How are debt mutual funds taxed in India?

The rule changed, and it matters

Debt fund taxation was reshaped in recent years. For a specified debt fund, one investing more than 65% in debt and money market instruments, the entire gain is now added to your income and taxed at your slab rate, whatever the holding period, under Section 50AA. There is no long-term rate and no indexation.

For someone in a higher slab, this makes debt funds less tax-favoured than they once were. They can still make sense for stability, liquidity and diversification; the point is to choose them for those reasons, not for a tax edge that no longer exists.

Which funds this covers

From FY 2025-26 the definition narrowed. It now catches funds with more than 65% in debt and money market instruments, and funds of funds that put at least 65% into such funds. Funds in between, some hybrids, fall into the residual "other" category with its own treatment; see how mutual funds are taxed.

Please verify: the treatment of debt fund units acquired before 1 April 2023 follows older transitional rules and should be confirmed for a specific holding.

The risks worth naming

Tax aside, a debt fund is not a fixed deposit. Its value moves with interest rates, and it carries the credit risk of the bonds it holds. In a credit event a scheme may segregate the affected securities into a side portfolio. None of that is a reason to avoid debt funds; it is a reason to understand what you own. If you would like that explained against a specific fund, talk to us.