Debt Mutual Fund Tax Under Section 76 for Tax Year 2026-27
- What section 76 says
- Which funds are “Specified Mutual Funds”
- Three categories of fund, three tax outcomes
- Units bought before 1 April 2023
- Worked example 1: the 30% slab investor
- Worked example 2: slab taxation can help a lower earner
- Other points
- Year labels
- Where this fits
If you bought units of a debt mutual fund on or after 1 April 2023, the gain on selling or redeeming them is always short-term, however long you hold them. Section 76 of the Income-tax Act, 2025 does this for units of a “Specified Mutual Fund”: one that invests more than 65% of its money in debt and money market instruments. The gain is added to your income and taxed at your slab rate, with no indexation and no 12.5% long-term rate. Units bought before 1 April 2023 still follow the normal holding-period rules. Held for more than 24 months, they give long-term gains taxed at 12.5%.
What section 76 says
- Section 76(1) applies “irrespective of anything contained in section 2(101) or section 72”. It treats gains on transfer, redemption or maturity of the listed assets as short-term capital gains.
- Section 76(2) lists those assets:
- units of a Specified Mutual Fund acquired on or after 1 April 2023;
- Market Linked Debentures;
- unlisted bonds and debentures transferred, redeemed or maturing on or after 23 July 2024.
- Section 76(3) computes the gain as sale or redemption value, minus cost of acquisition, minus expenses incurred wholly and exclusively for the transfer.
- Section 76(4) disallows any deduction for securities transaction tax.
Which funds are “Specified Mutual Funds”
Section 76(5)(b) covers two kinds of fund:
- a mutual fund that invests more than 65% of its total proceeds in debt and money market instruments;
- a fund that invests 65% or more of its total proceeds in units of such a fund, which covers most debt fund-of-funds.
The percentages are measured as the annual average of daily closing figures. “Debt and money market instruments” includes anything SEBI classifies or regulates as such.
In practice this catches liquid, overnight, money market, gilt, corporate bond, banking and PSU, short- and medium-duration funds, and debt index funds. Debt ETFs meeting the 65% test are caught too.
Three categories of fund, three tax outcomes
| Fund type (units bought on or after 1 April 2023) | Holding period rule | Short-term gain | Long-term gain |
|---|---|---|---|
| Specified Mutual Fund (more than 65% debt) | Always short-term (section 76) | Slab rate | Not possible |
| Equity-oriented fund (at least 65% listed domestic equity) | 12 months | 20% (section 196) | 12.5% above ₹1.25 lakh (section 198) |
| Neither, for example a fund with 40% to 65% in debt | 24 months; 12 months if the units are listed | Slab rate | 12.5%, no indexation (section 197) |
Check the fund’s asset allocation, not its name. A “balanced” or “hybrid” label says nothing about which side of the 65% lines the fund actually sits.
Units bought before 1 April 2023
Section 76(2)(a) applies only to units acquired on or after 1 April 2023. Older debt fund units are ordinary capital assets:
- Unlisted units held for more than 24 months are long-term under section 2(101).
- Long-term gains are taxed at 12.5% under section 197(1), with no indexation. The indexation option in section 197(3) is limited to land and buildings acquired before 23 July 2024.
- Units held for 24 months or less give short-term gains taxed at slab rates.
Worked example 1: the 30% slab investor
Rahul pays tax at 30% under the new regime. In tax year 2026-27 he redeems two debt fund holdings, each with a gain of ₹5,00,000:
| Units bought in 2024 | Units bought in 2021 | |
|---|---|---|
| Rule | Section 76: short-term | Held over 24 months: long-term under section 197 |
| Tax rate | 30% slab | 12.5% |
| Tax | ₹1,50,000 | ₹62,500 |
| Cess at 4% | ₹6,000 | ₹2,500 |
| Total | ₹1,56,000 | ₹65,000 |
Illustrative; surcharge ignored.
Many investors with pre-2023 units are effectively holding a lower-taxed asset. Redeeming and reinvesting moves the money into section 76 treatment.
Worked example 2: slab taxation can help a lower earner
Because section 76 gains are taxed at slab rates, they are part of income taxed under section 202(1). That means the new-regime rebate under section 156(2) can apply to them. Gains taxed under section 196 get no rebate.
Sunita is a resident on the new regime, with total income of ₹11,00,000 after the standard deduction. That includes a ₹2,00,000 gain:
| Gain from a debt fund (section 76) | Short-term gain on listed shares (section 196) | |
|---|---|---|
| Slab tax on income | ₹50,000 on ₹11 lakh | ₹30,000 on ₹9 lakh of other income |
| Tax on the gain | Included above | 20% × ₹2,00,000 = ₹40,000 |
| Rebate under section 156 | ₹50,000 (income within ₹12 lakh) | ₹30,000, limited to slab tax by section 156(3) |
| Tax payable before cess | Nil | ₹40,000 |
Other points
- Tax only on redemption. A capital gain is charged in the tax year of transfer. Growth-option units create no tax until you redeem or otherwise transfer them, unlike fixed deposit interest, which is usually taxed year by year.
- Losses. A loss under section 76 is a short-term capital loss. Section 108(2)(a) lets it be set off against any capital gain in the year.
- Surcharge. Section 76 gains are not taxed under sections 196, 197 or 198, so the 15% surcharge cap on capital gains does not apply to them. At high incomes the normal surcharge rates apply.
- IDCW payouts. Income distributions are taxed as income from other sources. From tax year 2026-27, section 93(2), as substituted by the Finance Act, 2026, allows no deduction against them.
Year labels
This page covers redemptions on or after 1 April 2026 under the Income-tax Act, 2025. Redemptions in FY 2025-26 belong to AY 2026-27 under the Income-tax Act, 1961, where the corresponding rule was section 50AA.
Where this fits
- Fixed deposit or debt fund after tax: FD vs debt mutual fund
- Compute a gain: capital gains calculator
- Equity funds for comparison: tax on equity shares and equity funds
- Using a loss: capital loss set-off and carry forward
Sources. Income-tax Act, 2025, sections 2(101), 76, 108, 156, 196, 197, 198 and 202, Gazette of India, 21 August 2025. Finance Act, 2026, sections 3(4) and 44, Gazette of India, 30 March 2026.