The Two Categories: Equity-Oriented vs Debt-Oriented MFs
Indian mutual fund taxation is split into two regimes depending on whether the fund is classified as equity-oriented or other than equity-oriented (debt).
A fund is equity-oriented if it invests at least 65% of its corpus in Indian equity shares. This includes pure equity funds, ELSS funds, and balanced advantage funds (if equity allocation ≥65%). Hybrid funds with <65% equity, debt funds, and international funds fall in the other category.
Equity-Oriented Mutual Fund Taxation (FY 2025-26)
The Finance Act 2024 revised capital gains rates effective 23 July 2024, which apply fully for FY 2025-26:
| Holding Period | Classification | Tax Rate (FY 2025-26) |
|---|---|---|
| ≤ 12 months | STCG | 20% (Section 111A) + 4% cess |
| > 12 months | LTCG | 12.5% on gains above ₹1.25 lakh (Section 112A) + 4% cess |
The rules are identical to listed equity shares. The ₹1.25 lakh exemption (raised from ₹1 lakh by Finance Act 2024) applies to the combined LTCG from equity shares and equity-oriented MFs for the year.
Grandfathering for Equity MF Units Purchased Before 31 January 2018
The grandfathering provision applies to equity MF units too. For units bought before 31 January 2018, the cost of acquisition is the higher of:
- Actual purchase NAV, or
- NAV as on 31 January 2018 (capped at redemption NAV)
Most fund houses publish the NAV as on 31 January 2018 on their websites. RTAs like CAMS and KFintech include this in their capital gains statements.
The Finance Act 2023 Change: Debt MF Taxation
This is the most significant recent change in MF taxation. Before the Finance Act 2023 (effective 1 April 2023):
- Debt MF units held >3 years were taxed as LTCG at 20% with indexation
- Units held ≤3 years were STCG at slab rate
After the Finance Act 2023 amendment to Section 50AA:
- All debt MF redemptions on or after 1 April 2023 are taxed at slab rate, regardless of holding period
- The LTCG with indexation benefit is gone for new purchases
- Exception: Units purchased before 31 March 2023 and redeemed with a holding period >3 years — these may still qualify for the old regime under certain interpretations, though CBDT has not clarified this definitively
For FY 2025-26 returns, CAs should treat all debt MF gains as ordinary income at slab rate unless the client has a specific situation warranting different treatment backed by legal advice.
Debt-Oriented MF Taxation (FY 2025-26)
| Purchase Date | Redemption Date | Tax Treatment |
|---|---|---|
| Before 1 April 2023 | On/after 1 April 2023, held >3 years | Debated — was 20% with indexation; now likely slab rate per Section 50AA |
| Before 1 April 2023 | On/after 1 April 2023, held ≤3 years | Slab rate (STCG) |
| On/after 1 April 2023 | Any date | Slab rate (Section 50AA) |
International Funds and Fund of Funds
International mutual funds (those investing in foreign equity) are treated as debt-oriented for tax purposes, regardless of their underlying equity allocation. This is because they don't meet the 65% Indian equity threshold.
Fund of Funds (FoFs) that invest in equity-oriented MFs may be treated as equity-oriented if the underlying funds are equity-oriented — but this has been litigated. Conservative practice is to treat FoFs as debt.
How to Get the Capital Gains Statement for MFs
For ITR filing, CAs need the capital gains statement from one of these sources:
- CAMS (camsonline.com): Covers MFs from AMCs using CAMS as RTA (HDFC, ICICI Prudential, Axis, SBI, Nippon, etc.)
- KFintech (kfintech.com): Covers MFs from AMCs using KFintech as RTA (Mirae, Kotak, Franklin, DSP, etc.)
- Broker platforms: Groww, Zerodha (Coin), Paytm Money, etc. provide capital gains reports for MFs purchased through them
If a client has MF units from multiple RTAs and brokers, all statements need to be consolidated — which is a common pain point for CAs managing clients with large MF portfolios.
Reporting MF Capital Gains in ITR
In ITR-2 or ITR-3:
- Equity MF STCG: Schedule CG, Part B(1) — same as equity shares STCG under Section 111A (20% for FY 2025-26)
- Equity MF LTCG: Schedule CG, Part B(3) — same as equity shares LTCG under Section 112A (12.5% on gains above ₹1.25 lakh). Scrip-wise data required in Schedule 112A (fund name, ISIN, units, purchase date, sale date, cost, FMV, sale value)
- Debt MF (post-2023): Schedule OS (Other Sources) as per Section 50AA — reported under "Income from other sources"
ELSS (Tax Saving) Funds
ELSS funds have a mandatory 3-year lock-in. Since the holding period always exceeds 12 months by the time units can be redeemed, all ELSS redemptions are LTCG. For FY 2025-26, the rate is 12.5% on gains above ₹1.25 lakh (Finance Act 2024).
Note: ELSS investments qualify for Section 80C deduction (up to ₹1.5 lakh) under the old tax regime. The deduction and the LTCG tax on redemption are separate — the deduction was taken in the year of investment, not offset against the LTCG.
How FirstReports Handles MF Capital Gains
FirstReports accepts capital gains statements from CAMS, KFintech, Groww, Zerodha (Coin), and Paytm Money. It automatically classifies each redemption as equity MF STCG, equity MF LTCG, or debt MF (slab rate), applies grandfathering for pre-2018 units, and consolidates all sources into a single statement ready for ITR filing — with FY 2025-26 tax rates applied.