Tax Implications of Investing in FDs, MFs, PMS and AIFs

How Different Investment Products Are Taxed in India – A Practical Guide Tax Implications of Investing in FDs, MFs, PMS & AIFs – A Practical Guide for Investors and Advisors (FY 2026-27) for Investors and Advisors (FY 2025-26)

The tax rates on equity, debt, PMS, and AIF investments remain unchanged for FY 2026-27. The LTCG rate of 12.5% and STCG rate of 20% on equity-oriented investments, as revised post July 23, 2024, continue to apply. All rates and thresholds mentioned in this article are current and applicable for FY 2026-27.

With the Union Budget 2025 revising TDS thresholds on Fixed Deposit interest and the July 2024 amendments significantly changing LTCG and STCG rates across asset classes, many investors are still working with outdated tax assumptions. This guide consolidates the current tax treatment across Fixed Deposits, Mutual Funds, PMS, and AIFs  fully updated for FY 2026-27.

“Taxability” is one of the important aspects of investment, however, it comes in to the picture when investor books profit / redeem the investment. Though Taxation part should not be the only deciding factor, it is considerable as it affects the real (net) returns on investment.

In this article, we are going to understand the taxation rules for different investment products.

Taxation on Fixed Deposits:

Interest income from Bank Fixed Deposits is fully taxable. It gets added to your total annual income and get taxed as per your slab rates applicable. It is to be shown under the head ‘Income from Other Sources’ in your Income Tax Return.

Please note that while crediting the interest, Banks deduct tax at source (TDS), if the amount of interest is beyond certain amount. In Budget 2025, the limit is increased for F.Y.2025-26. It is increased up to Rs. 50,000/- for individuals other than a senior citizen (earlier the limit was Rs. 40,000/-). In the case of senior citizen, the threshold is Rs. 1,00,000/- (earlier the limit was Rs. 50,000/-).

The total interest amount will be taxable; however, the above-mentioned limits are just for TDS purpose. The rate of TDS is 10% if PAN number is available.

Taxation on Mutual Fund:

Now here comes the little complex part to understand. In this blog we will only cover “Equity” Asset Class.

Taxation on Equity Funds:

Equity Mutual funds are those funds who invest at least 65% of total money (AUM of that particular fund) in stocks of Indian Listed Companies. Large-cap, Mid-cap, and Small-Cap, thematic funds, Value Funds as well as Aggressive Hybrid, Equity Saving, and Arbitrage Funds are all classified under “Equity” category.

The profit you earn form Equity can be divided in to two parts, Long-Term & Short-Term.

If you sell the Equity MF units after holding it for more than 12 months, it treats as “Long-Term”. The long-term capital gains (LTCG) tax rate is 12.50%. However, it is only applicable to capital gains (profits) exceeding Rs 1.25 lakh.

On the contrary, if you sell the Equity MF units within the period of 12 months, it is considered as “Short-Term”. The tax rate is 20% for short-term capital gains (STCG).

Tax on Equity-Linked Savings Scheme (ELSS)

Mutual Funds Schemes under Equity Linked Savings Scheme (ELSS) category invest at least 80% of their net assets in equities. If your goal is to reduce taxes; this is the scheme you want. Money invested in an ELSS is deductible up to ₹1.5 lakh u/s 80C of the Income Tax Act, 1961 (under Old Regime only). Remember that section 80C itself has a cap of ₹1.5 lakhs.

ELSS Schemes has a minimum three-year lock-in period. It means, once you invest in ELSS category, you will not be able to withdraw your money for 3 years. Hence, profits earned from ELSS category will attract LTCG tax and not STCG tax. In case of emergency, you can avail a loan against it.

Taxation on PMS (Portfolio Management Service):

PMS can invest in Equity & Debt, both the asset category.

Listed Equity:

• Short-term Capital Gains: Tax rate applicable is 20% (if units sold within one year). (If assets sold on or after 23rd July 2024)
• Long-term Capital Gains: Tax rate applicable is 12.5% (without indexation), applicable on gains exceeding ₹1.25 lakh in a financial year. (If assets sold on or after 23rd July 2024)

Debentures and Bonds:

Gains from Debt Category (Debentures & bonds) can be categorised in to three parts i.e. Interest, STCG & LTCG.

• Interest Income is taxed as per your individual tax slabs.
• STCG is taxed according to your applicable income tax slab if held for less than 12 months.
• LTCG is taxed at 20% with indexation benefits provided the bonds are held for more than 12 months.

Taxation on AIF (Alternative Investment Fund)

Category 1 & 2 AIF emphases on Unlisted securities, such as bonds or equity, come with specific tax implications. They provide pass-through taxation, which means that depending on the type of income received, investors pay taxes directly.

• Short-term capital gains (STCG) are taxed according to the investor’s applicable income tax slab. Long-term capital gains (LTCG) are taxed at a flat rate of 12.5%.
• Any interest generated from unlisted securities is taxed at the investor’s personal income tax rate.
• Dividend income is taxed based on the individual’s total dividend income for the year.

Category 3 AIFs emphases on listed securities, such as equities and derivatives, are typically taxed at the fund level. Here’s a breakdown of the key tax implications:

• Short-term capital gains (STCG) are taxed at 20%. Long-term capital gains (LTCG) are taxed at 12.5% on profits.
• Income generated from derivatives is treated as business income and is taxed according to the investor’s applicable income tax slab.
• Dividend income is taxed based on the investor’s applicable tax slab.

Which Investment Structure Is Most Tax-Efficient for Your Income Slab?

For investors and CAs comparing investment options for clients, the choice of instrument can significantly impact post-tax returns depending on the client’s income slab. The table below illustrates how the same ₹5 lakh LTCG gain is taxed differently across investment products for investors in the 20% and 30% tax slabs.

Assumption: ₹5,00,000 long-term capital gain, all assets held for more than 12 months.

Key takeaway: For investors in the 30% slab, Fixed Deposits are significantly less tax-efficient than Equity MF or PMS for long-term gains. A ₹5 lakh FD gain results in ₹1,50,000 in tax versus ₹46,875 for the same gain in an Equity MF held for over 12 months a difference of over ₹1 lakh on a single redemption. For CAs and financial advisors reviewing client portfolios, this gap becomes material when clients hold large FD positions that could be partially reallocated to more tax-efficient instruments without compromising on safety or liquidity objectives.

Tax Efficiency of AIF and PMS

Depending on the investor’s tax status and the investment objective, both PMS and AIFs can provide tax efficiency. Due to the reduced LTCG tax rate, PMS investments may be more tax-efficient for investors with lower income tax slab rates.

However, because they may be eligible for tax pass-through status and other tax advantages, AIFs might be more tax-efficient for investors with higher income tax rates. In the end, an investor’s overall financial objectives, risk tolerance, and tax status should all be carefully considered when assessing the tax consequences of PMS and AIF investments.

Conclusion:

The taxation is not as complex as it may seem. The taxation mostly depends on the holding duration and the asset category (whether the scheme is debt- or equity-oriented). Hence, make your decision based on your financial objectives, risk capacity, returns expectations and consult your financial advisor.

For CAs and financial advisors reviewing client portfolios, understanding the interaction between investment structure and client tax slab is increasingly important as HNIs diversify across MF, PMS, and AIF simultaneously. A holistic review of the client’s entire investment portfolio – not just individual instruments is essential to ensure that the overall tax outflow is optimized without compromising on their financial goals or risk profile.

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