Mutual Fund Capital Gains Tax for AY 2026-27: Equity, Debt and Hybrid Fund ITR Reporting

AY 2026-27 covers income earned from 1 April 2025 to 31 March 2026. Mutual fund units redeemed, switched or otherwise transferred during this period are generally taxed under the Income-tax Act, 1961.

This guide covers transactions up to 31 March 2026. Transactions from 1 April 2026 fall under the new tax-year framework and should be reviewed separately.

The tax treatment depends on the fund’s tax classification, when you acquired the units, how long you held them and what you did with them. A scheme’s label, such as “hybrid” or “debt”, does not always determine its tax treatment. Check the fund’s portfolio and the statutory definitions.

Mutual fund capital gains tax at a glance

These are general rules. Surcharge and health and education cess may also apply. The specific transaction, fund classification and eligibility conditions can change the result.

Equity-oriented mutual funds

Equity-oriented mutual fund units may qualify for special rates under Sections 111A and 112A if the statutory conditions are met. Broadly, the fund must satisfy the Act’s definition of an equity-oriented fund, which includes a domestic-equity investment test. The concessional rates generally require Securities Transaction Tax (STT) to have been paid on the transfer.

For units of an equity-oriented fund:

• A gain is generally short-term if you held the units for 12 months or less.
• A gain is generally long-term if you held them for more than 12 months.
• Qualifying short-term capital gains are taxed at 20% under Section 111A.
• Qualifying long-term capital gains are taxed at 12.5% under Section 112A on the portion of your aggregate eligible gains above ₹1.25 lakh for the financial year.

The ₹1.25 lakh threshold applies to aggregate qualifying long-term gains under Section 112A. It is not a separate threshold for each fund or scheme. If you have gains from more than one qualifying investment, include them when working out the threshold.

Example: Suppose you have ₹1,80,000 of qualifying long-term gains from equity-oriented mutual funds in FY 2025-26 and no other Section 112A gains. The amount above ₹1.25 lakh is ₹55,000. Tax on that amount is ₹6,875 at 12.5%, before any applicable surcharge and cess.

If you make a qualifying short-term gain of ₹70,000 on an equity-oriented fund, the Section 111A tax is ₹14,000 before applicable surcharge and cess. Your final tax calculation may also depend on your other income and circumstances.

These special rates do not provide an indexation benefit. In particular, do not apply indexation when calculating Section 111A or Section 112A gains.

Debt funds and Section 50AA

For AY 2026-27, Section 50AA defines a “specified mutual fund” by reference to a fund that invests more than 65% of its total proceeds in debt and money market instruments. The definition also covers certain funds that invest at least 65% of their proceeds in units of funds meeting that test.

Where Section 50AA applies to units acquired on or after 1 April 2023, the gain is deemed to be short-term capital gain, regardless of how long you held the units. It is generally taxed at your applicable rate, rather than at the special rates for qualifying equity-oriented funds or the general long-term capital gains rate.

This can matter for a debt-heavy fund held for several years: a long holding period alone does not make the gain long-term if Section 50AA applies.

Units acquired before 1 April 2023 are generally outside Section 50AA’s acquisition-date rule. Their treatment depends on the usual asset-classification and holding-period rules. If you bought units in instalments over time, do not use one purchase date for the entire scheme.

Hybrid, international and other funds

Hybrid funds hold different mixes of equity and debt. Some may qualify as equity-oriented funds, while others will not. International funds, gold funds and funds of funds can also receive different treatment depending on their structure and portfolio.

For AY 2026-27, check the relevant definitions and scheme information for the units you held. Consider:

• Whether the fund meets the tax definition of an equity-oriented fund.
• Whether it meets the Section 50AA definition of a specified mutual fund.
• When you acquired the units.
• Whether the units meet the applicable holding-period test for long-term treatment.
• Whether STT and other conditions for a special rate have been met.

A scheme’s marketing name or general category is not enough to determine its tax treatment. If you also hold gold funds or ETFs, see TaxClear’s guide to tax on gold and silver sales, which covers those investments.

What counts as a transfer?

The redemption or sale of mutual fund units is a transfer for capital gains purposes. Switching from one scheme to another is generally treated as a redemption of the old units and a purchase of new units. Changes between plans or options may also have tax consequences. A gain may need to be reported even if the proceeds stay with the fund house and are not paid into your bank account.

By contrast, an increase in a fund’s NAV does not usually create a capital gain while you continue to hold the units. Tax generally arises when a transfer occurs.

Dividends or income distributions, often called IDCW, are separate from capital gains. They are generally taxable under “Income from Other Sources” at the taxpayer’s applicable rate. Report distributions separately from gains on redemption. If tax was deducted from a distribution, review your tax-credit information before claiming the credit.

How to calculate gains

For a straightforward redemption, capital gain is generally based on the redemption or sale value less the cost of acquisition and eligible transfer expenses. Specific rules may apply to particular transactions or units. Securities Transaction Tax is not deductible as a transfer expense when computing capital gains.

For each redemption or switch:

1. Match the transaction with the units transferred.
2. Identify the acquisition date and cost of those units.
3. Determine whether the fund is equity-oriented, a specified mutual fund under Section 50AA or another category.
4. Apply the relevant holding period and tax treatment.
5. Work out the gain or loss using the transaction statement and current ITR utility.

SIP instalments and multiple purchases

Each SIP instalment is a separate purchase made on a different date. A redemption can therefore include units bought at different times and costs. Some units may generate short-term gains while others generate long-term gains.

Use the detailed capital gains statement from the fund house, registrar or broker. Review the lot-wise calculation rather than relying only on the average purchase price shown in an account summary.

The same issue can arise if you made additional purchases, reinvested distributions or switched between schemes. Keep transaction histories for each scheme and plan. If units are held in demat form, use records that reflect the applicable cost and unit-identification rules.

What happens to a capital loss?

Capital losses from mutual fund transfers are subject to set-off rules:

• A short-term capital loss may generally be set off against short-term or long-term capital gains.
• A long-term capital loss may generally be set off only against long-term capital gains.
• Capital losses cannot generally be set off against salary or dividend income.
• Eligible unadjusted losses may be carried forward for up to eight assessment years if the loss return is filed by the applicable due date under Section 139(1).

Do not ignore a loss simply because you have no gain in the same year. If you want to preserve an eligible loss for future set-off, report it correctly and check the filing deadline.

How to report mutual fund gains in your ITR

Capital gains are reported in Schedule CG of the ITR. Dividend or IDCW income is generally reported separately in Schedule OS. Your ITR form depends on your income sources and eligibility.

• ITR-2 is generally relevant to an individual or HUF with capital gains who does not have income taxable under “Profits and Gains of Business or Profession,” subject to the form’s other conditions.
• ITR-3 may be required if you have business or professional income.
• ITR-1 may be available in limited cases where you have qualifying long-term capital gains under Section 112A not exceeding ₹1.25 lakh and meet all other eligibility conditions. It is not generally available for short-term capital gains or if the form’s other restrictions apply. Check the AY 2026-27 instructions.

For AY 2026-27, the Income Tax Department’s ITR-2 guidance says the Schedule CG requirement to split capital gains by transfers before and after 23 July 2024 has been removed. Use the current AY 2026-27 utility and instructions rather than copying fields from a previous year’s return.

Not every amount shown in an Annual Information Statement (AIS) is a taxable gain. Compare the information with your redemption and purchase records. Conversely, if a taxable transfer is missing from AIS or another statement, that does not automatically remove the obligation to report it.

TaxClear’s salaried employee ITR guide explains return-form choices for employees with investment income. For the filing process, see the online ITR filing guide for AY 2026-27. File by the due date that applies to your category; the deadline may differ if an audit or other condition applies.

Records to keep

Keep the records used to calculate and report your transactions, including:

• Mutual fund capital gains statements and account statements.
• Purchase, SIP, switch and redemption confirmations.
• Scheme details needed to determine the fund’s tax classification.
• Bank statements and records of amounts received.
• Details of IDCW distributions and any tax deducted.
• Your ITR acknowledgement and loss calculations, if applicable.

Reconcile the fund house or broker statement with your own transaction history before filing. If a statement appears incomplete or incorrect, request a corrected statement from the fund house, registrar or broker and keep a copy of the correspondence.

Common mistakes to avoid

• Applying the same treatment to all debt, hybrid or international funds.
• Assuming a scheme’s tax status from its name alone.
• Treating a switch as tax-free because the money did not reach your bank account.
• Using an average holding period for all SIP units.
• Applying the ₹1.25 lakh Section 112A threshold separately to each scheme.
• Reporting redemption gains after deducting IDCW or combining both in one ITR field.
• Claiming a loss carry-forward without meeting the filing requirements.
• Relying only on AIS, Form 26AS or Form 16 instead of reconciling actual transactions.

Frequently asked questions

Are mutual fund gains taxable when the NAV rises?

No. A rise in NAV while you continue to hold units is generally not a taxable transfer. Tax may arise when you redeem, sell or switch units.

Are all debt fund gains taxed at my applicable rate?

No. Treatment depends on the fund, when you acquired the units and the applicable rules. Gains on covered units acquired on or after 1 April 2023 are deemed short-term under Section 50AA. Other non-equity units may follow the regular holding-period rules.

Does each equity fund have a separate ₹1.25 lakh threshold?

No. Qualifying long-term gains are aggregated for the financial year rather than assessed fund by fund.

Should I report a scheme switch in my ITR?

A switch is generally treated as a transfer of the old units and may result in a capital gain or loss. Check the switch statement and report the transaction where required.

Which ITR form should I use for mutual fund capital gains?

ITR-2 is generally used by eligible individuals or HUFs with capital gains and no business or professional income. ITR-3 may apply where you have business or professional income. ITR-1 may be available in limited cases for qualifying Section 112A long-term gains up to ₹1.25 lakh, subject to all other eligibility conditions. Check the current ITR instructions for your circumstances.