Decoded: When to book profits in Mutual Funds? How to reduce tax burden?

Changing mutual fund investment trends have reignited a key question among investors - When should one book profits in mutual funds? How can tax liabilities on these earnings be minimized?

Despite market volatility and shifting global sentiments, investor inflows into mutual funds remain resilient. However, April 2025 witnessed a 3.24% decline in equity mutual fund investments, while debt funds saw robust buying with a staggering inflow of ₹2.19 lakh crore. Notably, even amid market turbulence and heightened India-Pakistan tensions following the Pahalgam terror attack on April 22, investor confidence has largely remained intact.

 

These changing mutual fund investment trends have reignited a key question among investors — When should one book profits in mutual funds? And more importantly, how can tax liabilities on these earnings be minimized?

 

When Is the Right Time to Book Profits in Mutual Funds?

 

According to A.K. Nigam, Director at BPN Fincap, the basic rule of mutual fund profit booking is simple: whenever you achieve your investment goals — such as wealth creation or income generation — it's an appropriate time to redeem your funds. Additionally, if the market appears highly overvalued, that could signal a good time to book profits. If your mutual fund's performance significantly deviates from its benchmark or peer group, a reassessment of your investment is warranted.

 

Sushil Jain, CEO of PersonalCFO, adds that since mutual funds are typically long-term investments, your first portfolio review should ideally happen after 3 years, and then at least once every year. If there's a need for funds, it’s reasonable to book profits; otherwise, adhere to your asset allocation strategy.

 

Strategic Profit Booking Approaches

AK Nigam suggests avoiding lump-sum redemptions. Instead, go for partial withdrawals to maintain your investment while locking in gains. He advocates a target-based strategy — define a return target in advance, and once achieved, go ahead and book profits. He also emphasizes the importance of regular portfolio rebalancing to ensure your investments remain aligned with your risk profile and financial goals.

 

How to Reduce Tax Liability on Mutual Fund Profits?

Tax planning should go hand-in-hand with profit booking. According to Nigam, to benefit from long-term capital gains (LTCG) tax exemptions, investments should ideally be held for over one year. To further lower tax outgo, investors can sell underperforming assets and use those losses to set off gains — a technique known as tax-loss harvesting. Additionally, consider withdrawing from tax-efficient accounts or funds with minimal tax impact.

 

Jain advises investors to maximize gains and minimize taxes by adhering to their risk profile and investment time horizon. Always review the exit load before rebalancing. Check that equity-based profits do not exceed ₹1.25 lakh, the current tax-free limit, and ensure carry-forward losses are properly accounted for. Underperforming funds should be reviewed and losses booked if needed for tax adjustment purposes.

 

April Sees Dip in Equity, Surge in Debt Fund Inflows

As per the Association of Mutual Funds in India (AMFI), April 2025 showed mixed trends in mutual fund investments. Equity mutual funds saw a decline of 3.24%, down to ₹24,269 crore — the fourth consecutive month of drop in equity inflows. However, April also marked the 50th straight month of net positive inflows into equity funds.

 

On the other hand, debt mutual funds posted a massive comeback. After witnessing net outflows of ₹2.02 lakh crore in March, April saw inflows worth ₹2.19 lakh crore. Overall, the mutual fund industry attracted ₹2.77 lakh crore in net investments in April compared to net outflows of ₹1.64 lakh crore in March.

 

Thanks to these strong inflows, the Asset Under Management (AUM) for the mutual fund industry rose from ₹65.74 lakh crore to a record ₹70 lakh crore.

 

How tax is calculated on MF gain

 

Following the Union Budget 2025, the distinction between long-term and short-term capital gains continues to play a pivotal role—particularly for investors in mutual fund schemes. This classification directly influences the applicable tax rates when investors choose to redeem or sell their investments, making it essential for them to understand the tax implications tied to their holding period.

 

Mutual fund taxation in India is primarily determined by two factors. First,type of scheme (Equity-Oriented or Non-Equity-Oriented) and Holding Period (Short-Term or Long-Term), 

 

Equity-Oriented Mutual Funds (These schemes invest at least 65% of their assets in listed domestic equity shares)

 

Long-Term Capital Gains (LTCG)

  Applicable if units are held for more than 12 months

 

Tax Rate: 12.5% (subject to change for specified mutual funds)

 

Exemption may apply up to a certain limit as per prevailing tax laws

 

Short-Term Capital Gains (STCG) Applicable if units are redeemed before 12 months

 

Tax Rate: 20%

 

Non-Equity-Oriented Mutual Funds (These include debt funds, gold funds, international funds, etc.)

 

Long-Term Capital Gains (LTCG)

Applicable if units are held for more than 24 months

Tax Rate: 12.5%

 

Short-Term Capital Gains (STCG)

If redeemed before 24 months,

Taxed as per the investor’s income tax slab

 

Withholding Tax for Resident Investors (TDS)

 

A 10% Tax Deducted at Source (TDS) is applicable on all mutual fund income (capital gains or otherwise), for resident Indian investors

 

This applies uniformly to both equity and non-equity schemes, and to both long-term and short-term gains

 

Example: If a resident investor earns ₹1,00,000 in long-term capital gains from a mutual fund:

 

TDS of 10% (₹10,000) will be deducted at source

 

The investor will receive ₹90,000 as the net amount

 

The deducted amount will reflect in Form 26AS and must be reconciled while filing ITR

 

Disclaimer: Mutual fund investments are subject to market risks. Please consult your financial advisor before making any investment decisions.