Published 21 October 2026
An investor who has held a debt fund for five years can still find that the whole gain is short-term and taxed at slab rates. Since 1 April 2023, holding period does not matter for some investments. Section 50AA of the 1961 Act (section 76 of the 2025 Act) deems the gain short-term whatever the holding. What section 50AA covers has changed twice, and the definition that matters most, “Specified Mutual Fund”, was rewritten for assessment year 2026-27. This guide explains which investments are caught, from which date, and how the rest are taxed.
Which Act applies
- Transfers, redemptions and maturities up to 31 March 2026 fall under section 50AA of the Income-tax Act, 1961.
- From 1 April 2026 they fall under section 76 of the Income-tax Act, 2025, from tax year 2026-27. The repeal and savings provision is section 536.
What section 50AA catches
Section 50AA, as substituted by the Finance (No. 2) Act, 2024 with retrospective effect from 23 July 2024, applies where the capital asset:
“(a) is a unit of a Specified Mutual Fund acquired on or after the 1st day of April, 2023 or a Market Linked Debenture; or (b) is an unlisted bond or an unlisted debenture which is transferred or redeemed or matures on or after the 23rd day of July, 2024”.
Section 76(2) of the 2025 Act has the same three categories.
For any of them, the gain on transfer, redemption or maturity is the consideration less the cost and the transfer expenses. It is “deemed to be the capital gains arising from the transfer of a short-term capital asset”. The opening words, “Notwithstanding anything contained in clause (42A) of section 2 or section 48”, displace both the holding period and indexation. No deduction is allowed for securities transaction tax (proviso to section 50AA; section 76(4)).
There is no special rate. The gain is added to total income and taxed at the person’s slab rate.
Three categories, three dates
| Asset | Caught when |
|---|---|
| Unit of a Specified Mutual Fund | Acquired on or after 1 April 2023, whenever sold |
| Market-linked debenture | Any MLD, whenever acquired |
| Unlisted bond or unlisted debenture | Transferred, redeemed or maturing on or after 23 July 2024, whenever acquired |
A market-linked debenture is “a security by whatever name called, which has an underlying principal component in the form of a debt security and where the returns are linked to market returns on other underlying securities or indices”, and includes anything SEBI classifies or regulates as one (Explanation (i); section 76(5)(a)).
“Specified Mutual Fund”: the definition changed for 2025-26
The original definition. Section 50AA was inserted by the Finance Act, 2023 with effect from 1 April 2024 (assessment year 2024-25). It defined a Specified Mutual Fund as one “where not more than thirty five per cent of its total proceeds is invested in the equity shares of domestic companies”. The test looked only at domestic equity. A fund holding gold, foreign shares or a mix with little Indian equity was a Specified Mutual Fund even though it held no debt at all.
The substituted definition. The Finance (No. 2) Act, 2024 substituted clause (ii) of the Explanation with effect from 1 April 2026, that is, from assessment year 2026-27, which covers transfers in financial year 2025-26. A Specified Mutual Fund now means:
- (a) a mutual fund “which invests more than sixty-five per cent of its total proceeds in debt and money market instruments”; or
- (b) a fund “which invests sixty-five per cent or more of its total proceeds in units of a fund referred to in sub-clause (a)”.
The percentage is computed on the annual average of daily closing figures. “Debt and money market instruments” includes anything SEBI classifies or regulates as such. Section 76(5)(b) of the 2025 Act uses the same test.
The new test is a positive test of debt exposure, not a negative test of Indian equity. Its effect on different funds bought on or after 1 April 2023:
| Fund (units acquired on or after 1 April 2023) | Old test (to 2024-25) | New test (2025-26 onwards) |
|---|---|---|
| Debt fund, liquid fund, gilt fund | Specified | Specified |
| Fund of funds holding 65 per cent or more in debt funds | Specified | Specified |
| Gold ETF or gold fund of funds; international equity fund | Specified (domestic equity not more than 35 per cent) | Not specified (debt not more than 65 per cent) |
| Hybrid fund with, say, 30 per cent Indian equity, 30 per cent gold and 40 per cent debt | Specified | Not specified |
| Conservative hybrid with 25 per cent equity and 75 per cent debt | Specified | Specified |
A fund that is no longer specified is taxed on the ordinary rules below. For a sale in financial year 2025-26, the question is whether the fund meets the new definition. The fund house’s disclosure of its asset allocation is the practical source of the percentages.
Everything outside section 50AA
Units and bonds not caught by section 50AA follow the normal rules.
- Holding period. Listed securities, including listed units such as exchange-traded funds and listed bonds, are long-term after 12 months. Unlisted units, such as ordinary mutual fund units bought from the fund house, are long-term after 24 months (section 2(42A) and its proviso; section 2(101)).
- Short-term gains are taxed at slab rates. Section 111A is confined to equity shares, equity-oriented funds and business trust units.
- Long-term gains are taxed at 12.5 per cent for transfers on or after 23 July 2024 (section 112(1); section 197). Indexation is no longer available. The second proviso to section 48 is now limited to transfers “which takes place before the 23rd day of July, 2024”. The fourth proviso had already denied indexation to bonds and debentures, other than capital indexed bonds and sovereign gold bonds. Under the 2025 Act, indexation survives only in the land and building comparison in section 197(3).
So a debt fund unit bought before 1 April 2023 is outside section 50AA. If held for more than 24 months, it gives a long-term gain at 12.5 per cent without indexation. A gold ETF unit bought in 2024 and sold in 2025-26 after more than 12 months gives a long-term gain at 12.5 per cent under the new definition. Under the old one it was short-term.
Losses
A loss under section 50AA is a short-term capital loss. It can be set off against any capital gain, short or long, in the same year, and carried forward for eight years (section 74; section 111). It cannot be set off against salary or other heads. Carry forward requires a return filed by the due date (section 80; section 121).
Income distributed by a debt fund (the IDCW option) is not a capital gain. It is taxed as income from other sources.
What to have ready
- The mutual fund capital gains statement from the registrar or fund house. It must show the purchase date of each lot, since 1 April 2023 is the dividing line.
- The fund’s scheme classification and asset allocation for the year of sale, from the fund’s factsheet or annual disclosure. This is the basis for the 65 per cent test.
- Contract notes or demat statements for listed bonds, ETFs and market-linked debentures.
- Redemption or maturity advice for unlisted bonds and debentures.
- The AIS, which reports redemptions (see Reconciling AIS, TIS and Form 26AS).
Reporting, due date and corrections
In the ITR-2 and ITR-3 notified for assessment year 2026-27, Schedule CG has no separate line for section 50AA. A short-term gain under section 50AA, including on a Specified Mutual Fund unit, falls in item A5, “From sale of assets other than at A1 or A2 or A3 or A4 above”. It is then taxed at the applicable (slab) rate. A long-term gain on a listed bond or debenture goes in item B2, “listed securities (other than a unit) or zero coupon bonds as per Section 112(1)”. A long-term gain on units goes in the item for other assets (B8). See Reporting Capital Gains in the Return.
Tax on these gains forms part of advance tax (see Advance Tax and Self-Assessment Tax). The return is due by the section 139(1) date and is then verified (see E-Verifying a Return). A gain wrongly reported as long-term can be corrected by a revised return, or later by an updated return. An updated return cannot be used to reduce tax already returned.
Summary
- Fix the Act by date of transfer: section 50AA to 31 March 2026, section 76 from 1 April 2026.
- Section 50AA deems the gain short-term, with no indexation, for three assets: Specified Mutual Fund units acquired on or after 1 April 2023, any market-linked debenture, and unlisted bonds or debentures transferred or redeemed on or after 23 July 2024.
- For assessment year 2026-27 onwards, a Specified Mutual Fund is one with more than 65 per cent in debt and money market instruments, or a fund with 65 per cent or more in such funds. The old 35 per cent domestic-equity test no longer applies.
- Gold, international and some hybrid funds have left section 50AA as a result. Their gains follow the 12-month or 24-month rule and the 12.5 per cent long-term rate.
- Debt units bought before 1 April 2023 are taxed on the normal rules, without indexation for transfers from 23 July 2024.
- Report section 50AA gains in Schedule CG item A5, at slab rates.
The next guide, Buybacks, Bonus Shares and Splits, covers corporate actions that change cost, holding period or the head of income.