Tax on Mutual Funds & ETFs in India (2025 Guide)

How does taxation work for mutual fund and ETF investments?

Tax Treatment for Mutual Funds and Equity ETFs in India
The tax treatment for mutual funds and ETFs in India depends primarily on two factors:
  1. Type of Fund: Equity-oriented, debt-oriented, or other funds (e.g., hybrid funds).
  2. Holding Period: The duration for which you hold the investment before selling.

Here’s a detailed and updated breakdown:

1. Equity-Oriented Funds and ETFs

These are funds where at least 65% of the portfolio is invested in Indian equities or equity-related instruments.
Short-Term Capital Gains (STCG)
  1. Holding Period: Less than 12 months.
  2. Tax Rate: Gains are taxed at 20% (plus applicable cess and surcharge).
  3. Update: The Union Budget 2024 increased the STCG tax rate for equity-oriented funds and ETFs from 15% to 20% (source: Union Budget 2024 announcements).
  4. Cess and Surcharge: A 4% health and education cess applies. Surcharge varies based on income level (e.g., 10–37% for high-income earners).
Long-Term Capital Gains (LTCG)
  1. Holding Period: 12 months or more.
  2. Tax Rate: Gains exceeding ₹1.25 lakh in a financial year are taxed at 12.5% without indexation benefit.
  3. Update: The Union Budget 2024 increased the LTCG exemption limit from ₹1 lakh to ₹1.25 lakh and raised the tax rate from 10% to 12.5% (source: Union Budget 2024).
  4. Cess and Surcharge: 4% cess applies, along with applicable surcharge.

2. Debt-Oriented Funds and ETFs

These are funds that primarily invest in bonds, money market instruments, or other debt securities (less than 65% in equities). A significant change was introduced in 2023, impacting debt fund taxation. For debt funds purchased on or after 1 April 2023, indexation benefit is no longer available, no matter how long you hold them.
Short-Term Capital Gains (STCG)
    1. Holding Period: Less than 36 months.
    2. Tax Rate: Gains are added to your total income and taxed as per your income tax slab (e.g., 5%, 20%, or 30% depending on your income).
    3. Note: No change in STCG taxation for debt funds.
Long-Term Capital Gains (LTCG)
    1. Holding Period: 36 months or more.
    2. Tax Rate: Gains are taxed as per your income tax slab, with no indexation benefit.
    3. Update: The Finance Act 2023 removed the indexation benefit for debt mutual funds purchased on or after April 1, 2023. All gains from such funds are now taxed as per the investor’s slab rate, regardless of the holding period (source: Finance Act 2023).
    4. Cess and Surcharge: 4% cess and applicable surcharge apply.
    5. Clarification: Your original statement about 20% tax with indexation for LTCG on debt funds is outdated for funds purchased after April 1, 2023. Indexation is no longer available for these funds.

3. Hybrid Funds

Hybrid funds (e.g., balanced funds, aggressive hybrid funds) are taxed based on their equity exposure:
  1. If 65% or more of the portfolio is in Indian equities, they are taxed as equity-oriented funds (see above).
  2. If less than 65% is in equities, they are taxed as debt-oriented funds (see above).
  3. Clarification: Funds with 35–65% equity exposure were previously subject to different rules, but post-2023, they are generally treated as debt funds unless they meet the 65% equity threshold.

4. Dividends (Now Called Income Distribution cum Capital Withdrawal, or IDCW)

  1. Taxation: Dividends from mutual funds and ETFs are added to your income and taxed as per your income tax slab.
  2. TDS: A 10% Tax Deducted at Source (TDS) is applicable if the dividend/IDCW exceeds ₹5,000 in a financial year (source: Section 194K of the Income Tax Act).
  3. Note: Investors can claim a credit for TDS when filing their tax returns.
  4. Clarification: Your statement about dividends is accurate, but it’s worth noting that mutual funds now refer to dividends as IDCW to reflect that they may include a portion of the capital.

5. Securities Transaction Tax (STT)

Equity-Oriented Funds/ETFs:
STT is levied at 0.001% when units are sold on a recognized stock exchange (applicable to ETFs).
For mutual fund units (non-ETF), STT is applied at 0.001% on redemption through the fund house.

Debt-Oriented Funds/ETFs:
No STT is applicable.
Note: Your original statement is correct for ETFs but should clarify that STT also applies to equity mutual fund redemptions, though the rate remains the same.

6. Other Important Points

Specified Mutual Funds: The Finance Act 2023 introduced the term “specified mutual funds,” which includes funds with less than 35% investment in Indian equities. These are taxed like debt funds (slab rates, no indexation) for investments made on or after April 1, 2023.

International and Gold ETFs:
  1. International Equity ETFs: If they invest 65% or more in Indian equities, they are taxed as equity-oriented funds. Otherwise, they are treated as debt funds.
  2. Gold/Silver ETFs: Taxed as debt funds (slab rates, no indexation for investments post-April 1, 2023).
  3. Tax Loss Harvesting: Investors can offset capital losses against gains (STCG against STCG, LTCG against LTCG) to reduce tax liability.
  4. SIP Taxation: For Systematic Investment Plans (SIPs), each installment is treated as a separate investment with its own holding period for STCG/LTCG purposes.

Example (Updated for 2025)

  1. If you invest in an equity ETF and sell it after 14 months with a profit of ₹1.5 lakh:
  2. Exemption: The first ₹1.25 lakh of LTCG is tax-free (updated exemption limit).
  3. Taxable Gain: ₹1.5 lakh - ₹1.25 lakh = ₹25,000.
  4. Tax: ₹25,000 × 12.5% = ₹3,125 (plus 4% cess = ₹125, total tax = ₹3,250).
  5. STT: 0.001% on the sale value (negligible, e.g., ₹1.50 on a ₹1.5 lakh sale).

If you invest in a debt mutual fund (post-April 1, 2023) and sell it after 36 months with a profit of ₹1.5 lakh:
Tax: The entire ₹1.5 lakh is added to your income and taxed as per your slab rate (e.g., 30% for high-income earners = ₹45,000 tax, plus cess).

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