Edition: Tax year 2026-27 (1 April 2026 to 31 March 2027). Last checked against published rules in October 2026. Tax law changes through budgets and notifications — confirm the current position before you act.
Tax is one input into an investment decision, not the reason for it. Still, two investments with the same pre-tax return can leave you with very different amounts, so it helps to understand the broad rules. This primer covers how common investments are taxed for resident individuals. It is a map, not a tax opinion.
A new Act, a new vocabulary
The Income-tax Act, 2025 came into force on 1 April 2026. Its stated aim is simplification: fewer sections, clearer language, and a single "tax year" in place of the old pairing of "previous year" and "assessment year". The first tax year under the new law is 2026-27.
For investors, the practical change is mostly about references. Section numbers you may remember from older articles have changed, and some forms have been renamed or merged. We avoid section numbers here; if you need them, ask a tax professional or check the Income Tax Department's official resources.
Listed shares and equity-oriented mutual funds
A fund is generally treated as equity-oriented for tax if it keeps at least 65% of its assets in shares of Indian companies. For these funds and for listed shares:
- Held for more than 12 months: gains are long-term. Long-term gains up to ₹1.25 lakh a year in aggregate are exempt; gains above that are taxed at 12.5%.
- Held for 12 months or less: gains are short-term and taxed at 20%.
Surcharge and cess apply on top where relevant. For illustration, an investor with ₹3 lakh of long-term equity gains in a year would pay 12.5% on ₹1.75 lakh — ₹21,875 before cess and any surcharge.
ELSS funds follow the same capital gains rules, with a three-year lock-in on each investment.
Debt mutual funds
Funds that invest more than 65% in debt and money-market instruments are taxed differently:
- Units bought on or after 1 April 2023: gains are added to your income and taxed at your slab rate, regardless of how long you hold them. There is no indexation.
- Units bought before 1 April 2023: gains on units held for more than 24 months are taxed at 12.5% without indexation; shorter holdings are taxed at your slab rate.
Hybrid and other funds that are neither equity-oriented nor predominantly debt generally sit in between: gains after 24 months are treated as long-term and taxed at 12.5%, and shorter-term gains at slab rates. A fund's scheme documents describe how its units are treated, and the treatment depends on the portfolio it actually holds.
Dividends and IDCW
IDCW payouts from mutual funds and dividends from shares are added to your income and taxed at your slab rate. Fund houses and companies deduct TDS at 10% once payouts to you cross ₹10,000 in a year. Choosing the growth option instead defers tax until you redeem, when the gain is taxed as a capital gain.
Fixed deposits
Interest from fixed deposits is taxed at your slab rate. A point that surprises many depositors: interest is generally taxable as it accrues each year, even in a cumulative FD that pays everything at maturity.
Banks deduct TDS once interest across your deposits with that bank exceeds ₹50,000 in a year, or ₹1 lakh for senior citizens. The rate is 10% when your PAN is on record and higher without it. If your total income is below the taxable limit, you can give the bank a self-declaration so that tax is not deducted. From 1 April 2026, a single Form 121 replaced the older Forms 15G and 15H for this purpose.
Bonds and debentures
- Interest (coupons) is taxed at your slab rate.
- Listed bonds sold after more than 12 months: long-term gains are taxed at 12.5% without indexation; shorter holdings at slab rates.
- Unlisted bonds and debentures: gains are taxed at your slab rate, whatever the holding period.
Old regime or new regime
The new tax regime is the default; the old regime remains available if you opt for it. The choice matters to investors because most deductions — including the familiar ₹1.5 lakh bucket that covers ELSS, PPF and life-insurance premiums, and the deduction for health-insurance premiums — apply only under the old regime. Under the new regime very few deductions are available; employer contributions to NPS are a notable exception.
Which regime suits you depends on your income and the deductions you would genuinely use. Buying a product for a deduction you cannot claim is a common and avoidable mistake.
NPS at exit
NPS withdrawal rules for non-government subscribers changed in December 2025, allowing a larger share of the corpus to be taken as a lump sum at normal exit, with the remainder used to buy an annuity. Annuity income is taxed at your slab rate. The lump sum has its own tax conditions; check the current provisions before planning around a specific figure.
Withdrawals, switches and SWPs
- Each SWP instalment is a redemption. Only the gain portion of each withdrawal is taxed, under the rules for that fund type. Units are treated as redeemed in first-in, first-out order.
- A switch is a sale. Moving from one scheme to another — including from a regular plan to the direct plan of the same scheme — is a redemption followed by a purchase. It can trigger capital gains tax and an exit load.
At a glance
| Investment | What is taxed | Treatment for tax year 2026-27 |
|---|---|---|
| Listed shares, equity-oriented funds | Capital gains | Over 12 months: 12.5% above ₹1.25 lakh a year. Up to 12 months: 20% |
| Debt funds (units bought from 1 April 2023) | Capital gains | Slab rate, any holding period |
| Fixed deposits | Interest | Slab rate; TDS above the annual threshold |
| Listed bonds | Interest and gains | Interest at slab. Gains over 12 months: 12.5% |
| Unlisted bonds and debentures | Interest and gains | Slab rate |
| IDCW and dividends | Income | Slab rate; TDS above ₹10,000 a year |
Good habits
- Download your capital gains statements each year; they make filing and checking much easier.
- Check holding periods before you redeem. A few weeks can change the rate that applies.
- Remember that TDS is not your final tax. If your slab rate is higher than the rate deducted, the balance is payable when you file.
- Treat tax as one lens alongside risk, liquidity and your goals. Our tax-planning page frames it that way.