025 are slab only.
For the ₹1,25,000 limit, check whether the question gives other long-term gains in the same year. The exemption is shared.
Wrong answers cost marks in many NISM series, but V-A has no negative marking. Attempt every question, but rule out options that use the wrong rate first.
If the question mentions a date of purchase or redemption, it is testing which rule applies. Check the date against 1 April 2023, 23 July 2024 and 1 April 2025.

Practice questions from Taxation

Capital Gains Taxation on Mutual Fund Units in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalMutual Fund Returns and Performance Evaluation

Capital Gains Taxation on Mutual Fund Units: frequently asked questions

What is the holding period for LTCG on equity mutual funds?

For an equity-oriented fund, units held for more than 12 months give a long-term gain. Units held for 12 months or less give a short-term gain. The 65% domestic equity test decides whether a fund is equity-oriented.

What are the mutual fund capital gains tax rates in NISM exams?

For equity-oriented funds, short-term gains are taxed at 20% and long-term gains at 12.5% above ₹1,25,000 a year. Specified mutual funds under Section 50AA, with 35% or less in domestic equity (such as debt, gold and international funds), are taxed at slab rates on transfers from 1 April 2025, whatever the purchase date. Other funds, with more than 35% but under 65% domestic equity, get 12.5% on long-term gains without indexation (after 24 months if unlisted, after 12 months if listed), and slab rates on short-term gains.

Is indexation still available on mutual fund units?

For units transferred on or after 23 July 2024, long-term gains are taxed without indexation. Indexation used the Cost Inflation Index to raise the purchase cost. Treat it as an older rule unless the question says otherwise.

How do I calculate capital gains on mutual fund redemption?

Multiply units redeemed by the redemption NAV to get the sale value. Subtract the purchase cost, using FIFO for multiple lots. Classify the gain as short-term or long-term, then apply the exemption, if any, and the rate.