Have capital gains tax exemption rules for debt mutual funds changed in Budget 2026?

There will be no changes in how you pay income tax on your gains from debt mutual fund investments as Finance Minister Nirmala Sitharaman did not announce any change during her Budget 2026 speech today (Sunday, February 1, 2026).

No change in debt fund taxation rules means your debt fund investments will be taxed at slab rates and there will also be no change in the holding period for tax calculation.

Let’s go through what are the key debt mutual fund taxation rules, what have been the key changes in the recent past and how the past and present rules play a role in your tax outgo.

Debt mutual fund taxation (As per Gaurav Makhijani, managing partner and head of tax, Makhijani Gera & Associates LLP)

Type of mutual fund	Old rules (till July 22, 2024)	New rules (from July 23, 2024)
Debt mutual funds	Purchased on or before March 31, 2023 and sold before July 23, 2024: STCG taxed at slab rate if holding period is less than 36 months; LTCG taxed at 20% with indexation if holding period is more than 36 months. Purchased on or after April 1, 2023: Gains taxed at slab rate irrespective of holding period.	Purchased on or before March 31, 2023 and sold before July 23, 2024: STCG taxed at slab rate if holding period is less than 36 months; LTCG taxed at 20% with indexation if holding period is more than 36 months.

Taxability of debt mutual funds (As per Abhishek Soni, founder and CEO, Tax2Win)

As per the amendment related to the taxability of debt in the year 2023, specified mutual funds could no longer avail the benefit of indexation while calculating long-term capital gains. Therefore, debt mutual funds were to be taxed at applicable slab rates.

Taxability of debt mutual funds before April 1, 2023

Before April 1, 2023, the taxation of debt mutual funds was based on the holding period -

Short-term capital gains on debt mutual funds

If the holding period of a debt mutual fund was up to 36 months, gains on it were known as short-term capital gains (STCG). Such gains were added to other income and were taxed at applicable income tax slab rates.

Long-term capital gains on debt mutual funds

If a debt mutual fund was held for more than 36 months or sold only after 3 years of purchase, gains on it were known as long-term capital gains (LTCG).

LTCG and STCG Rates in 2023-24 and 2024-25 - comparison

Budget 2024 announced on July 23, 2024, brought significant changes in STCG and LTCG rates and holding periods of debt mutual funds.

Before Budget 2024, specified mutual funds (having more than 65% debt portion) were taxed at an investor’s income tax slab rates if the holding period was more than 36 months. However, after the Budget 2024, this holding period had been reduced to 24 months.

Product	Before July 23, 2024			After July 23, 2024
	Period of holding	Short Term	Long Term	Period of holding	Short Term	Long Term
Specified Mutual funds which has more than 65% in debt	> 36 months	Slab rate	Slab rate	> 24 months	Slab rate	Slab rate

How changed rules in Budget 2024 affected taxation on debt mutual funds

Soni illustrates it with an example showing-

Suppose a person invested Rs 10 lakh in FY 2017-18 in a debt mutual fund. The person sold the investment after three years in FY 2022-23 for Rs 20 lakh, resulting in a capital gain of Rs 10 lakh.

Particulars	FY	Cost Inflation Index (CII)	Amount (Rs.)
Investment made	2017-18	272	10,00,000
Sale	2022-23	331	20,00,000
Indexed cost of investment		(10,00,000 × 331 / 272)	12,16,912
Long-term capital gains (LTCG)			7,83,088
Tax payable (20% on LTCG)			1,56,618
Tax liability after changes in income-tax rules			Not applicable

Tax Liability after the changes in Income Tax Rules

Particulars	Financial year	Cost Inflation Index (CII)	Amount (Rs.)
Sale	2026-27	-	20,00,000
Less: Investment made	2023-24	-	-10,00,000
Short-term capital gain	-	-	10,00,000
Tax payable – 30% tax bracket	-	-	3,00,000
Tax payable – 20% tax bracket	-	-	2,00,000
Tax payable – 10% tax bracket	-	-	1,00,000

LTCG taxation before and after the amendment

Tax bracket	LTCG tax before amendment (Rs.)	LTCG tax after amendment (Rs.)
30% tax bracket	1,56,618	3,00,000
20% tax bracket	1,56,618	2,00,000
10% tax bracket	1,56,618	1,00,000

Soni says from the above example, it is clear that the changes in income tax rules will have a negative impact on the people falling under the 20%-30% tax bracket.