How mutual fund gains are taxed in 2026: short-term, long-term and the ₹1.25 lakh exemption

When you compare an equity mutual fund with a fixed deposit or PPF, the fund usually shows a bigger number. But that number is often before tax, while PPF’s is tax-free. To compare fairly you need to know what the fund’s gains will cost in tax when you sell.

This covers equity mutual funds and shares (the same rules apply to both), for resident individuals, for 2026-27.

Two rates, depending on how long you held

• Held 12 months or less: short-term. The gain is taxed at 20%.
• Held longer: long-term. The first ₹1.25 lakh of long-term gains in a financial year is tax-free; the rest is taxed at 12.5%.
• 4% cess is added to both.

Held	Taxed at	With cess	Tax-free part
12 months or less	20%	20.8%	None
Over 12 months	12.5%	13%	First ₹1.25 lakh a year

For resident individuals. Surcharge at high incomes is left out.

You pay this only when you sell (redeem). Until then, the gain grows untaxed, which is a real advantage over an FD, whose interest is taxed every year.

The ₹1.25 lakh exemption is for all your long-term equity gains in the year together, not per fund.

Two examples

A short-term sale. You sell units bought eight months ago, with a gain of ₹50,000. Tax: 20% = ₹10,000, plus cess = ₹10,400.

A long-term sale. You sell units held for three years, with a gain of ₹3 lakh and no other equity gains that year. The first ₹1.25 lakh is exempt, so tax is 12.5% of ₹1.75 lakh = ₹21,875, plus cess = ₹22,750.

Try it

Tax on a fund gain

Your gain₹3 lakh

How long you held it

12 months or lessMore than 12 months

When you sell

All in one yearHalf each in two years

Tax, with cess

₹22,750

Gain you keep

₹2.77 lakh

Tax as a share of the gain

7.58%

₹1.25 lakh of the gain is tax-free.

Open the full calculator, with every input

A SIP is many purchases

Each SIP instalment is a separate purchase with its own holding period. If you sell everything at once, the instalments from the last 12 months are short-term and the rest are long-term.

Take ₹10,000 a month for 15 years, at an illustrative 10% a year before tax. The fund grows to about ₹40.16 lakh. Selling it all, the tax comes to about ₹2.72 lakh. Only ₹1,332 of that is on the short-term gains from the last year’s instalments; the rest is long-term tax above the exemption. You keep about ₹37.44 lakh.

1. You put in₹18.00 lakh
2. Growth+₹22.16 lakh
3. Value when sold₹40.16 lakh
4. Tax on the gain−₹2.72 lakh
5. You keep₹37.44 lakh

An illustrative 10% a year before tax. Tax on the last year's instalments is short-term; the rest is long-term above ₹1.25 lakh. Fund returns are assumed, not promised. Markets can fall.

That after-tax figure is the one to compare with PPF or an FD. Our SIP vs PPF vs RD calculator does this split for you, and shows each option’s tax under its result.

What changes the tax

• When you sell. Selling in parts across financial years uses the ₹1.25 lakh exemption more than once.
• Your other equity gains. If you sell shares in the same year, they share the same exemption.
• High incomes. Surcharge can apply above ₹50 lakh of income; our tools leave it out and say so.

The rates and their sources are listed on each calculator page, from the Income Tax Department and PIB.