Most Indian investors pay more fund tax than the law asks for — not by earning more, but by never using the mechanics: the annual exemption left unharvested, losses carried forward until they expire, and switches treated as free moves when they are taxable exits. This page lays out the FY27 rules per fund type, then the strategy — with the costs and caveats that decide whether it actually saves money.
The rates, by fund type
Equity funds (65%+ Indian equity): long-term after twelve months, taxed at 12.5% above ₹1.25 lakh of gains a year (Section 112A); short-term at 20%. Debt funds bought on or after 1 April 2023: taxed at your slab regardless of holding period. Hybrid and multi-asset funds: equity taxation if the equity share is 65%+, otherwise the debt rules. Gold and international funds follow their own holding-period paths — our tax hub keeps the full table. Dividends are taxed at slab, with 10% TDS above ₹5,000 a year (Section 194K) — which is why growth plans and SWPs quietly beat dividend options for accumulators. One flag: a Budget 2025 proposal changes debt-fund treatment for units bought on or after 1 April 2026 (a 24-month route to long-term status has been reported); the enacted provision should be confirmed against the Finance Act before relying on it for new purchases.
FY27 fund taxation at a glance
Holding periods, rates and exemptions per fund type, with the loss-mechanics rows that most investors never use. The Budget 2025 debt-fund change for post-April-2026 purchases is flagged as reported-pending-enactment.
View the numbers as a table
| Fund type | Long-term after | Rate | Notes |
|---|---|---|---|
| Equity (65%+) | 12 months | 12.5% above ₹1.25L/yr; STCG 20% | s.112A; harvest the annual exemption |
| Debt (post-Apr-2023) | — (always slab) | Slab rate | Budget 2025 change for units from 1 Apr 2026: verify before relying |
| Hybrid / multi-asset | 12 months if 65%+ equity | Equity rates | Below 65%: debt rules |
| Dividends | — | Slab + 10% TDS above ₹5K (s.194K) | Growth + SWP usually better |
| Losses | — | STCL vs both; LTCL vs LTCG only (s.70) | 8 AY carry-forward (s.74); expires on late filing |
Verified 29 October 2026 against AMFI's tax page and department guidance (sources below). The full table with gold/international funds lives on the tax hub.
The set-off and carry-forward rules nobody uses
Short-term losses set off against both short- and long-term gains; long-term losses set off only against long-term gains (Section 70). Unused losses carry forward for eight assessment years (Section 74) — but only if the return declaring them is filed by the due date. The practical translation: the ₹40,000 loss from the 2022 Exit is still harvestable until it expires, and "selling a loser" before March is not admitting defeat — it is moving a tax asset from a depreciating ledger into an offset. The silent counter-rule: losses don't set off against anything in a year you file late, which is how most of them expire unused.
The ₹1.25 lakh exemption is a use-it-or-lose-it allowance
The equity LTCG exemption is annual — every financial year that passes with unharvested gains wastes it. Harvesting means selling enough of a long-held equity fund to book ₹1.25 lakh of gains, then repurchasing: the reset costs a small tax bill (zero, actually — gains under the exemption are tax-free), possibly an exit load, and the market risk of the repurchase gap. Done every year on a large portfolio, it converts a "free" allowance you never use into a real reduction of the eventual exit bill — the arithmetic our NPS-versus-funds comparison shows at scale: on a ₹1.29 crore gain, the exit tax swings by lakhs depending on how many years of allowance were banked.
The timing traps that turn strategy into loss
- Switches are sales. Moving from one fund to another — even within the same AMC — redeems units: gains crystallise, exit loads apply, and the clock restarts. A "portfolio cleanup" done blind can create the tax bill it was meant to avoid.
- SIP redemptions are FIFO. Each instalment has its own holding period; redeeming a five-year SIP books gains on the earliest units (long-term) and losses on the newest (short-term). The mix surprises people — run the redemption through the tool before the transaction, not after.
- Harvesting has costs. Exit loads on the redeemed lot, the repurchase gap (a weekend crash between sell and buy is real), and STT on equity transactions. The strategy pays when the portfolio is large and the allowance unharvested for years; it is theatre on a ₹2 lakh portfolio.
- Don't let tax drive the vehicle. Holding a bad fund for tax reasons is the classic inversion — the tax saved on switching is smaller than the TER drag of keeping it. Pay the tax, fix the portfolio.
The whole strategy, in three lines
Use growth plans and SWP instead of dividends; harvest the ₹1.25 lakh every year on any meaningful equity portfolio; and book real losses before they expire, netting them against gains — while respecting switches-as-sales and the due-date rule that keeps carry-forward alive. None of it is aggressive; all of it is just reading the law the way it is written.
Educational content, not financial advice. Rates and rules verified on 29 October 2026 against AMFI's tax page, the Income Tax Department's guidance and published fund-house summaries (sources below); the Budget 2025 debt-fund change is flagged as reported-pending-enactment. Tax computation for your own transactions belongs with the tool and your CA — this page is the map.