Did debt mutual funds become more tax efficient after Budget 2025?

Income Tax Income from Capital Gains
1

I invested in debt mutual funds in May 2023, and from what I read, my capital gains up to ₹12 lakh will be tax-free under the new 2025 Budget provisions. But I thought capital gains were taxed at special rates and weren’t eligible for rebate? How exactly does this work? Also, what about debt funds purchased before April 2023—there were changes announced back then too. Do those investments get taxed differently if redeemed now?

2

Yes, you’re correct. The taxation of debt funds will be impacted after the changes announced in the recent 2025 Budget. Moreover, debt funds purchased before and after April 2023 are also treated differently.

Taxation of debt funds

First, let’s understand the tax rates applicable for debt funds:

Tax on Debt Funds
Tax on Debt Funds953×239 21 KB

Now, as you can see, debt funds purchased after April 2023 are taxable at your slab rate irrespective of holding period.

  • Any income taxed at slab rate is eligible for rebate u/s 87A.
  • This rebate limit has been revised to ₹60,000 in the recent budget, which means income up to ₹12 lakh is effectively tax-free.

So, if you realise capital gains in the next financial year (FY 2025-26), this rebate will be applicable. If this is your only source of income, then there will be no tax payable up to ₹12 lakh.

What about debt funds purchased before April 2023?

  • If you sell these in the next financial year, the holding period will cross 24 months, making them long-term capital gains.
  • These gains are taxed at a special rate of 12.5%.
  • Since they are not taxed at slab rates, rebate u/s 87A will not apply.
  • The entire gain amount will be taxable at 12.5%.
3

Madam ,
I have a query on the same topic
For debt funds purchased before April 2023 u have mentioned that tax rate is 12.5%.

My query is do we get LTCG Exemption of 1.25 lakhs also ?Is the tax of 12.5% applicable on the balance capital gain recd on redemption of debt MFs.

4

Hi @Soniya ,

The ₹1.25L exemption is only available against the capital gains earned from equity or equity oriented mutual funds i.e. capital gains u/s 112A.

Thus, it is not available against gains from debt mutual funds.

5

1.25L exemption applies for gold and silver ETFs and mutual funds ?

6

Hey @Avinash1 ,

This exemption is not available against silver ETFs, gold ETFs and mutual funds other than equity oriented MFs.

7

Thanks for the reply madam. But there is a difference of opinion in this… Some have stated that since the purchase of short term debt mutual fund by me is in August 2020, the present rules are not applicable and tax exemption of 1.25 is applicable in my case. Hence no tax is there if redeemed this year.
Now I am totally confused madam…

8

Hello @Soniya

The tax exemption of 1.25 lakh is only applicable in the case of listed equity shares, equity-oriented mutual funds, and units of business trust under section 112A.