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nism-series-va-section-50aa-debt-mutual-fund-slab-taxation[ MUTUAL FUND DISTRIBUTORS ]

How are capital gains arising from the redemption of units of a 'Specified Mutual Fund' (a debt fund investing not more than 35% in domestic equities, acquired on or after April 1, 2023) taxed in the hands of an investor?

[ A ]Taxed at 20% with indexation benefit after a 36-month holding period.

[ B ]Taxed at a flat concessional rate of 12.5% after 24 months.

[ C ]Deemed to be Short-Term Capital Gains (STCG) and taxed at the investor's applicable marginal income tax slab rate, regardless of the holding period.[ CORRECT ]

[ D ]100% tax-exempt under Section 11 (the erstwhile Section 10(23D)).

Takeaway

Option C is correct: Deemed to be Short-Term Capital Gains (STCG) and taxed at the investor's applicable marginal income tax slab rate, regardless of the holding period.

Derivation

Section 76 of the Income-tax Act, 2025 (the erstwhile Section 50AA of the Income-tax Act, 1961) defines a 'Specified Mutual Fund' by an equity ceiling, not a debt floor: any scheme investing not more than 35% of its assets in domestic equity shares, acquired on or after 1 April 2023, falls under this provision. Once classified, the law deems every gain on redemption to be short-term — the holding period is irrelevant, so a unit sold after ten years is treated identically to one sold after ten days. This was a deliberate 2023 policy shift: previously, debt funds got 20% LTCG with indexation after 36 months, which let investors shelter fixed-income-like returns behind capital gains treatment. Section 76 closes that gap by taxing the entire gain at the investor's slab rate with indexation fully withdrawn.

Why the others fail

A — Taxed at 20% with indexation benefit after a 36-month holding period.

20% indexed LTCG after 36 months was the pre-2023 debt fund rule; the Finance Act 2023 withdrew indexation entirely for Specified Mutual Funds regardless of how long units are held.

B — Taxed at a flat concessional rate of 12.5% after 24 months.

12.5% without indexation is the Section 197 rate for other long-term assets; Section 76 specifically overrides this by deeming the gain short-term from day one.

D — 100% tax-exempt under Section 11 (the erstwhile Section 10(23D)).

Section 11 of the Income-tax Act, 2025 (the erstwhile Section 10(23D) of the Income-tax Act, 1961) exempts the fund's own income from tax at the scheme level; it does not extend to the capital gains an investor books when redeeming units.