9.2 Capital Gains on Mutual Fund Units

The Rates in Force

The Finance (No. 2) Act, 2024 reset capital gains taxation for transfers made on or after 23 July 2024, and a further amendment redefined Specified Mutual Funds from assessment year 2026-27. The position below is the current one.

Equity-oriented schemes

• The INR 1.25 lakh exemption is per investor per financial year, aggregated across all listed equity shares and equity-oriented units — not per scheme and not per transaction.
• No indexation is available.
• Surcharge as applicable and health and education cess at 4% apply on top of both rates.

Specified Mutual Funds

For units acquired on or after 1 April 2023:

• Gains are deemed short-term regardless of holding period, under section 50AA
• Taxed at the investor's applicable slab rate
• No indexation, and no long-term treatment however long the units are held

Holding a Specified Mutual Fund for eight years produces exactly the same tax treatment as holding it for eight weeks.

Other schemes

Gold ETFs, gold and international fund of funds, and hybrids holding between 35% and 65% in domestic equity:

A gold ETF is listed, so its long-term threshold is 12 months. A gold fund of funds is unlisted, so its threshold is 24 months. Two products giving broadly the same exposure carry different holding-period tests, and the exam has used exactly this contrast.

Indexation Has Been Withdrawn

Indexation adjusted the cost of acquisition for inflation before computing the gain. For transfers made on or after 23 July 2024 it is no longer available on mutual fund units. Long-term gains are now computed simply as sale value less cost, taxed at the flat 12.5% rate. Any material describing indexation as available for mutual fund units is out of date.

Worked Examples

Example 1 — equity-oriented, long-term. Purchased INR 6,00,000 of an equity fund; redeemed after 26 months for INR 9,20,000. No other equity gains in the year.

Gain                 = 9,20,000 - 6,00,000 = INR 3,20,000
Exempt               =                        INR 1,25,000
Taxable              = 3,20,000 - 1,25,000 = INR 1,95,000
Tax at 12.5%         =                        INR 24,375  (plus cess)

Example 2 — equity-oriented, short-term. Purchased INR 4,00,000; redeemed after 7 months for INR 4,70,000.

Gain          = INR 70,000
Tax at 20%    = INR 14,000  (plus cess)

The INR 1.25 lakh exemption does not apply to short-term gains.

Example 3 — Specified Mutual Fund. Purchased INR 10,00,000 of a corporate bond fund in June 2023; redeemed after 3 years for INR 12,40,000. Investor in the 30% slab.

Gain               = INR 2,40,000
Treatment          = Short-term regardless of the three-year holding
Tax at 30% slab    = INR 72,000  (plus surcharge and cess)

Example 4 — gold ETF. Purchased INR 3,00,000; sold on the exchange after 20 months for INR 3,90,000.

Listed unit, held over 12 months  -> long-term
Gain                              = INR 90,000
Tax at 12.5% without indexation   = INR 11,250  (plus cess)

Computing the Gain

Capital Gain = Full value of consideration
             - Cost of acquisition
             - Expenditure wholly and exclusively incurred on the transfer

Exit load is not deductible from the sale consideration for computing capital gains; it reduces the amount the investor receives but does not reduce the taxable gain.

FIFO applies. Where units were acquired on several dates, redemption is matched against the earliest units first, which determines both the holding period and the cost. For an investor with a long-running SIP this matters greatly: a redemption today draws on instalments made years ago, so much of the gain may qualify as long-term even though recent instalments do not.

Summary Table