Debt Mutual Funds Taxation: Short-Term Capital Gains Rules Explained

• Government bonds
• Corporate bonds
• Treasury bills
• Money market instruments

They are less risky than equity funds and offer more stable returns. But their tax rules are different from equity mutual funds.

What is Short-Term Capital Gain (STCG) in Debt Funds?

If you sell or redeem a debt mutual fund within 36 months (3 years) from the date of purchase, the profit you make is called a short-term capital gain (STCG).

Short-Term Taxation Rules for Debt Mutual Funds

Before April 1, 2023

After April 1, 2023 (New Rule)

Important Update:
From April 1, 2023, all capital gains from most debt mutual funds (that have less than 35% equity exposure) are treated as short-term, even if you hold them for more than 3 years. You don’t get indexation benefits anymore.

How is Tax Calculated on STCG in Debt Funds?

You pay tax based on your income slab:

There is no special rate for debt fund gains. It’s the same as your income tax.

Sample Example (Tax Report)

Example:

• You invest ₹1,00,000 in a debt fund in Jan 2024
• You redeem it in Jan 2025 for ₹1,10,000
• Your gain = ₹10,000
• You fall in the 20% income tax slab

Tax you’ll pay = ₹10,000 × 20% = ₹2,000

You have to report this in your income tax return under “Capital Gains” and pay it before the due date.

Types of Debt Funds That Are Affected

The following are affected by short-term taxation after the 2023 rule:

• Liquid funds
• Corporate bond funds
• Short-duration funds
• Banking & PSU funds
• Gilt funds (unless equity exposure > 35%)

Tax Filing and Declaration

• Gains must be declared in your ITR (Income Tax Return)
• STCG from debt funds go under Schedule CG
• You can’t set off these gains against salary or other income
• You can use capital losses (if any) to reduce tax liability

FAQs

Q1. Are debt mutual funds now taxed like fixed deposits?

Yes. After April 2023, taxation is similar. Your entire gain is taxed as per your slab rate.

Q2. Is indexation benefit available for debt funds?

No. Indexation benefit has been removed for most debt funds after April 2023.

Q3. Is there any way to save tax on debt funds?

You can invest through Systematic Transfer Plans (STPs) or go for hybrid funds with equity exposure over 35%, which are taxed like equity.

Q4. What if I have losses in debt funds?

You can set off short-term capital losses against other short-term or long-term gains.

Summary

The tax on short-term capital gains from debt mutual funds has become stricter. Now, holding for the long term doesn’t reduce your tax unless your fund has significant equity exposure. Every gain is taxed based on your income slab.

Planning well can help you optimize returns and reduce tax burden.