Understanding long term capital gains exemption on mutual funds starts with one number: the first ₹1.25 lakh of long-term gains from equity shares and equity mutual funds combined is tax-free each financial year, and gains above it are taxed at 12.5%. This is general information, not tax advice, and rules differ by fund type.
The exemption is simple, but it’s narrower than many investors assume.
- It applies to equity-oriented mutual funds held for more than 12 months
- The first ₹1.25 lakh of eligible long-term gains in a financial year is exempt, and the rest is taxed at 12.5% without indexation
- Short-term gains, from units held 12 months or less, are taxed at 20%
- Surcharge and cess apply on top of the 12.5%
Which Funds Qualify
The exemption follows the fund’s classification, not its name.
- Equity funds with at least 65% in equity qualify
- Equity-oriented hybrid funds with at least 65% in equity qualify
- ELSS funds qualify, with their three-year lock-in
- One guide says the exemption doesn’t apply to debt, gold or international fund categories
Where It Doesn’t Apply
Several fund types sit outside the exemption.
- Debt funds bought on or after 1 April 2023: taxed at your income-tax slab rate whatever the holding period, with no ₹1.25 lakh exemption
- Debt units bought before 1 April 2023: one guide says units held more than 24 months are taxed at 12.5% without indexation
- Gold and international fund-of-funds: unlisted non-equity units are taxed at 12.5% after 24 months, with no exemption, according to one guide
- Balanced hybrids with 35% to 65% in equity: one guide says 12.5% after 24 months, so check how your fund is classified
How the Exemption Works
It’s a single annual allowance, not one per fund.
- The ₹1.25 lakh limit is cumulative across all your long-term gains from equity shares and equity mutual funds combined in a financial year
- It isn’t a separate exemption for each fund or transaction
- Unused exemption doesn’t carry forward, so each year’s allowance is use it or lose it
A Worked Example
Suppose you sell units and shares in the same year.
- Long-term gains of ₹3 lakh from equity mutual funds plus ₹50,000 from shares total ₹3.5 lakh
- After the ₹1.25 lakh exemption, taxable gains are ₹2.25 lakh
- Tax at 12.5% is ₹28,125, or about ₹29,250 with 4% cess, before any surcharge
- One guide gives a similar illustration: a gain of ₹8 lakh less the exemption leaves ₹6.75 lakh, taxed at 12.5% for ₹84,375
SIPs and the Holding Period
Each instalment has its own clock.
- Every SIP purchase is a separate investment with its own purchase date
- Units are generally redeemed on a first-in, first-out basis, according to one guide, so the oldest units go first
- Units from a recent SIP instalment may still be under 12 months and taxed at 20% if sold early
- Check which units your redemption actually sells
Using the Exemption Each Year
Some investors sell and reinvest to use the allowance, a practice called tax harvesting.
- Selling units with about ₹1.25 lakh of gains and buying back resets your cost price higher, so future gains shrink
- The tax avoided is at most ₹15,625 a year at 12.5%, before cess, and one guide estimates about ₹1.5 lakh over ten years
- Exit loads, brief market exposure gaps and the effort involved can eat into that
- It only helps if you’d otherwise exceed the exemption later
Losses and Set-Off
Losses can reduce your taxable gain.
- Long-term capital losses can be set off only against long-term capital gains, according to one guide
- Short-term capital losses can be set off against both short-term and long-term gains
- Report losses in your return, or you may not be able to use them later
What Budget 2026 Changed
Less than some guides suggest.
- Two 2026 guides say the framework is unchanged from the structure introduced after July 2024, with no Budget 2026 changes
- One guide credits Budget 2026 with the ₹1.25 lakh limit, but the increase, from ₹1 lakh, came in 2024
- The Income-tax Act, 2025 now applies, so section numbers may differ from the 112A and 111A that guides still quote
- Confirm current rules with a chartered accountant before filing
Common Mistakes
A few errors cost investors money.
- Applying the exemption to each fund separately instead of in total
- Assuming debt funds qualify, when units bought after 1 April 2023 are taxed at slab rate
- Selling SIP units that are under 12 months and paying 20% instead of 12.5%
- Forgetting that gains from shares count towards the same ₹1.25 lakh
- Not reporting gains because the tax due is zero
FAQs
Q1. What is the LTCG exemption on equity mutual funds?
₹1.25 lakh per financial year, across all equity shares and equity mutual funds combined, with gains above it taxed at 12.5%.
Q2. Is the ₹1.25 lakh exemption per fund?
No. It’s one cumulative limit for all your eligible long-term equity gains in a year.
Q3. Do debt mutual funds get this exemption?
No. Units bought on or after 1 April 2023 are taxed at your slab rate regardless of holding period.
Q4. What holding period counts as long term?
More than 12 months for equity-oriented funds, with 24 months for some other categories.
