Debt mutual fund taxation in FY26: How capital gain is taxed and when Section 87A rebate applies under old vs new regime

Tax rules for debt funds

I am 82 years old. In the last financial year (2024–25), I booked a profit of Rs 3 lakh on my debt mutual funds. I filed my ITR under the old tax regime and did not have to pay any tax since my total income was below the exemption limit of Rs 5 lakh. 

I understand that under the new tax regime for the financial year 2025–26, there is no tax liability for income up to Rs 12 lakh. Will I have to pay tax on redemption of my debt fund schemes if I choose the old tax regime? I am a bit confused about how debt funds are taxed under the old and new regimes.

Expert's Advice: If your debt funds were acquired before April 1, 2023 and holding period is more than 24 months, the profits on redemption during FY 2025–26 will be treated as long-term capital gains (LTCG) and taxed at a flat rate of 12.5 percent. The short term capital gain, where holding period is within 24 months, is taxed at the slab rate. However, if the funds were purchased on or after April 1, 2023, the profits will be treated as short-term capital gains (STCG), irrespective of the holding period, and taxed at your applicable income tax slab rate.

For the current financial year, there will be no tax liability if your total income does not exceed Rs 12 lakh under the new regime, owing to the rebate available under Section 87A. However, once your total income exceeds Rs 12 lakh, this rebate is not available. You will then have to pay tax on income exceeding Rs 4 lakh, which is the new exemption limit for all individual taxpayers under the new regime, regardless of age.

Under the new tax regime you will have to pay tax @ 12.50 percent on the first category of capital gains irrespective of the level of your overall income as rebate under section 87A is not available in respect of income on which tax is to be paid at special rate and not slab rate.

If you opt for old tax regime, you will be able to claim rebate even in respect of tax payable on debt funds acquired prior to 1st April 2023 provided the total income including the long term capital gains on such debt funds does not exceed five lakhs. Since you do not have income taxable under the head profits and gains of business, you can toggle between old and new tax regime as and when you want. So based on the composition and level of your income, you can opt for appropriate tax regime every year.

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