ITR Filing 2025: Mutual Fund Tax Rules for Capital Gains, SWP & NRI Investments Explained

The 2025 Union Budget introduced new tax rules for mutual fund investments under the Income Tax Act. Whether you are a resident investor or an NRI, these updates affect ITR filing, capital gains classification, SWP withdrawals, and how each type of fund is taxed. This article helps decode the changes so that investors can better understand the tax implications of their holdings.

ITR Filing 2025: Understanding Mutual Fund Tax Rules for Capital Gains

The taxability of mutual funds depends on 3 main factors: the type of mutual fund, the duration for which it is held, and the investor’s income bracket. Capital gains arise when mutual fund units are sold at a profit. These gains are classified as either short-term or long-term, depending on the holding period.

Equity Mutual Funds, Including ELSS

To qualify as equity funds, at least 65% of the portfolio must be in domestic equities.

• Short Term Capital Gains (STCG) for holdings less than 12 months are taxed at a flat 20%.
• Long Term Capital Gains (LTCG) for holdings of 12 months or more are taxed at 12.5% on gains exceeding ₹1.25 lakh annually under Section 112A.
• Securities Transaction Tax (STT) of 0.001% is applicable.
• ELSS funds also follow the same tax rules and come with a 3-year lock-in period.
   

Debt Mutual Funds

Debt mutual funds are those with less than 35% equity exposure.

• STCG for holdings of less than 36 months is taxed at the individual’s slab rate.
• LTCG for holdings of 36 months or more is taxed at 20% with indexation for investments made before July 2024, and 12.5% without indexation thereafter.
• A new exemption of ₹4 lakh annually is introduced under the 2025 Budget. No TDS is applicable for resident investors.
• Indexation benefits have been removed for investments made after April 1, 2023.

Aggressive Hybrid Funds

These funds invest more than 65% in equities and are taxed like equity funds.

• STCG on holdings below 12 months is taxed at 20%.
• LTCG on holdings of 12 months or more is taxed at 12.5% above ₹1.25 lakh.
• No indexation benefit is available.

Conservative Hybrid Funds

These funds invest less than 35% in equities and are taxed like debt funds.

• All gains are taxed at slab rates, regardless of the holding period.
• Investors may benefit from the Section 87A rebate and the ₹4 lakh LTCG exemption. These funds no longer enjoy indexation or favourable LTCG treatment, making them less attractive for long-term investments.

Balanced Hybrid Funds

Balanced hybrid funds with equity exposure between 35% and 65% follow a mixed tax treatment.

• Investments before April 1, 2023:
  • <24 months: STCG at slab rate.
  • ≥24 months: LTCG at 12.5%, with ₹4 lakh exemption.
     
• Investments after April 1, 2023:
  • All gains are taxed as STCG at slab rates .
  • No LTCG benefit or indexation.

Gold Funds, International Funds and Fund of Funds

These funds generally have equity exposure of less than 35%.

• Investments before April 1, 2023:
  • <36 months: STCG at slab rates.
  • ≥36 months: LTCG at 20% with indexation up to July 2024, and 12.5% without indexation afterwards.
     
• Investments after April 1, 2023:
  • <24 months: STCG at slab rates.
  • ≥24 months: LTCG at 12.5%, no indexation, but ₹4 lakh exemption applicable.

Dividend Income from Mutual Funds

Since the removal of Dividend Distribution Tax in 2020, all dividends are added to the investor’s income and taxed as per their slab rate.

• TDS of 10% is applicable for resident investors.
• For NRIs, TDS is deducted at 20%.
• Dividends are to be reported in the ITR and taxed accordingly.

Read More: ITR Filing 2025: Why You Should Wait Till June 15, 2025.

Taxation on Systematic Withdrawal Plans (SWPs)

SWPs are treated as redemptions, and tax liability depends on the type of capital gains triggered.

• STCG or LTCG rules apply based on the fund category and holding period.
• LTCG exemption and Section 87A rebate can be claimed if the criteria are met. 

Taxation for Non-Resident Indians (NRIs)

NRIs are taxed based on the Double Taxation Avoidance Agreement between India and their country of residence.

• TDS of 20% applies to equity STCG.
• Rates for other categories depend on the respective treaty provisions.
• NRIs should consult their specific DTAA terms to avoid double taxation and claim any applicable relief.

Conclusion

The 2025 updates to mutual fund taxation aim to simplify and unify tax treatments across fund categories. Investors should remain informed about how their mutual fund transactions are classified for tax purposes and ensure proper reporting while filing their ITR.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.