Tax Benefits of Debt Funds Vs Equity Funds
Written by Mariyam Sara
2 min read | Updated on November 25, 2025, 12:06 IST
Mutual funds are becoming increasingly popular with young adults seeking long-term wealth creation and capital appreciation. Mutual funds allow novice investors to invest in Indian markets without the hassle of researching and monitoring their investments.
There are two main categories of Mutual funds: Debt Mutual Funds & Equity Mutual Funds. Investing in these funds not only secures your financial future but also provides tax benefits.
What Is an Equity Fund?
An equity fund is a type of mutual fund that predominantly invests in stocks of companies listed in the Indian Stock market. SEBI (Securities Exchange Board of India) has made it mandatory for equity funds to invest 75% of the total funds in equities.
Types of Equity Funds
Equity Funds are further divided into sub-categories:
Market Capitalisation
These equity funds are invested in stocks based on their market capitalization, such as Large cap, Mid-cap, Small cap, Multi-cap cap and Flexi-cap funds. The risk involved in these funds depends on the market cap category it invests in.
Tax Savings ELSS Fund
ELSS Mutual Fund exclusively invests in equities and offers tax benefits as per Section 80 of the Income Tax Act, 1961. When you invest in ELSS funds, your funds will be locked in for 3 years and provide a tax rebate of ₹1.50 Lakh.
Sectoral Equity Funds
Sectoral Equity Funds invest in specific sectors such as the IT sector, the Automobile Sector, the Green Energy sector, etc. If you invest in a sector, you face sector-specific risks that impact the NAV of your Mutual Fund units.
What Is a Debt Fund?
Debt funds invest in fixed-income securities such as debt and money market instruments. It predominantly invests in assets such as money market instruments, corporate bonds and government securities. Debt Funds carry low risk compared to equities and provide a stable return to risk-averse investors.
Types of Debt Fund
There are different types of debt funds.
Overnight Fund
This fund predominantly invests in debt instruments with a one day maturity period. The risk and return on these is very low due to short holding duration, making it suitable for risk avoidant investors stable income.
Short-term Duration Funds
This fund exclusively invests in short-term securities with a duration ranging from 1 to 3 years. This fund is suitable for investors with low risk appetite and short to medium-term financial goals.
Liquid Fund
Liquid funds focus on low-risk debt securities with high liquidity, suitable for short-term investments and immediate redemption options.
Corporate Bond Fund
When companies require capital to meet their operational expenses, they issue bonds. Corporate mutual funds invest in corporate bonds, which potentially offer higher yields.
Money Market Fund
Money market funds focus on investing in money market instruments, suitable for short-term investments with low risk.
Tax Benefits of Debt Funds Vs Equity Funds
The following is a comparison of tax benefits and rates applicable to debt funds and equity funds.
| Fund Type | Holding Period | STCG | LTCG | Exemption |
|---|---|---|---|---|
| Equity Fund | 12 Months | 20% | 12.5% | ₹1.25 Lakh |
| Debt Fund | 24 Months | As per the Income slab rate | As per the Income slab rate | No Exemption |
Securities Transaction Tax (STT) on Debt Fund & Equity Fund
Other than STCG and LTCG tax, there is also a tax called Securities Transaction Tax (STT). STT of 0.1% is applicable on the purchase and sale of mutual fund units in equity funds or hybrid equity-oriented funds. However, no STT is applicable for the sake of debt fund units.
While equity funds offer tax benefits like exemptions, debt funds do not offer any tax benefits but carry low-risk and stable returns. So choose a mutual fund that aligns with your financial goals and risk appetite.
About Author
Mariyam Sara
Sub-Editor
holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.
Read more from Upstox
Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.