If you invested in debt mutual funds before April 1, 2023, and are planning to redeem them or have already redeemed them during FY 2025-26, understanding the tax rules is crucial before filing your Income Tax Return (ITR) for AY 2026-27.
The taxation of debt mutual funds underwent a significant change from April 1, 2023. While investments made on or after that date no longer enjoy the earlier long-term capital gains benefits, investments purchased before the rule change continue to receive grandfathered tax treatment, subject to certain conditions.
If you’ve sold or are considering selling debt fund investments bought before April 2023, this is the time to review how your gains will be taxed, what benefits may still be available, and how to report them correctly while filing your ITR for AY 2026-27.
What is the key difference in taxation between debt funds purchased before and after 1 April 2023?
There has been a significant shift in the taxation structure for debt instruments pre and post April 1, 2023. Earlier instruments held for more than 36 months were taxed as long-term capital gains (20% base rate) with the benefit of indexation.
Now this benefit of indexation is no longer there. In very simple terms, the benefit of indexation was an inflation adjustment. Also, now everything is taxed at a slab rate, and hence, the benefit of a concessional tax rate is also not available.
Documents to keep ready
Before filing ITR for AY 2026-27, investors should keep the following documents ready:
Capital gains statement from the mutual fund house.
Account statement showing purchase and redemption dates.
Consolidated Account Statement (CAS).
AIS and Form 26AS.
Bank account statements reflecting redemption proceeds.
Previous investment records, if required for verification.
How should gains be reported in ITR for AY 2026-27?
If you redeemed debt mutual fund units during FY 2025-26, the capital gains should be reported under Schedule CG (Capital Gains) using ITR-2 (for individuals without business income) or ITR-3 (for individuals with business income), said Sanjiv Malhotra, Senior Advisor – Head of Tax Practice at Shardul Amarchand Mangaldas & Co.
“While Long-term gains must be reported in Schedule 112A, Short-term gains covered under Section 111A (where Securities Transaction Tax or STT has been paid) are reported as consolidated figures in the respective sections of Schedule CG,” he further added.
Taxpayers can calculate capital gains on debt mutual funds in the same manner as earlier, i.e., if the debt fund was bought and sold by March 31, 2023.
“Essentially (and assuming the holding period is more than 36 months), you take the sale price and subtract the cost price (after adjusting the indexation factor). This gives you the long-term capital gains and thereon apply the applicable tax rate (i.e., 20%),” said Sanjiv Malhotra.
Taxpayers should:
Obtain the capital gains statement.
Verify redemption details.
Check acquisition dates carefully.
Determine whether grandfathering provisions apply.
Reconcile transactions with the Annual Information Statement (AIS).
The reporting requirements may differ depending on whether the gains are classified as short-term or long-term under the applicable provisions.
However, it is most important for the taxpayers to know which tax regime (old law or new law) is applicable to them. Also, it’s important to know that each SIP is a separate transaction for tax purposes.
Does the purchase date or the redemption date determine the applicable tax treatment for debt fund investments?
It is important to note that the old regime has been grandfathered, which means that it is still applicable for debt funds bought till March 31, 2023. While the purchase date is most relevant, as it determines whether the old law or the new law will be applicable.
Redemption date is also relevant to compute the period of holding, in case the old law applies (and the benefit of long-term capital gains is availed).
Further, if the purchase is after April 1, 2023, of a unit of a debt mutual fund, then, irrespective of the period of holding, the gains will be deemed as short-term capital gains.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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