Moment guide · FY 2026-27

I'm redeeming debt mutual funds

How is debt mutual fund redemption taxed in FY 2026-27?

Any redemption of a specified mutual fund — debt funds, gold funds, international fund-of-funds, and most hybrids with equity ≤ 35% — is taxed as short-term capital gain at your slab rate regardless of holding period, under section 50AA. No LTCG rate and no indexation. Only genuinely equity-oriented funds (> 65% equity) still get 20% STCG under 111A and 12.5% LTCG over ₹1.25 lakh under 112A.

The #1 trap

Holding a debt fund for 10 years no longer changes the tax outcome — section 50AA taxes every redemption at your slab rate; so if your horizon is truly long-term, PPF/EPF/NPS Tier 1 or hold-to-maturity bonds usually beat debt MFs on an after-tax basis.

Neha, chartered accountant and 30% slab investor

Neha invested ₹10 lakh in a corporate bond fund in April 2018 and did not touch it for eight years. In June 2026 she redeems the whole position for ₹16.5 lakh. Her gain is ₹6.5 lakh. Under the pre-1-April-2023 regime she would have used indexation and paid about 20% on the indexed gain; under section 50AA, none of that survives. The fund is a specified mutual fund because its equity exposure is well below 35%. The entire ₹6.5 lakh is therefore short-term capital gain taxable at her slab rate of 30% plus 4% cess — roughly ₹2.03 lakh. The fact that she held for eight years is irrelevant. She could have held the identical fund for one day and the post-tax amount would be nearly the same. Neha then rebuilds her fixed-income allocation. She puts the maximum into PPF for the year — ₹1.5 lakh, fully tax-free on interest and maturity. She increases EPF voluntary contributions at 12% of basic pay, and parks part of the balance in a State government-backed AAA bond held to maturity. On a 9% pre-tax bond in her 30% slab, the post-tax yield is about 6.15%; PPF's tax-free 7.1% now looks better for the first ₹1.5 lakh she can save. A colleague suggests an equity-oriented hybrid fund with 70% equity. Neha checks: because equity is above 65%, gains after 12 months can still qualify for 112A at 12.5% above the ₹1.25 lakh exemption. That makes the hybrid a better tax wrapper than the debt fund for her medium-term goals, provided she accepts equity volatility. She also notes the finer point: section 50AA applies to units of specified mutual funds, not to directly held bonds or fixed deposits. Direct AAA bonds held to maturity give her coupon income taxed at slab but no capital-gain surprise, while a debt fund's mark-to-market gain is fully taxable on redemption. A quick call with us dials in the final figure.