Tax and Regulations

Mutual fund taxation and regulation in India. Budget 2025, Section 87A, equity, debt, hybrid tax rules. Mahindra Manulife investor awareness.

Mutual Fund Taxation and Regulation in India

Budget 2025 changes the dynamics of mutual fund taxation using an increased Section 87A rebate. Now, individuals earning up to ₹12 lakh pay no tax under the new regime. Debt funds gave away the indexation benefit, changing the investment argument against fixed deposits altogether. SEBI's April 2025 regulations entail harsher qualification and transparency norms for all fund houses.

How Your Mutual Funds Are Taxed: The Three-Category System

India's mutual fund tax regime is structured on the exposure of the funds with reference to equity, leading to different tax treatment for different types of funds. Pursuant to the Finance (No. 2) Act 2024, applicable w.e.f. FY 2025-26, "specified mutual funds" are defined as those where not more than 35% of investible funds are in equity shares of domestic companies (Section 50AA).

Equity Funds

Equity funds continue to enjoy tax preferences provided they invest at least 65% of their fund in Indian stocks. STCG (below one year) at 20%; LTCG over ₹1.25 lakh per annum at 12.5%. STT of 0.001% applies to equity fund redemption only.

Debt-Oriented Funds

Funds investing less than 35% in domestic equities are subject to different taxation. For investments on or after 1 April 2023, all gains are treated as short-term and taxed at slab rate, regardless of holding period.

Hybrid Funds

Taxation is determined by actual equity allocation. Funds with 35–65% equity generally follow debt-fund taxation; those exceeding 65% equity qualify for equity fund tax treatment.

The New ₹12 Lakh Tax Break Explained

Under Budget 2025, the Section 87A rebate was increased from ₹25,000 to ₹60,000, and the income floor for rebate from ₹7 lakh to ₹12 lakh. This effectively allows individuals earning up to ₹12 lakh to pay nil tax. Salaried individuals with taxable income up to ₹12.75 lakh per annum pay no Income Tax under the new regime.

Example: Individual earning ₹12 lakh (new regime)

This nil-tax outcome applies only under the new regime and only to slab-rate income. Special-rate capital gains (like equity LTCG/STCG) are not covered by the rebate. Under the old regime, the rebate ceiling remains ₹5 lakh.

Which Mutual Funds Can Now Be Tax-Free?

The additional rebate is a boon to buyers of debt mutual funds sold after April 2023. As these gains are taxed at slab rates, they get the benefit of the rebate under Section 87A—so the investor can pay nil tax if total income does not exceed ₹12 lakh.

The rebate does NOT apply to:

Long-term capital gains from equity funds under Section 112A

Income taxed at special rates

Post-April 2023 debt fund investments can effectively be tax-free for moderate earners within the rebate limit.

Pre–1 April 2023

On or after 1 April 2023:

All gains at slab rates regardless of holding period. No LTCG distinction. No indexation. Eligible for Section 87A rebate under the new regime.

Hybrid and International Funds

24-month threshold for long-term. STCG at slab rates. LTCG at 12.5% without indexation for pre-April 2023 investments held over 24 months and sold after 23 July 2024. Post-April 2023 investments: all gains at slab rates.

The Indexation Benefit Loss: What It Means for Your Returns