Capital Gains on Mutual Funds: How to Calculate and Report
- PRITI SIRDESHMUKH
- Nov 12, 2025
- 11 min read
Capital gains tax on mutual funds is determined by how long the investment is held and the type of fund—equity or debt. The Income Tax Act, 1961, categorizes these gains into short-term and long-term, each attracting distinct tax rates. Budget 2025 has introduced clarity on holding periods, tax slabs, and exemption limits, making compliance easier for investors. With automation-led tax filing platforms like TaxBuddy, reporting capital gains has become simpler and more accurate, ensuring every gain is correctly reflected in your return.
Table of Contents
Understanding Capital Gains on Mutual Funds
Capital gains on mutual funds represent the profit earned when the redemption value of mutual fund units exceeds their purchase cost. In simpler terms, when investors sell mutual fund units at a higher price than they bought them, the difference is considered capital gain. The taxation of these gains is governed by the Income Tax Act, 1961, and the treatment varies based on how long the units were held and the type of mutual fund—equity or debt. The gain is computed by subtracting the cost of acquisition and any applicable expenses from the sale value. These gains are then categorized into short-term or long-term, each attracting different tax rates and exemptions.
Types of Mutual Funds and Their Tax Treatment
Mutual funds in India are broadly classified into two categories—equity-oriented and debt-oriented funds. The tax treatment differs for both.
For equity-oriented mutual funds, at least 65% of the portfolio must be invested in equity shares of domestic companies. The gains from these funds are considered short-term if held for less than 12 months and long-term if held for 12 months or more. The short-term capital gains (STCG) are taxed at 15%, while long-term capital gains (LTCG) exceeding ₹1,25,000 in a financial year are taxed at 12.5%, as per the Budget 2024 updates.
For debt-oriented mutual funds, including liquid funds and other non-equity schemes, the classification depends on a 36-month holding period. STCG from units held for less than 36 months are taxed as per the individual’s applicable slab rate. LTCG on units held for over 36 months are taxed at 20% with indexation if acquired before April 1, 2023. However, units acquired after that date are taxed according to slab rates without indexation benefits.
Short-Term vs. Long-Term Capital Gains Tax Rates
The duration of holding determines whether the gains are short-term or long-term. For equity-oriented funds, short-term gains apply to holdings under 12 months, taxed at 15%. Long-term gains apply to holdings of 12 months or more and are taxed at 12.5% beyond the exemption limit of ₹1,25,000.
In the case of debt-oriented funds, short-term gains are taxed at the investor’s applicable slab rate if the units are sold before 36 months. For long-term gains on debt funds purchased before April 1, 2023, indexation can be used to reduce taxable income, with tax applied at 20%. For funds purchased on or after this date, the LTCG is added to total income and taxed at the applicable slab rate.
How to Calculate Capital Gains on Mutual Funds
The computation of capital gains is a straightforward process but requires accuracy in recording purchase and sale details. The formula is:
Capital Gain = (Sale NAV × Units Sold) - (Purchase NAV × Units Bought)
From this amount, investors can deduct any brokerage fees or transfer charges incurred during the sale. For long-term gains on debt mutual funds, indexation may be applied to adjust the purchase price for inflation.
For example, if an investor buys 1,000 units at ₹100 each and sells them at ₹120 after a year, the total sale value is ₹1,20,000 and the cost of acquisition is ₹1,00,000, resulting in a capital gain of ₹20,000. Depending on the holding period and fund type, this gain will be taxed either as STCG or LTCG.
Indexation Benefits for Debt Mutual Funds
Indexation is a key benefit available for long-term capital gains on debt mutual funds purchased before April 1, 2023. It adjusts the purchase cost based on inflation, thereby reducing taxable gains. The Central Board of Direct Taxes (CBDT) publishes the Cost Inflation Index (CII) every year, which helps compute the indexed cost of acquisition.
For example, if a debt mutual fund was bought in FY 2018-19 for ₹1,00,000 and sold in FY 2023-24 for ₹1,50,000, with the CII being 280 and 348 respectively, the indexed cost would be:
Indexed Cost = (348 / 280) × 1,00,000 = ₹1,24,285 Taxable LTCG = ₹1,50,000 - ₹1,24,285 = ₹25,715
This reduces the tax liability significantly compared to calculating gains without indexation.
Reporting Capital Gains in Income Tax Return
Capital gains from mutual funds must be disclosed under the “Capital Gains” section in the Income Tax Return (ITR). Accurate reporting ensures compliance and avoids notices from the tax department. Investors must provide the nature of the gain (short-term or long-term), fund category, and the amount earned.
If the gains are from equity-oriented funds, they are reported separately from debt-oriented funds. Details of each mutual fund transaction are often auto-populated in Form 26AS and the Annual Information Statement (AIS), which can be verified using AI-based filing platforms like TaxBuddy for error-free reporting.
Choosing the Right ITR Form for Mutual Fund Investors
The correct ITR form depends on the nature of income in addition to mutual fund gains. Individuals with salary income and capital gains should use ITR-2, while those with business or professional income must file ITR-3.
Investors who only earn dividends or interest from mutual funds can use ITR-1 (Sahaj) if there are no capital gains. However, once mutual fund sales generate STCG or LTCG, ITR-2 becomes mandatory. Filing through TaxBuddy helps in auto-selecting the right form and mapping mutual fund data directly to the respective sections.
Tax Implications for Dividends from Mutual Funds
Dividends received from mutual funds are fully taxable in the hands of investors. The dividend amount must be reported under “Income from Other Sources” in the ITR. The tax is levied at the investor’s applicable slab rate, and for resident individuals, no TDS is deducted if the dividend amount is below ₹5,000 per financial year.
Mutual fund houses deduct TDS at 10% if dividends exceed ₹5,000. For non-residents, the TDS rate is 20%, subject to the provisions of the Double Taxation Avoidance Agreement (DTAA).
Common Mistakes to Avoid While Reporting Capital Gains
Many investors unintentionally make reporting errors that can trigger notices or penalties. Common mistakes include:
Mixing up short-term and long-term gains.
Ignoring indexation for eligible debt mutual funds.
Failing to include dividend income.
Using the wrong ITR form.
Overlooking pre-filled data discrepancies in Form 26AS or AIS.
Using a guided tax filing platform like TaxBuddy ensures that these errors are automatically identified and corrected before submission.
Practical Strategies to Reduce Capital Gains Tax
Investors can minimize their tax burden on mutual fund gains through proper planning. Some effective strategies include:
Utilizing the ₹1,25,000 LTCG exemption on equity mutual funds every financial year.
Staggering redemptions to manage taxable income and avoid higher slabs.
Investing in tax-efficient funds such as ELSS for additional Section 80C benefits.
Transferring investments among family members with lower taxable income.
TaxBuddy’s AI-driven system can help simulate different tax outcomes and recommend the most efficient strategy before redemption.
Role of TaxBuddy in Accurate Capital Gains Reporting
TaxBuddy simplifies the process of calculating and reporting capital gains from mutual funds. It automatically imports data from your broker statements, Form 16, AIS, and TIS, ensuring no transaction is missed. Its intelligent algorithms classify gains as short-term or long-term, apply correct tax rates, and fill in the relevant sections of the ITR.
Additionally, TaxBuddy provides expert-assisted plans where professionals review returns to ensure accuracy and compliance with the latest tax rules. This combination of automation and expertise makes filing returns faster and more reliable.
Conclusion
Capital gains taxation on mutual funds may appear complex, but with proper understanding of holding periods, fund types, and reporting rules, investors can handle it efficiently. Staying informed about indexation, exemptions, and the correct ITR form prevents errors and optimizes tax savings.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers both self-filing and expert-assisted plans to cater to different types of taxpayers. The self-filing plan is ideal for individuals with straightforward cases, such as those having salary income or basic capital gains. It uses AI-powered automation to pre-fill details from PAN, Form 16, and AIS, ensuring accuracy and saving time. On the other hand, the expert-assisted plan is designed for individuals with more complex tax scenarios, such as business income, F&O trades, crypto gains, or multiple sources of income. In this plan, certified tax experts review every entry, identify potential deductions, and file the return on the taxpayer’s behalf. This dual-plan flexibility allows taxpayers to choose based on their comfort level and complexity of filing.
Q2. Which is the best site to file ITR?
The official Income Tax e-Filing portal (incometax.gov.in) is the government’s primary site for filing returns in India. However, many taxpayers prefer third-party platforms like TaxBuddy, which combine automation with human expertise. TaxBuddy simplifies tax filing by automatically importing data from Form 16, Form 26AS, and AIS, performing error checks, and offering live assistance. It also provides features such as real-time calculation of tax liability, notice support, and post-filing services—making it one of the most reliable platforms for both salaried individuals and professionals. The combination of guided AI and expert verification ensures both compliance and peace of mind.
Q3. Where to file an income tax return?
An income tax return can be filed either through the official Income Tax Department portal or through authorized private platforms such as TaxBuddy. While the government portal requires manual data entry and understanding of multiple sections, TaxBuddy offers a simplified approach with guided steps, automated imports, and expert review. TaxBuddy’s mobile app also allows users to upload their Form 16, AIS, and capital gains statements directly from their phone. The return is automatically processed, reviewed by experts (if opted), and e-verified seamlessly—ensuring that the entire filing process takes just a few minutes.
Q4. How are capital gains on mutual funds calculated?
Capital gains on mutual funds are computed by subtracting the purchase cost of units from their sale value. The formula is:
Capital Gain = (Redemption NAV × Units Sold) – (Purchase NAV × Units Bought)
The gain is classified as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG) depending on the holding period. For equity mutual funds, holdings under 12 months are short-term, and over 12 months are long-term. For debt funds, units held for less than 36 months are short-term. Long-term gains for debt funds purchased before April 1, 2023, qualify for indexation benefit, allowing inflation adjustment in the purchase price. Accurate calculation ensures proper tax compliance and reporting in ITR forms.
Q5. What is the tax rate for short-term capital gains on equity mutual funds?
Short-term capital gains on equity-oriented mutual funds—those held for less than 12 months—are taxed at a flat rate of 15%, plus applicable health and education cess and surcharge. This concessional rate is available under Section 111A of the Income Tax Act, 1961. However, to qualify for this rate, the mutual fund must have invested at least 65% of its corpus in domestic equities. STCG is added to the taxpayer’s total income but taxed separately at the flat rate. For investors in higher income slabs, this rate often results in substantial tax savings compared to normal slab taxation.
Q6. What is the exemption limit for long-term capital gains on mutual funds?
Under the latest provisions, long-term capital gains (LTCG) on equity mutual funds up to ₹1,25,000 per financial year are exempt from tax. Only gains exceeding this limit are taxed at 12.5% (plus cess and surcharge). This exemption encourages long-term investments in equity funds and promotes disciplined wealth creation. For debt mutual funds, however, there is no such exemption—LTCG is taxed at 20% with indexation (for investments before April 1, 2023) or at slab rates (for investments after this date). Proper planning of redemptions can help investors make full use of this exemption every year.
Q7. Are dividends from mutual funds taxable?
Yes, dividends distributed by mutual funds are fully taxable in the hands of investors. The dividend amount must be declared under the head “Income from Other Sources” in the ITR. The applicable tax rate depends on the investor’s income slab. For resident individuals, if the total dividend income from mutual funds exceeds ₹5,000 in a financial year, TDS at 10% is deducted by the fund house. For non-resident investors (NRIs), TDS is deducted at 20%, subject to Double Taxation Avoidance Agreements (DTAA). It’s also important to note that mutual fund houses no longer pay Dividend Distribution Tax (DDT); the liability now rests with investors.
Q8. Can indexation benefits be claimed for debt mutual funds?
Indexation benefits apply only to long-term capital gains from debt mutual funds purchased before April 1, 2023. Indexation adjusts the purchase price based on inflation using the Cost Inflation Index (CII) published by the government each year. This increases the cost of acquisition and reduces the taxable gain, effectively lowering the tax burden. However, for investments made on or after April 1, 2023, LTCG from debt mutual funds are taxed at the investor’s income slab rate without indexation benefits. Investors holding older debt fund units should carefully calculate the indexed cost to optimize tax savings.
Q9. Which ITR form should be used to report mutual fund capital gains?
The appropriate ITR form depends on the nature of income:
ITR-2 should be used by individuals and Hindu Undivided Families (HUFs) who have salary, pension, or other income sources, along with capital gains from mutual funds.
ITR-3 is required for those who have capital gains along with income from business or profession.
ITR-1 (Sahaj) cannot be used if the taxpayer has any capital gains.
Filing through a platform like TaxBuddy ensures that the right ITR form is automatically selected, all capital gains entries are mapped correctly, and required schedules (such as Schedule CG) are accurately filled.
Q10. How to minimize tax liability on mutual fund capital gains?
Investors can legally minimize tax liability through smart investment and redemption strategies:
Utilize the ₹1,25,000 LTCG exemption limit each financial year by planning redemptions.
Redeem equity funds after 12 months and debt funds after 36 months to qualify for LTCG rates.
Invest in ELSS mutual funds, which provide deductions under Section 80C up to ₹1.5 lakh.
Spread investments across family members to use multiple exemption limits.
Opt for tax-efficient fund categories and monitor portfolio turnover to control frequent short-term gains.
Platforms like TaxBuddy help simulate different scenarios before redemption to achieve tax efficiency.
Q11. Is TDS applicable on mutual fund capital gains?
For resident Indian investors, no TDS (Tax Deducted at Source) is deducted on capital gains arising from the sale or redemption of mutual fund units. However, TDS is applicable for NRIs. The rate of deduction is 10% on short-term capital gains for equity funds and 20% on long-term capital gains for debt funds, subject to applicable surcharges and cess. If the NRI’s country of residence has a Double Taxation Avoidance Agreement (DTAA) with India, the lower rate specified in the agreement will apply. Residents are required to report these gains in their annual ITR even though no TDS is deducted.
Q12. How does TaxBuddy simplify mutual fund capital gains filing?
TaxBuddy streamlines the filing process by combining automation and expert guidance. The platform automatically imports mutual fund transaction data from Form 26AS, AIS, and broker statements, categorizes them into STCG and LTCG, and applies the correct tax rates based on the holding period and fund type. It also detects eligible indexation benefits for debt funds purchased before April 1, 2023. For investors who prefer expert assistance, TaxBuddy’s professionals review and finalize the return to ensure compliance with current tax laws. This minimizes errors, prevents mismatches with AIS data, and guarantees a seamless filing experience.
