Taxation On Debt Mutual Funds

By CA Mohammed S Chokhawala

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Updated on: Jul 18th, 2025

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5 min read

The taxation of debt mutual funds depends on the date of purchase and their holding period. For units purchased on or after 1st April 2023, any gains from transfer, redemption, or maturity are treated as short-term capital gains and taxed at the investor's applicable slab rate, irrespective of the holding period.

However, for units purchased before 1st April 2023, the tax treatment varies based on how long they are held. If held for more than 2 years, the gains are taxed as long-term capital gains at a flat rate of 12.5% without indexation benefits. If held for 2 years or less, they are taxed as short-term capital gains at the investor's slab rate.

Taxation on Debt mutual Funds

What are Debt Mutual Funds?

Debt mutual funds are investment instruments that primarily invest in fixed-income securities such as bonds, treasury bills, commercial papers, debentures, and other debt instruments. These funds generate returns mainly through interest income and occasional capital appreciation, making them an attractive option for conservative investors seeking stable and predictable returns with lower risk compared to equity funds. For taxation purposes, a mutual fund is classified as a debt mutual fund if it invests more than 65% of its total proceeds in debt and money market instruments. 

Taxation Of Debt Mutual Funds After 1 April 2023

From 1st April 2023, the taxation of debt mutual funds has changed significantly due to amendments in Budget 2023. Any gains arising from the transfer, redemption, or maturity of units of debt mutual funds purchased on or after this date will be treated as short-term capital gains, regardless of the holding period. These gains will be taxed at the investor’s applicable slab rates, and the benefit of indexation will no longer be available, as such funds are no longer classified as long-term capital assets. 

However, if the investment was made before 1st April 2023, the earlier rules will continue to apply. In such cases, if the units are held for more than 24 months, the gains will be considered long-term capital gains and taxed at 12.5% without indexation benefits. If held for 24 months or less, they will be taxed as short-term capital gains at the applicable slab rate.

This can be summarised as follows:

Purchase DateTax Implication
Before 1st April 2023LTCG at 12.5% after holding for more than 2 years. Else STCG at slab rates.
On or After 1st April 2023Gains are taxed at applicable slab rates.

Taxation Of Debt Mutual Funds Before 1 April 2023

Before 1st April 2023, the taxation of debt mutual funds was based on their holding period. If a debt mutual fund unit was sold within 36 months (three years) of purchase, the gains were classified as short-term capital gains (STCG) and taxed at the investor’s applicable slab rates. However, if the units were sold after 36 months, the gains were treated as long-term capital gains (LTCG) and taxed at 20% with the benefit of indexation. The indexation benefit allowed investors to adjust their purchase cost for inflation, effectively reducing their taxable gains and the overall tax liability.

How Will The Changes In Income Tax Rules Affect Taxation On Debt Mutual Funds?

Let us consider the tax flow on debt funds before and after the amendments.

Illustration for Tax Treatment before Amendment 

Example 1: Mr X invested Rs. 10 lakhs in FY 2020-21 in a debt mutual fund and sold the investments after four years of holding them in FY 2024-25 on or after 23rd July, 2024 for a sale value of Rs. 20 lakhs, thereby earning a capital appreciation value of Rs. 10 lakhs. 

ParticularsFinancial YearAmount (Rs.)
Investment Made2020-2110,00,000
Sale2024-2520,00,000
Less: Cost of Investment(10,00,000)10,00,000
Long-term capital gain(20,00,000-10,00,000)10,00,000
Tax PayableTax @ 12.5%1,25,000

Illustration for Tax Treatment after Amendment 

Example 2: Mr. X invested Rs. 20,00,000 in a debt mutual fund in FY 2024-25. He sold the units in FY 2025-26 for Rs. 30,00,000. In this scenario, as the investment was made after 1st April 2023 the gains will be deemed as short-term capital gains irrespective of the holding period. The computation will be as follows:

Assuming that Mr. X opts for the New Tax Regime

ParticularsAmount
Sale Consideration30,00,000
(-) Cost of Acquisition-20,00,000
Short Term Capital Gains10,00,000
Tax Liability 
Up to 4 lakhs0
4 lakhs to 8 lakhs20,000
8 lakhs to 10 lakhs20,000
Short Term Capital Gains Tax*41,600

*The above calculation is based on the assumption that there is no other income for the assessee during the financial year. 

Comparison Of Fixed Deposits And Mutual Funds Taxation

ParticularsFixed DepositsEquity Mutual Funds  (Equity: ≥  65% Debt: < 35%)Debt Mutual Funds  (Equity: <35% Debt: ≥  65%)
Types of fundsFDsEquity funds
Aggressive hybrid fund
Balanced advantage funds
Arbitrage funds
All debt funds
Gold ETF
Multi-asset funds
Conservative hybrid fund
International FoF
NA
Interest Rates (or) Returns 6-8%10-12%7-9%NA
Risk FactorNo RiskModerate to High RiskLow to moderate riskNA
LiquidityMinimal LiquidityHighly liquid (subject to exit load)Highly liquid (subject to exit load)NA
Investment OptionOne Time InvestmentOne Time Investment or SIP options availableOne Time Investment or SIP options availableNA
Related ExpensesNo such expensesNominal amount is charged as expense ratio. Nominal amount is charged as expense ratio.  
Tax Implications  Old ruleNew Rule
What is Taxable?InterestCapital AppreciationCapital AppreciationCapital Appreciation
When is it Taxable?Every Year on an accrual basisWhenever you sell (redeem) the mutual fund unitsWhenever you sell (redeem) the mutual fund unitsWhenever you sell (redeem) the mutual fund units
Holding Period-12 months24 monthsHolding Period Not Applicable
Taxed at what rate?At slab ratesTransfer Before 23 July 2024
- STCG: 15% rates 
- LTCG: 10% (on gains more than Rs 1.25 lakh)
Transfer On or After 23 July 2024
- STCG: 20% rates 
- LTCG: 12.5% (on gains more than Rs 1.25 lakh)
 
Purchased Before 1 April 2023
- STCG: Slab rate 
- LTCG: 12.5% (without indexation benefit)
 
Purchased On or After 1 April 2023
- Deemed to be STCG: Slab rate, irrespective of holding period.
 
Set off and Carry Forward of LossesNot AllowedAllowedAllowedAllowed

Are Fixed Deposits(FDs) Better Than Debt Mutual Funds?

While recent tax changes have made debt mutual funds similar to fixed deposits in terms of taxation, debt mutual funds still offer several advantages over FDs. Unlike regular FDs, which often impose penalties on premature withdrawals, debt mutual funds generally have no exit load after a certain period, making them more liquid and cost-effective. Additionally, debt mutual funds tend to provide higher returns compared to fixed deposits. Another benefit is in their taxation: 

  • profits from debt mutual funds are treated as capital gains, allowing investors to carry forward and set off losses against future gains, 
  • while interest earned on fixed deposits is taxed as ‘income from other sources’ with no such set-off benefit. 

These factors make debt mutual funds a potentially better option for tax efficiency and returns compared to traditional FDs.

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Frequently Asked Questions

How can I show my debt mutual fund income in the ITR?

You can show the sale of debt mutual fund in schedule CG - capital gains.

Are indexation benefits removed from debt mutual funds ?

Yes, for all debt mutual funds purchased after 1st April 2023 any gains irrespective of holding period will be deemed to be short term capital gain and tax will be levied at slab rate. However any Debt mutual funds (Non Equity Mutual funds) purchased before 1st April 2023.

Will tax be deducted automatically from mutual funds ?

For Indian Tax Residents no tax will be deducted when you sell mutual funds or stocks. Tax needs to be paid at the time of filing return or as advance tax. For Non Resident - TDS will be deducted by the broker depending upon the type of capital gain. 

Am I liable to pay tax on the SWP - Systematic Withdrawal Plan?

Yes, SWP involves the redemption of mutual funds. If the units are sold at a higher value, then you are liable  for capital gain tax.

I have invested in a U.S Opportunity Mutual fund, i.e. Mutual fund which invests in Stocks listed on the U.S. Stock Exchange. Why is this considered a non-equity fund?

To Consider a Mutual fund as an equity-oriented, more than 65% of the assets need to be invested in Indian Listed Equity shares. Since the fund is investing in U.S Listed Equity shares, it is considered a Non-Equity fund, and any gain will be deemed to be considered a short-term capital gain. 

About the Author
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CA Mohammed S Chokhawala

Content Writer
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I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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