Mutual Funds and Stocks: Understanding Capital Gains Tax Implications in 2025

mutual funds

Mutual Funds and Stocks: Understanding Capital Gains Tax Implications in 2025

mutual funds

Investing in mutual funds and stocks is a time-tested route to building wealth. However, returns from these assets attract capital gains tax, and staying informed about tax rules is crucial to avoid unexpected liabilities. As of 2025, the tax landscape for investors in India continues to evolve. This article breaks down how capital gains on stocks and mutual funds are taxed in 2025, the latest updates, available exemptions, and smart strategies to lower your tax burden.

Understanding Capital Gains

Capital gains arise when you sell a capital asset—like shares or mutual fund units—for a price higher than what you paid. Based on how long you hold the asset before selling, gains are classified as:

  • Short-Term Capital Gains (STCG)

    • Equity instruments: Sold within 12 months.

    • Debt instruments: Sold within 36 months.

  • Long-Term Capital Gains (LTCG)

    • Equity instruments: Held for more than 12 months.

    • Debt instruments: Held for more than 36 months.

mutual funds

Capital Gains Tax on Stocks

Listed Equity Shares

  • STCG: Taxed at 15% under Section 111A.

  • LTCG: Taxed at 10% on gains exceeding ₹1 lakh/year under Section 112A (no indexation benefit).

Unlisted Shares

  • STCG: Taxed as per your income tax slab.

  • LTCG: Taxed at 20% with indexation under Section 112.

Capital Gains Tax on Mutual Funds

Equity-Oriented Mutual Funds (≥65% equity exposure)

  • STCG: Taxed at 15%.

  • LTCG: 10% tax on gains above ₹1 lakh/year (no indexation).

Debt Mutual Funds

As per the Finance Act 2023, debt mutual funds purchased on or after April 1, 2023, lose indexation benefits.

  • All gains are taxed at slab rates—no matter the holding period.

Hybrid Mutual Funds

  • Equity-oriented hybrids: Follow equity fund taxation.

  • Debt-oriented hybrids: Taxed as debt funds.

What’s New in 2025?

While major changes came via the 2023 amendments, the 2025 updates include:

  • Possible revision of LTCG tax thresholds.

  • Potential return of indexation for specific instruments.

  • Revised tax exemptions for retirement-focused products.

Investors should monitor future Budget announcements for formal updates.

Exemptions & Deductions

Some ways to reduce tax impact on capital gains:

  • Section 54F: Exemption on LTCG if proceeds are invested in a residential house.

  • Set-Off of Losses:

    • STCL can be set off against STCG and LTCG.

    • LTCL can only offset LTCG.

    • Losses can be carried forward for up to 8 years.

Tax-Saving Strategies

  • Tax Harvesting: Book profits up to ₹1 lakh annually in LTCG and reinvest to reset cost.

  • Hold for Long-Term: To avail lower LTCG rates.

  • ELSS Funds: Offers tax deduction under Section 80C (up to ₹1.5 lakh annually).

  • Grandfathering Clause: Gains till Jan 31, 2018, are exempt under earlier rules.

Taxation Rules for NRIs

For Non-Resident Indians investing in Indian capital markets:

  • Equity Funds:

    • STCG: 15%

    • LTCG: 10% beyond ₹1 lakh/year

  • Debt Funds: Taxed at slab rates (no indexation benefit).

  • TDS Applicable: Tax is deducted at source; filing a return is required for refunds/adjustments.

Reporting & Compliance

  • ITR Filing: Use ITR-2 or ITR-3, depending on your income sources.

  • Advance Tax: Required if your capital gains are substantial to avoid interest under Sections 234B/234C.

  • AIS & Form 26AS: Reconcile your capital gains data before return filing to avoid mismatches.

mutual funds

Budget 2025 Update – ULIP Tax Relief for Senior Citizens

A key takeaway from the Union Budget 2025:

  • ULIP Maturity Exemption under Section 10(10D) continues for senior citizens (60+) even if the annual premium exceeds ₹2.5 lakh, provided:

    • The policy was purchased before April 1, 2025, or

    • It’s their only ULIP with sum assured ≥10x the premium.

  • For policies bought on/after April 1, 2025, ULIP maturity proceeds are taxable as capital gains for non-senior citizens. However, senior citizens are allowed an exemption on gains up to ₹5 lakh/year under the revised Section 10(10D).

This measure encourages long-term, retirement-focused investments for seniors.

Read More: Income Tax Return 2025: What’s New in the ITR-2 Filing Process for AY 2025-26

Capital gains taxation in 2025 remains a vital factor in investment planning. While equity-related gains continue to attract concessional tax rates, changes in debt fund rules and new ULIP provisions highlight the importance of staying updated. Smart strategies like tax harvesting, reinvestment planning, and understanding exemptions can significantly improve post-tax returns. When in doubt, consult a qualified tax advisor to align your investments with the latest tax laws.

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        What is a mutual fund? Why invest in mutual funds?

        mutual fund

        What is a mutual fund? Why invest in mutual funds?

        mutual fund

        Mutual Fund

        Mutual funds allow you to combine your funds with other investors to collectively invest in stocks, bonds, and other assets.

        • Professional fund managers oversee the investment decisions, determining which securities (such as stocks and bonds) to purchase and when to sell them.
        • Investors benefit from exposure to a diverse portfolio of investments held within the fund, along with any generated income.
        • Mutual funds provide access to a broad range of investment strategies and styles to suit various preferences and objectives.

        Advantages of Investing in Mutual Funds

        Professional Management

        Mutual funds are overseen by seasoned money managers who possess the expertise and resources to actively manage investments, providing investors with professional portfolio management tailored to meet specific objectives.

        Risk Diversification

         Investing in mutual funds allows for easy diversification across multiple securities and asset classes, reducing overall investment risk. This diversification helps mitigate the impact of market fluctuations on individual investments within the portfolio.

        Affordability & Convenience (Accessible Investment)

        Mutual funds offer an affordable entry point for investors to access a diversified portfolio of securities, making it convenient to invest even small amounts without directly purchasing individual securities.

        Liquidity

        Open-ended mutual funds provide high liquidity, allowing investors to easily redeem their units to meet financial needs. Redemption proceeds are typically credited to the investor’s bank account within a few business days.

        Cost Efficiency

        Mutual funds benefit from economies of scale, resulting in lower operating expenses and management fees compared to individual investing, making them a cost-effective investment option.

        Regulatory Oversight

        Mutual funds are well-regulated by authorities such as the Securities and Exchange Board of India (SEBI), ensuring investor protection, transparency, and adherence to fair valuation practices.

        Tax Advantages

        Certain mutual fund investments, such as Equity Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act, making them a tax-efficient investment avenue for long-term wealth accumulation.

        Types of Mutual Funds in India

        In India, mutual funds are broadly classified into five main categories, with Equity Funds and Debt Funds being among the most popular.

        Equity Funds

        Equity funds predominantly invest in stocks or equities, targeting long-term capital appreciation. They carry higher risk due to stock market volatility. Equity funds are further categorized based on market capitalization (large-cap, mid-cap, small-cap), sector focus, and investment style (value, growth, blend).

        Debt Funds

        Debt funds primarily invest in fixed-income instruments like government securities, corporate bonds, and money market instruments. These funds aim to offer stable returns with lower risk compared to equity funds. Debt funds are classified based on their duration and risk profile, including liquid funds, short-term funds, and dynamic bond funds.

        Understanding How Mutual Funds Operate

        Fund Establishment

        A mutual fund is established when an asset management company (AMC) designs a fund with specific investment goals, strategies, and risk levels.

        Pooling Investments

        Investors looking to participate in the fund purchase units at the current Net Asset Value (NAV). The NAV represents the per-unit value of the fund’s net assets (assets minus liabilities).

        mutual fund

        Portfolio Management

        Experienced fund managers oversee the investment process. They conduct research and select securities to construct a diversified portfolio aligned with the fund’s objectives. Fund houses charge management fees for this service.

        Regular Reporting

        Fund managers ensure regular updates are provided to investors regarding the fund’s performance, holdings, and any strategy adjustments by the AMC.

        Read More: Best Performing Mid-Cap Mutual Funds in India: Top 10 Schemes with Strong Five-Year Returns

        Redemption and Exit

        Investors have the option to sell their units back to the fund at the prevailing NAV, providing liquidity. Some mutual funds may impose an Exit Load as a fee if investors withdraw prematurely (before a specified duration) from the fund.

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              Best Performing Mid-Cap Mutual Funds in India: Top 10 Schemes with Strong Five-Year Returns

              Mutual Funds

              Best Performing Mid-Cap Mutual Funds in India: Top 10 Schemes with Strong Five-Year Returns

              Mutual Funds

              Leading Mutual Funds for Investment in India

              Over the last five years, several prominent mutual funds across diverse market segments have demonstrated impressive performance. According to data from the AMFI website, Quant Mid Cap Fund tops the list among the top 10 mid-cap mutual funds. Motilal Oswal Midcap Fund and Mahindra Manulife Mid Cap Fund closely follow in rankings. Other noteworthy performers include PGIM India Midcap Opportunities Fund, Edelweiss Mid Cap Fund, and Baroda BNP Paribas Midcap Fund. HDFC Mid-Cap Opportunities Fund, Kotak Emerging Equity Fund, SBI Magnum Midcap Fund, and Invesco India Mid Cap Fund are also featured among the top performers. These funds showcase strong growth potential and are favored selections for investors looking to diversify into mid-cap stocks through mutual funds.

              Here is a compilation of the best-performing mutual funds in India within the mid-cap segment. Among these ten funds, seven have outperformed their respective benchmarks.

              Top-Performing Mid-Cap Mutual Funds in India

              These mid-cap mutual funds in India have delivered impressive returns over the specified period:

              • Quant Mid Cap Fund – 33.33%
              • Motilal Oswal Midcap Fund – 28.13%
              • Mahindra Manulife Mid Cap Fund – 27.21%
              • PGIM India Midcap Opportunities Fund – 27.12%
              • Edelweiss Mid Cap Fund – 25.89%
              • Baroda BNP Paribas Midcap Fund – 24.87%
              • HDFC Mid-Cap Opportunities Fund – 24.75%
              • Kotak Emerging Equity Fund – 24.22%
              • SBI Magnum Midcap Fund – 24.09%
              • Invesco India Mid Cap Fund – 24.08%
              Mutual Funds

              Mutual Funds Investing in Mid-Cap Companies

              Investing in mid-cap mutual funds is beneficial for portfolio diversification, targeting medium-sized companies poised for growth. While these funds offer attractive growth potential, they also entail higher risk compared to large-cap stocks but are relatively less risky than small-cap stocks.

              Read More: Benefits Of Filing Your Income Tax Return

              India's Equity Mutual Fund Inflows Decelerate in March: AMFI Report

              According to AMFI data released on April 10, inflows into India’s equity mutual funds slowed down in March, with small-cap funds witnessing outflows for the first time since September 2021. Meanwhile, investor interest in large-cap funds rebounded. Across all equity categories, inflows were observed except for small-cap funds, which experienced an outflow of ₹94 crore. Additionally, the monthly Systematic Investment Plan (SIP) inflow hit a new high of ₹19,270 crore in March, up from ₹19,187 crore in February. Total SIP contributions reached ₹2 lakh crore, marking a 28% increase from the previous year.

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