What you really earn after taxes natters more than fund hype

January 10, 2026 Finance Talk Valli Sarvani

Many investors judge mutual funds only by absolute returns.

However, this approach misses the most important factor in investing.

Taxes decide how much money finally reaches your bank account.

In mutual funds, long-term capital gains (LTCG) tax plays a decisive role. Yet, for many retail investors, tax remains an afterthought.

The belief is simple. If returns look strong, the investment has succeeded.

But investing does not end when markets rise. It ends when you redeem units and keep the money. The gap between gross returns and net returns defines real wealth creation.

This difference becomes critical because mutual fund taxation varies sharply across categories. Equity, debt, and hybrid funds follow different tax rules. Therefore, identical returns can produce very different outcomes.

For equity mutual funds, LTCG applies after a holding period of 12 months. Gains above ₹1.25 lakh in a financial year are taxed at 12.5 per cent, plus surcharge and cess. Gains up to ₹1.25 lakh remain tax-free.

The same tax rule applies to equity-oriented funds of funds, overseas equity funds, listed bonds, and gold or silver mutual funds.

In contrast, debt mutual funds follow a different regime. All gains are taxed at the investor’s income slab rate. The holding period no longer provides tax relief.

This distinction directly affects net returns.

Consider an investor who puts ₹10 lakh into an equity mutual fund for three years. Assume the fund delivers a 12 per cent annual return. The investment grows to about ₹14.05 lakh.

The gross gain is ₹4.05 lakh. Out of this, ₹1.25 lakh is exempt. The remaining ₹2.8 lakh is taxed at 12.5 per cent. The tax works out to roughly ₹35,000. The investor finally receives around ₹13.7 lakh.

Now compare this with a debt mutual fund delivering the same return. The corpus again reaches ₹14.05 lakh. However, the entire ₹4.05 lakh gain is taxed at slab rates.

For an investor in the 30 per cent tax bracket, the tax exceeds ₹1.2 lakh. The post-tax value falls to nearly ₹12.8 lakh. The difference is close to ₹90,000, driven only by taxation.

Over longer periods, this gap widens further. Compounding magnifies tax efficiency. Hence, equity funds often outperform debt funds on a post-tax basis for high-income investors.

Behaviour also matters. Frequent switching triggers higher taxes and disrupts compounding.

Equity funds sold within a year attract short-term capital gains tax at 20 per cent. Even long-term investors lose efficiency if they churn portfolios often.

Therefore, investment decisions must align with time horizons and goals.

Markets decide how your money grows. Taxes decide how much you keep.

Ignoring post-tax returns can quietly erode wealth and derail retirement plans.

Smart investors plan for net returns, not just headline numbers.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on February 12, 2017