Nobody plans for a cash crunch. But when it hits, most investors immediately think about selling their mutual funds. That is not always the right move—especially if you have been holding for years and sitting on good gains.
A Loan on Mutual Funds India allows investors to unlock liquidity without selling a single unit—which is exactly why smart investors prefer it over redemption.
But confusion around the tax on mutual funds holds many back. Does pledging trigger capital gains? What about taxation on debt mutual funds in India after the 2026 changes?
Read this article to know the latest trends on the tax rules, benefits, risks, and implications—so you can make an informed decision.
What Is a Loan on Mutual Funds in India?
A loan on mutual funds India is a secured loan where your existing mutual fund units serve as collateral. You do not sell them—you pledge them with a bank or NBFC and receive funds in return. Your units stay invested, keep growing, and are released once the loan is repaid.
How Loan on Mutual Funds in India Works
- You pledge mutual fund units with the lender as collateral
- The lender evaluates the current NAV and offers 50% to 80% of the fund value as the loan amount
- You pay interest—usually through an overdraft facility where you only pay for what you actually use
- Once fully repaid, the pledge is lifted and your units are free again
Types of Mutual Funds Eligible for Loans
- Equity mutual funds—large-cap, mid-cap, flexicap funds—are accepted; LTV is lower due to volatility
- Debt mutual funds—lenders prefer these for their stable NAV; higher LTV ratios are offered
- Hybrid funds—may be eligible depending on the lender’s credit policy
Does Taking a Loan on Mutual Funds India Trigger Taxes?
No—and this is where most investors get it wrong. Taking a Loan Against Mutual Funds India does not trigger capital gains tax, since the units are pledged and not redeemed. Not even close.
No Capital Gains Tax on Loan
The tax on mutual funds—capital gains specifically—only applies when you actually sell or redeem your units. A pledge is not a sale. Your name stays on those units throughout.
The lender holds a lien, not ownership. So nothing taxable has happened. And the loan amount itself? That is borrowed money, not income—completely non-taxable.
Difference Between Redeeming and Pledging Mutual Funds
- Redeeming = selling units = ownership transfers = capital gains tax applies immediately
- Pledging for a loan = borrowing against units = ownership stays with you = zero tax triggered
If you use the loan for business purposes, the interest paid may be claimed as a business expense—reducing your taxable income. For personal use, no deduction applies. It’s best to confirm with your CA.
What if investors sell the mutual funds?
The moment redemption happens—whether voluntary or forced by the lender—the tax on mutual funds kicks in. Equity LTCG above Rs. 1.25 lakh is taxed at 12.5%, and STCG at 20%. Debt fund gains are taxed at your prescribed income slab rate.
Understanding Taxation on Debt Mutual Funds in India
Debt funds are widely used as loan collateral. But the taxation on debt mutual funds in India changed in 2023—here is what you need to know.
Current Taxation Rules on Debt Mutual Funds
Before April 2023, debt fund investors enjoyed indexation benefits and a flat 20% LTCG rate after 3 years. The Finance Act 2023 scrapped that.
For any debt mutual fund bought on or after April 1, 2023, all gains are taxed at your applicable income slab—regardless of the holding period. Funds purchased before that date continue under the old rules.
How It Affects Investors Taking Loans
Here is the good part—this updated taxation on debt mutual funds in India does not affect you while you are pledging. Tax stays dormant until actual redemption. Taking a loan today? No tax. Repaying and holding on? Still no tax.
Tax Implications If You Fail to Repay the Loan Amount
When Lenders Sell Your Mutual Fund Units
Do not skip this part. If you default, the lender can invoke the pledge and forcibly sell your units to recover dues. This is called forced redemption—and it is treated exactly like a regular sale for tax purposes.
Capital Gains Tax in Such Situations
- Equity funds held under 12 months—STCG at 20%
- Equity funds held over 12 months—LTCG at 12.5% above Rs. 1.25 lakh
- Debt funds—gains taxed at your income slab rate (post-2023 purchase)
And here is what catches people off guard: the tax bill lands on you—not the lender. Even if they triggered the sale, the capital gains liability is yours. Factor this in before pledging.
Benefits of Taking Loan Against Mutual Funds India
Avoid Capital Gains Tax from Selling Investments
This is the biggest win. Redeeming your funds triggers an immediate tax hit. A loan against mutual funds India sidesteps that entirely. For a portfolio that has grown well over the years, that tax saving alone can be substantial.
Continue Earning Market Returns
Pledged units do not stop compounding. If the fund earns 12-14% annually and your loan costs 10-11%, you are still ahead. Selling kills that compounding—and buying back later at higher prices costs even more.
Quick Access to Instant Online Loans in India
- Steady approvals—most digital lenders disburse the loan amount within 24 to 48 hours
- The pledge is done fully online via CAMS or KFintech—zero paperwork
- Interest rates ranging between 9% and 13% p.a. are considered to be far cheaper than personal loans, where interest rates rise up to 36%
- Overdraft structure allows you to make interest payments only on the amount you have actually withdrawn.
Keep yourself updated on market fluctuations, which can reduce collateral value and trigger margin calls. Defaulting leads to forced redemption with a tax bill. ELSS units in lock-in cannot be pledged.
Key Factors Every Investor Should Know Before Taking a Loan
Loan-to-Value (LTV) Ratio
You will not get the full portfolio value. Equity funds: 50% to 65% of NAV. Debt funds: up to 80% to 85%. Plan how much you want to pledge accordingly.
Interest Rates and Charges
The headline rate may attract a lot of investors at first, but watch the fine print—processing fees, overdraft renewal charges, and prepayment penalties can make significant changes to your total cost.
Market Risk on Mutual Funds
A sharp fall in markets reduces your collateral value. If it dips below the lender’s threshold, you may face a margin call—pledge more units or repay a portion immediately.
Impact on Portfolio Liquidity
Pledged units are locked during the loan tenure—you cannot redeem or switch them. If you have upcoming financial goals tied to those units, sort that out before pledging.
Loan on Mutual Funds India vs Selling Mutual Funds
Still looking for other alternatives? Here is a structured comparison:
| Factor | Loan Against MF | Selling Mutual Funds |
| Tax Impact | No capital gains triggered | Tax applies immediately on gains |
| Liquidity | Loan disbursed fast; units stay pledged | Instant cash but units are gone |
| Investment Continuity | Units keep compounding in your portfolio | Compounding stops permanently |
| Financial Planning | Short-term need met; long-term plan intact | May disrupt long-term goals |
| Cost | Interest on borrowed amount only | Tax cost eats into your returns |
Avoid It: When your repayment ability is uncertain, your pledged funds are highly volatile, or the amount needed is too small to justify the process.
Consider It: You have a short-term cash need, redeeming would attract heavy capital gains, or you want liquidity without disturbing your long-term financial plan.
Tip By BULWARK CAPITAL
“A loan on mutual funds is one of the most tax-efficient liquidity options for investors because it avoids redemption and capital gains tax.”
Conclusion
At the end of the day, a loan on mutual funds India gives you something most financing options do not—liquidity without a tax cost. No tax on mutual funds, no disruption to your portfolio, and no stopping the compounding you have worked hard to build.
That is exactly what Bulwark Capital helps you do. Their fully digital platform makes accessing Instant Online Loans in India against your mutual fund holdings quick, simple, and paperless—so you get the funds you need without selling what you have built.
Your portfolio is working for you every single day. Make sure your financial decisions are too. Visit bulwarkcapital.in and explore your Loan Against Mutual Funds India options today.
