Union Budget 2025-26: Tax Reckoner on Mutual Funds & Investments

Union Budget 2025–26: Complete Tax Reckoner on Mutual Funds, ETFs & Investment Products

The Union Budget 2025–26 has introduced several important changes in the taxation of mutual funds, ETFs, commodities, foreign funds and other capital market instruments. These changes are based on amendments to the Income Tax Act, 1961, as proposed in the Finance Bill, 2024, and are applicable for FY 2025–26.

This document has been compiled using various sections and sub-sections of the Income Tax Act. Investors are advised to consult their tax advisors for further clarification and action.

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Key Abbreviations

• STCG – Short Term Capital Gain
• LTCG – Long Term Capital Gain
• FOF – Fund of Fund
• ETF – Exchange Traded Fund

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Equity-Oriented Mutual Funds (More than 65% in Equity)

Particulars	Short Term	Long Term
Holding Period	Up to 12 Months	More than 12 Months
Tax Rate	20%	12.5%
STT Paid	Yes	Yes
Section 111A Applicable	Yes	No
Section 112A Applicable	No	Yes
Section 2(42A) – 12 Month Rule	Yes	Yes

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Domestic Equity ETF – Fund of Fund (FOF)

Where more than 90% of investments are in Domestic Equity ETFs as per Explanation 1 of Section 112A:

• Units acquired before 01.04.2023
• Units acquired after 31.03.2023
• Treated as Equity-Oriented Mutual Fund
• STCG taxable at 20%
• LTCG taxable at 12.5% after 12 months
• STT applicable

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Fund of Fund where Debt > 65% and Equity ETF < 90%

• Units acquired before 01.04.2023
• Units acquired after 31.03.2023
• Treated as Short-Term Capital Asset
• Taxed as per Income Tax Slab
• No benefit of Section 111A or 112A

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Debt-Oriented Mutual Funds (> 65% in Debt Assets)

• Includes FOF investing more than 65% in debt-oriented funds
• Units acquired before 01.04.2023
• Units acquired after 31.03.2023
• Classified as Specified Mutual Fund
• Always treated as Short-Term Capital Asset under Section 2(42A)
• Taxed as per applicable Income Tax Slab

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Foreign Fund of Fund (FOF) – Investing in Offshore Schemes

• Units acquired before 01.04.2023
• Units acquired after 31.03.2023
• Taxed as per Income Tax Slab
• LTCG tax rate: 12.5% if held for more than 2 years
• No STT benefit
• Section 111A and 112A not applicable

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Foreign Equity Index Fund (India Domiciled)

• Units acquired before 01.04.2023
• Units acquired after 31.03.2023
• No STT benefit
• No benefit of Section 111A or 112A
• LTCG taxable at 12.5% after 2 years

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Foreign Equity ETF (India Domiciled & Listed)

• Listed on Recognised Stock Exchange
• Units acquired before and after 01.04.2023
• Taxed as per Income Tax Slab
• No equity taxation benefit

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Commodities ETF (Listed on Recognised Stock Exchange)

Feature	Status
Listed on Exchange	Yes
STT Paid	Yes
Holding Period for LTCG	More than 12 Months
LTCG Tax Rate	12.5%
Section 111A / 112A	Not Applicable

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Commodities Fund of Fund (FOF)

• Units acquired before and after 01.04.2023
• Treated as Short-Term Capital Asset
• Taxed as per Income Tax Slab

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Specified Mutual Fund – New Definition (Section 50AA)

Effective from 01 April 2025, “Specified Mutual Fund” means:

• A mutual fund investing more than 65% of its total proceeds in debt and money market instruments, or
• A fund investing 65% or more of its total proceeds in units of such debt-oriented fund

Earlier, debt mutual funds were loosely defined as “other than equity.” This ambiguity has now been removed.

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Key Rate & Threshold Changes

• STCG rate increased from 15% to 20% with effect from 23 July 2024
• LTCG tax rate increased from 10% to 12.5%
• LTCG exemption limit increased from INR 1,00,000 to INR 1,25,000

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Change in Holding Period – Section 2(42A)

Short-term holding period reduced from 36 months to 24 months for all assets except:

• Securities listed on recognised stock exchange
• Units of UTI
• Equity-oriented mutual funds
• Zero coupon bonds
• Listed shares of companies

For the above assets, holding period of 12 months continues to define long-term capital asset.

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Revised Securities Transaction Tax (STT)

Instrument	STT Rate
Options	0.1%
Futures	0.02%

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Sovereign Gold Bonds (SGBs)

• Redemption or buyback by RBI is exempt from capital gains tax for individuals under Section 47(viic)
• Such redemption is not regarded as a transfer
• If sold on exchange, LTCG applies after 12 months
• Taxable under Section 112 and not 112A
• Tax rate: 20% with indexation or 12.5% without indexation
• Tax treatment remains same whether purchased from RBI or stock exchange

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Important Sections Impacted

• Section 50AA
• Section 111A
• Section 112A
• Section 155
• Section 2(42A)

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Mutual fund investments are subject to market risks. Investors should read all scheme-related documents carefully and consult their financial advisor or mutual fund distributor before investing.