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How Capital Gains Tax Affects Mutual Fund Returns
When you invest in mutual funds, your returns are not completely tax-free. The profit you earn from selling fund units is called capital gains, and it is taxed under Indian tax laws.These taxes depend on how long you hold your investment. Learning the difference between short-term and long-term capital gains allows you to create plans and reduce tax costs.
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- How Capital Gains Tax Affects Mutual Fund Returns
What is Capital Gains Tax?
Capital gains tax is the tax paid on profits earned from selling mutual fund units at a price higher than the purchase cost. This gain is known as capital gains. In mutual funds, capital gains are further classified into two categories, depending on the length of time you can hold your investment:
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Short-Term Capital Gains (STCG)
Short-term capital gains happen whenever mutual fund units are disposed of within one year of buying. These gains on equity mutual funds are taxed at 20%, provided Securities Transaction Tax (STT) is paid. Short-term capital profits from debt mutual funds are taxed according to the individual's relevant income-tax slab rate.
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Long-Term Capital Gains (LTCG)
Long-term capital gains occur when equity mutual fund units are sold after being held for more than one year. For equity mutual funds and shares these profits are taxed at 12.5% on amounts above ₹1.25 lakh within one financial year. For debt mutual funds purchased on or after 1 April 2023, all gains are taxed as per the investor's income tax slab, regardless of the holding period, and there is no separate long-term capital gains benefit.
- Insurance Companies
- Mutual Funds
| Returns | ||||
|---|---|---|---|---|
| Fund Name | 5 Years | 7 Years | 10 Years | |
| Equity Fund SBI Life | 8.75% | 9.92% |
11.02%
View Plan
|
|
| Opportunities Fund HDFC Life | 12.52% | 13.5% |
13.81%
View Plan
|
|
| High Growth Fund Axis Max Life | 18.11% | 19.74% |
17.84%
View Plan
|
|
| Opportunities Fund ICICI Prudential Life | 11.51% | 11.8% |
12.11%
View Plan
|
|
| Multi Cap Fund Tata AIA Life | 21% | 19.25% |
22%
View Plan
|
|
| Accelerator Mid-Cap Fund II Bajaj Life | 12.44% | 11.92% |
13.49%
View Plan
|
|
| Multiplier Birla Sun Life | 14.57% | 13.67% |
15%
View Plan
|
|
| Virtue II PNB MetLife | 12.74% | 15.04% |
14.46%
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|
|
| Growth Plus Fund Canara HSBC Life | 8.9% | 9.11% |
10.26%
View Plan
|
|
| Blue-Chip Equity Fund Star Union Dai-ichi Life | 7.66% | 8.51% |
9.89%
View Plan
|
|
Fund rating powered by
Last updated: Mar 2026
Compare more funds
| Fund Name | AUM | Return 3 Years | Return 5 Years | Return 10 Years | Minimum Investment | Return Since Launch |
|---|---|---|---|---|---|---|
| Motilal Oswal BSE Enhanced Value Index Fund Regular - Growth | ₹1,748.84 Crs | 29.74% | N/A | N/A | ₹500 | 29.63% |
| Bandhan Small Cap Fund Regular-Growth | ₹20,474.12 Crs | 27.65% | 20.77% | N/A | ₹1,000 | 26.59% |
| Motilal Oswal Midcap Fund Regular-Growth | ₹33,689.20 Crs | 18.96% | 20.42% | 15.88% | ₹500 | 19.13% |
| ICICI Prudential Infrastructure Fund-Growth | ₹8,097.89 Crs | 21.51% | 23.93% | 17.68% | ₹5,000 | 15.11% |
| Canara Robeco Large Cap Fund Regular-Growth | ₹17,103.62 Crs | 11.65% | 9.73% | 13.1% | ₹100 | 11.73% |
| Mirae Asset Large Cap Fund Direct- Growth | ₹40,184.41 Crs | 11% | 10.14% | 13.7% | ₹5,000 | 14.68% |
| Kotak Midcap Fund Regular-Growth | ₹61,694.40 Crs | 18.6% | 16.45% | 17.28% | ₹100 | 14.16% |
| SBI Small Cap Fund-Growth | ₹34,931.73 Crs | 11.56% | 13.34% | 16.95% | ₹5,000 | 17.8% |
| SBI Gold ETF | ₹24,897.99 Crs | 33.01% | 25.38% | 16.25% | ₹5,000 | 13.42% |
Updated as of Mar 2026
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Difference Between Short-Term and Long-Term Capital Gains
The distinction between short-term and long-term capital profits in mutual fund investments depends on the duration held and the taxation percentage charged on earnings overall.
| Parameter | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
| Equity Mutual Funds – Holding Period | Up to 1 year | More than 1 year |
| Equity Mutual Funds – Tax Rate | 20% | 12.5% on gains exceeding ₹1.25 lakh |
| Debt Mutual Funds (invested on or after 1 April 2023) | All holding periods | No LTCG classification |
| Debt Mutual Funds – Tax Treatment | Taxed as per income tax slab | Taxed as per income tax slab |
Key Takeaways
The tax levied on capital gains on mutual funds can be largely determined by the duration of holding investment and the nature of fund you invest in. Short-term profits face higher tax charges and this may lower your overall returns. Long-term investing is more tax-efficient, primarily for equity mutual funds, where lower tax rates and exemptions apply. The duration of the investment should be considered to maximise returns, as it helps reduce tax liability.
Frequently Asked Questions
-
How is capital gains tax calculated on mutual funds?
It is determined by the difference between the purchase price and the selling price. The tax rate will be based on the holding period and type of fund. -
Is capital gains tax applicable to all mutual funds?
Indeed it is valid for both equity and debt mutual funds. The tax amount changes depending upon the time you hold investments. -
Is it possible to save my capital gains tax on mutual funds?
Yes, by choosing long-term investments and planning withdrawals with care. Sensible tax planning through longer holding periods and well-timed withdrawals can help reduce tax pressure, subject to prevailing tax laws and regulations.
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*All savings are provided by the insurer as per the IRDAI approved insurance
plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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˜The insurers/plans mentioned are arranged in order of highest to lowest first year premium (sum of individual single premium and individual non-single premium) offered by Policybazaar’s insurer partners offering life insurance investment plans on our platform, as per ‘first year premium of life insurers as at 31.03.2025 report’ published by IRDAI. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the IRDAI website www.irdai.gov.in
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.