Taxation of Mutual Funds: The Three-Bucket Framework for FY 2025-26
Mutual fund taxation for FY 2025-26 operates as a three-bucket system, determined by what a fund actually invests in. Bucket A — equity-oriented funds (≥65% domestic equity) — use a 12-month holding period, with LTCG at 12.5% above a ₹1.25 lakh annual exemption and STCG at 20%. Bucket B — “Specified Mutual Funds” (debt-oriented, >65% debt/money market) — are always taxed at slab rate as deemed short-term gains, regardless of holding period. Bucket C — everything else, including 35–65% equity hybrid funds and, importantly, Gold/Silver ETFs/FoFs and international FoFs from FY 2025-26 onwards (a recent and favourable reclassification from Bucket B) — use a 24-month holding period with 12.5% LTCG (no exemption threshold) and slab-rate STCG. This guide also covers IDCW taxation as slab-rate income (with the Section 194K TDS threshold recently increased from ₹5,000 to ₹10,000), the FIFO principle’s interaction with SIPs/SWPs/STPs, equity grandfathering, loss set-off rules across buckets, and where to find Capital Gains Statements and CAS for filing.