How Much Capital Gains Tax Do You Pay When You Sell Equity Mutual Funds in 2026

If you started a SIP in 2022 or 2023, your oldest units are now crossing the 12-month mark that separates short-term from long-term capital gains. The first time you redeem some of those units, you will encounter a tax calculation that looks simple but has a few important details that can change your actual liability significantly. Getting these details right before you hit the redeem button is worth a few minutes of your time.

What Are the Current Tax Rates on Equity Mutual Funds?

For equity-oriented mutual funds (those with at least 65% of assets in equities), there are two tax rates depending on how long you held the units. Short-term capital gains apply when you held units for 12 months or less, and are taxed at a flat 20% plus applicable surcharge and cess under Section 111A of the Income Tax Act. Long-term capital gains apply when you held units for more than 12 months, and are taxed at 12.5% plus surcharge and cess under Section 112A.

These rates were set by the Union Budget 2024, effective from July 23, 2024. Budget 2025 made no changes to these rates, so they remain current for FY 2025-26 (Assessment Year 2026-27). Before July 2024, LTCG was taxed at 10% and STCG at 15%, so if you are comparing notes with someone who last sold funds a couple of years ago, their rates are no longer applicable.

Holding Period	Tax Rate (Section)	Surcharge + Cess	Effective (15% surcharge bracket)
Up to 12 months (STCG)	20% (Sec 111A)	Varies by income	~23.92%
More than 12 months (LTCG)	12.5% (Sec 112A)	Varies by income	~14.95%

What Is the Rs 1.25 Lakh Exemption and How Does It Work?

The first Rs 1.25 lakh of long-term capital gains in a financial year is completely exempt from tax. This exemption applies across all equity shares and equity-oriented mutual funds combined, not per fund or per transaction. So if you redeem units from three different funds in the same financial year and your total LTCG across all of them is Rs 1.5 lakh, only Rs 25,000 is taxable – the first Rs 1.25 lakh is exempt. The 12.5% rate applies only to the amount above Rs 1.25 lakh.

There is no equivalent exemption for short-term capital gains. If you held units for less than 12 months and sell them at a profit, the entire gain is taxable at 20% from the first rupee.

A Real Example: What Does an SIP Investor Actually Pay?

Take a practical scenario. You started a Rs 10,000 monthly SIP in a large-cap equity fund in April 2022. By April 2026, you have invested Rs 4.8 lakh in total. Let’s say the current value is Rs 6.5 lakh, giving you total gains of Rs 1.7 lakh. You need Rs 1 lakh in cash and decide to redeem enough units to get that amount.

The calculation gets a little involved because each SIP instalment is treated as a separate purchase with its own cost and its own holding period. Units from your April 2022 SIP have been held for more than 36 months – clearly long-term. Units from March 2026 have been held for one month – clearly short-term. Each redemption uses the FIFO (First In, First Out) method by default, so the oldest units are sold first. In this case, your redemption would almost entirely consist of long-term units.

If you redeem units with a cost basis of Rs 75,000 and a current value of Rs 1,00,000, your gain is Rs 25,000. Since this is long-term, and it is below the Rs 1.25 lakh annual exemption, your tax liability is zero. This is why the exemption matters practically: many investors making modest partial redemptions from SIP portfolios will find their actual LTCG in a given year is below the Rs 1.25 lakh threshold, and they owe nothing on it.

Has Indexation Been Removed for Equity Funds?

Yes. Indexation, which allowed you to inflate your cost of acquisition using the Cost Inflation Index to reduce taxable gains, was removed for equity-oriented mutual funds from July 23, 2024. It was never available for equity funds under Section 112A – that provision only existed for debt funds under an older section 112 regime that has also since changed. So for any equity mutual fund redemption from FY 2024-25 onward, your taxable gain is simply the selling price minus your original purchase price, with no inflation adjustment.

This change matters most for very long holding periods. If you held a fund for 10 years and benefited from significant growth, your reported gain will be higher than it would have been under the old indexation regime, and more of it will be taxable. The way to partially offset this is to use the Rs 1.25 lakh annual exemption strategically – which brings us to the concept of tax-loss harvesting.

What Is Tax-Loss Harvesting and Should You Do It?

Tax-loss harvesting is the practice of selling fund units that are currently at a loss to create a capital loss that offsets your capital gains, reducing your net taxable amount. Long-term capital losses can only be offset against long-term capital gains, not short-term. Short-term losses can be offset against both short-term and long-term gains.

A practical example: you have Rs 2 lakh of LTCG from Fund A, which is above the Rs 1.25 lakh exemption. You also hold units in Fund B that are at a loss of Rs 80,000 (long-term). If you sell the Fund B units, you realise that Rs 80,000 loss, which you can set off against your Rs 2 lakh gain. Your net taxable LTCG becomes Rs 1.2 lakh, which falls under the exemption – tax liability reduced to zero. You can then buy Fund B units back the next day if you still want that exposure (there is no wash-sale rule in India like there is in the US).

This is a legitimate tax planning technique, not evasion. That said, it is most useful when done intentionally before March 31 each year rather than as an afterthought. Reviewing your portfolio for unrealised losses in February-March can meaningfully reduce your April tax liability from any redemptions made during the year.

How Is Tax Deducted at Source on Mutual Fund Redemptions?

For resident Indian investors, mutual funds do not deduct TDS (Tax Deducted at Source) on redemptions from equity-oriented schemes. You receive the full redemption amount and are responsible for declaring the gains and paying advance tax or self-assessment tax in your ITR. This is different from how TDS works on dividends, and it catches some investors by surprise when the tax bill arrives. If your capital gains in a year are large, it is worth paying advance tax in the applicable installment dates (June 15, September 15, December 15, March 15) to avoid interest under Section 234B and 234C.

For NRI investors, the rules are different – AMCs are required to deduct TDS at 12.5% on LTCG and 20% on STCG before crediting the redemption amount. NRIs should factor this into their cash flow planning when planning a redemption, since the net amount received will be after TDS.

To sum up, the two rates you need to remember for FY 2025-26 are 20% on STCG (held 12 months or less) and 12.5% on LTCG (held more than 12 months), with the first Rs 1.25 lakh of LTCG in a year exempt. The FIFO rule means your older, likely long-term units are sold first when you redeem. Use the exemption window strategically by checking your total LTCG across all funds before March 31, and consider tax-loss harvesting if you have unrealised losses sitting elsewhere in your portfolio. A quick calculation before redemption can save you a meaningful amount in taxes each year.

Frequently Asked Questions

What is the LTCG tax rate on equity mutual funds in 2026? The long-term capital gains tax rate on equity mutual funds is 12.5% for gains exceeding Rs 1.25 lakh in a financial year, applicable from July 23, 2024 onward under Section 112A. This rate remains unchanged for FY 2025-26.

What is the STCG rate for equity mutual funds? Short-term capital gains on equity mutual funds held for 12 months or less are taxed at 20% under Section 111A, effective from July 23, 2024. This rate applies from the first rupee of gain, with no exemption threshold.

Can I carry forward capital losses from mutual funds? Yes. Long-term capital losses can be carried forward for up to 8 assessment years and set off only against long-term capital gains. Short-term capital losses can be set off against both short-term and long-term gains, and also carried forward for 8 years.

Does the Rs 1.25 lakh exemption apply per fund or in total? The Rs 1.25 lakh annual exemption applies to total LTCG from all equity shares and equity-oriented mutual funds combined in a financial year, not per fund. Gains above this threshold are taxed at 12.5%.

Do I need to pay TDS when I redeem equity mutual funds? Resident Indian investors are not subject to TDS on equity mutual fund redemptions; they must declare gains in their ITR and pay advance tax if the liability is significant. NRI investors are subject to TDS at applicable rates deducted by the AMC before crediting the redemption amount.