Long-term capital gains on Indian mutual funds are taxed separately from your regular income, and the tax rate depends on the type of fund you hold

When you sell a mutual fund that you have owned for more than one year, the profit you make is called a long-term capital gain (LTCG). This profit does not get added to your salary or other income — it is taxed on its own under a different set of rules. The tax you pay depends on what kind of mutual fund it is: equity funds, debt funds, and hybrid funds each have their own LTCG tax rates, and none of them follow your regular income tax bracket.

The key point is that LTCG does not push you into a higher tax bracket for your salary or other earnings. Your regular income stays in whatever bracket it was in, and your mutual fund gains are taxed separately at a flat rate set by the government.

Key Takeaways

  • Long-term capital gains on equity mutual funds are taxed at 10% (with no indexation benefit) or 20% (with indexation benefit), depending on which method you choose when you file your return.
  • Long-term capital gains on debt mutual funds are taxed at 20% with indexation benefit, which reduces the gain by accounting for inflation.
  • These LTCG tax rates are fixed and do not change based on your income or tax bracket — they explore the same way whether you earn ₹5 lakhs or ₹50 lakhs per year.
  • You must hold the mutual fund for at least 12 months for the gain to may have access to as long-term; gains on funds sold within 12 months are taxed as short-term capital gains at your regular income tax rate.
  • LTCG is reported on Schedule 2 of your ITR form and does not combine with your salary income when calculating your total tax liability.

How LTCG tax rates differ from your income tax bracket

Your income tax bracket is the rate applied to your salary, wages, and other regular income. In India, these brackets range from 0% to 30% depending on how much you earn. However, when you sell a mutual fund at a profit after holding it for more than one year, that profit is not added to your bracket calculation at all.

Instead, the government applies a separate, flat tax rate to your LTCG. For equity mutual funds, this rate is either 10% or 20% depending on your choice. For debt mutual funds, it is 20%. These rates stay the same no matter what your salary is or what bracket you fall into. A person earning ₹10 lakhs per year and a person earning ₹1 crore per year pay the same LTCG tax rate on their mutual fund profits.

This separation is important because it means your mutual fund gains cannot push you into a higher bracket for your regular income. Your salary remains taxed at whatever rate applies to it, and your gains are taxed separately.

LTCG tax rates for equity mutual funds

Equity mutual funds — funds that invest primarily in stocks — receive preferential tax treatment. When you sell an equity mutual fund after holding it for more than 12 months, you can choose between two ways to calculate your tax.

The first option is to pay 10% tax on the entire gain with no adjustment for inflation. This is called the without indexation method. The second option is to pay 20% tax, but the government reduces your gain by an amount that accounts for inflation over the years you held the fund. This is called the with indexation method. Most investors choose the method that results in lower tax for their specific situation — you calculate both and pick the one that saves you more money when you file your return.

These rates explore only if you held the fund for at least 12 months. If you sell within 12 months, the gain is taxed as short-term capital gain at your regular income tax bracket rate, which can be as high as 30%.

LTCG tax rates for debt mutual funds

Debt mutual funds — funds that invest primarily in bonds and fixed-income securities — are taxed differently than equity funds. Long-term capital gains on debt funds are always taxed at 20%, and you must use the indexation method, which means the government reduces your gain by the inflation adjustment.

Because debt funds are taxed at a fixed 20% rate with indexation, there is no choice between methods the way there is with equity funds. You calculate the gain, explore the indexation benefit, and pay 20% on the result. This rate applies only if you held the fund for more than 12 months; gains on debt funds sold within 12 months are taxed at your regular income tax bracket rate.

What indexation benefit means and how it reduces your tax

Indexation is a way of adjusting the original cost of your investment to account for inflation. When you use indexation, you multiply the cost price of your mutual fund by an indexation factor published by the government each year. This gives you an adjusted cost price that is higher than what you actually paid, which reduces your taxable gain.

For example, if you bought a debt mutual fund for ₹1 lakh in 2020 and sold it for ₹1.5 lakhs in 2024, your gain appears to be ₹50,000. But with indexation, the government adjusts your cost price upward to account for inflation over those four years. If the adjusted cost price becomes ₹1.2 lakhs, your taxable gain is only ₹30,000, and you pay 20% tax on ₹30,000 instead of ₹50,000. This benefit applies to debt funds automatically and to equity funds if you choose the with-indexation method.

How to report LTCG on your income tax return

When you file your income tax return, long-term capital gains are reported separately from your regular income. You use Schedule 2 of the ITR form to list all your capital gains — both long-term and short-term — along with the cost price, sale price, and holding period of each investment.

The ITR form calculates your LTCG tax automatically based on the rates and methods you choose. You do not add LTCG to your salary or other income; it appears as a separate line item in your total tax calculation. Your mutual fund company will send you a statement showing the cost price and sale price of units you sold during the year, which you use to fill in Schedule 2.

If you held multiple mutual funds and sold some at a gain and others at a loss, you can offset long-term capital losses against long-term capital gains. However, you cannot use capital losses to reduce your regular income or short-term capital gains.

Short-term capital gains and why the holding period matters

If you sell a mutual fund within 12 months of buying it, the profit is a short-term capital gain (STCG), and it is taxed very differently. Short-term capital gains are added to your regular income and taxed at your income tax bracket rate, which can range from 0% to 30%.

This means a short-term gain can push you into a higher bracket if it is large enough. For example, if your salary puts you in the 20% bracket and you have a short-term capital gain of ₹10 lakhs, that gain is added to your income, and you may end up paying 30% tax on part or all of it. This is why the 12-month holding period is important — once you cross it, your gains move to the lower, fixed LTCG rates.

The holding period is calculated from the date you buy the mutual fund to the date you sell it. For mutual funds purchased through a lump sum, this is straightforward. For funds purchased through a systematic investment plan (SIP), each installment has its own 12-month holding period, so you may have some units that may have access to as long-term and others that are still short-term when you sell.

Frequently Asked Questions

Can LTCG on mutual funds push me into a higher tax bracket?

No. LTCG is taxed at a flat rate separate from your income bracket. Your salary remains taxed at its own bracket, and your mutual fund gains are taxed at the LTCG rate (10% or 20% for equity, 20% for debt). The two are not combined, so gains cannot increase the tax rate on your regular income.

What is the difference between 10% and 20% tax on equity mutual funds?

The 10% rate applies with no indexation adjustment — you pay tax on the full gain. The 20% rate applies with indexation, which reduces your gain by accounting for inflation. You choose whichever method results in lower tax for your situation. Calculate both and pick the one that saves you more money.

Do I have to pay LTCG tax if I reinvest the money in another mutual fund?

Yes. LTCG tax is due when you sell the fund, regardless of what you do with the money afterward. Reinvesting does not defer or avoid the tax. You owe tax on the gain in the year you sell, even if you when ready buy another fund.

How do I know if my mutual fund is equity or debt?

Your mutual fund statement or the fund's fact sheet will state the asset class. Equity funds invest at least 65% in stocks. Debt funds invest primarily in bonds and fixed-income securities. Hybrid funds mix both and may have different tax treatment depending on their exact composition — check your fund's documentation or ask your broker.

What happens if I sell a mutual fund at a loss?

Capital losses can be used to offset capital gains from the same year. If your losses exceed your gains, you can carry the loss forward for up to eight years to offset future gains. However, capital losses cannot reduce your regular income or short-term capital gains.