By Nick Investment · Updated 2026-10-28
Since April 2023, gains on most debt funds are taxed at your slab rate with no indexation. What that changes, what it doesn't, and how debt funds compare with FDs now.
Before April 2023, debt fund gains held for more than three years were taxed as long-term capital gains at 20% with indexation. Indexation let you raise your purchase cost by inflation before working out the gain, so the tax was often low. For people in the higher slabs, this made debt funds clearly better than FDs after tax.
The Finance Act, 2023 ended that for new purchases. For units of a 'specified mutual fund' bought on or after 1 April 2023, every gain is now treated as short-term, whatever the holding period. It is added to your income and taxed at your slab rate. There is no indexation.
In 2023 a specified mutual fund was one that kept no more than 35% in Indian shares. That caught pure debt funds, but also gold funds, international funds and many fund-of-funds.
From 1 April 2025 the definition was narrowed to funds that put more than 65% of their money in debt and money-market instruments (and funds that invest mainly in such funds). Gold funds, international funds and some hybrids caught by the earlier wording are now outside it. For those, gains on units held long enough are taxed as long-term capital gains at 12.5% without indexation. The holding period and rate depend on the fund type, so check before you sell.
Pure debt funds such as liquid, money-market, short-duration, corporate bond, banking and PSU and gilt funds remain specified funds. So do conservative hybrid funds, which hold only 10% to 25% in equity.
Units you already held before 1 April 2023 are not covered by the slab-rate rule. Their treatment was changed again by the July 2024 Budget: for sales from 23 July 2024, units held more than 24 months are taxed as long-term gains at 12.5% without indexation, and shorter holdings at your slab rate.
Because of this, it can make sense to redeem newer units first and keep older ones, where your needs allow. Your capital-gains statement from CAMS or KFintech shows the purchase date of each lot.
With the indexation advantage gone, the tax rate on debt fund gains and FD interest is now the same for most people: your slab rate. Some differences remain.
Every debt scheme publishes a Potential Risk Class (PRC) matrix, a SEBI-mandated grid showing how much interest-rate risk and credit risk the scheme is allowed to take. A fund in the lowest-risk cell is very different from one that can hold lower-rated bonds or long-dated government securities.
Read the PRC along with the riskometer and the portfolio in the monthly factsheet. Longer-duration funds can lose value when interest rates rise. Credit-risk funds can suffer if a company they lent to defaults.
Debt funds are often sold as 'safe'. Some are very low-risk; others are not. Before you invest, get clear answers to these:
Arbitrage funds hold hedged equity positions and are taxed as equity funds, so their gains after 12 months are long-term. Their returns tend to track short-term interest rates and can be low when markets are calm. They suit some people for short-term parking, but they are not a like-for-like replacement for an FD.
Conservative hybrid funds are sometimes suggested as a tax-saving swap for debt funds. Since they keep more than 65% in debt, they are still taxed at your slab rate. Balanced advantage and multi-asset funds vary: some are taxed like equity and some are not, depending on their equity level. The fund house states this in its documents.
Tax law changes often, and the Income-tax Act, 2025 has renumbered the sections from 1 April 2026. Check the current rules on the Income Tax Department website or with your CA before a large redemption.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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Nick Investment is an AMFI-registered Mutual Fund Distributor (ARN-112296). We are not a SEBI Registered Investment Adviser. We distribute regular plans and receive trail commission from the asset management companies, which is included in the scheme's expense ratio.