Taxation for Mutual Funds
Taxation of Dividends Offered by Mutual Funds-
As per the amendments made in the Union Budget 2020, dividends offered by any mutual fund scheme are taxed in the classical manner. That is, dividends received by investors are added to their taxable income and taxed at their respective income tax slab rates.
Taxation of Capital Gains Offered by Mutual Funds- The taxation rate of capital gains of mutual funds depends on the holding period and type of mutual fund. The holding period is the duration for which the mutual fund units were held by an investor. In simple words, the holding period is the time between the date of the purchase and sale of mutual fund units. Capital gains realised on selling units of mutual funds are categorised as follows:
| Fund Type | Short-term capital gains | Long-term capital gains |
| Equity funds | Shorter than 12 months | 12 months and longer |
| Debt funds | Shorter than 36 months | 36 months and longer |
The short-term and long-term capital gains offered by mutual funds are taxed at different rates.
Taxation of Capital Gains of Equity Funds-
Equity funds are those mutual funds whose portfolio’s equity exposure exceeds 65%. As mentioned above, you realise short-term capital gains on redeeming your equity fund units within a holding period of one year. These gains are taxed at a flat rate of 15%, irrespective of your income tax bracket.
You make long-term capital gains on selling your equity fund units after a holding period of one year or more. These capital gains of up to Rs 1 lakh a year are tax-exempt. Any long-term capital gains exceeding this limit attracts LTCG tax at the rate of 10%, and there is no benefit of indexation provided.
Taxation of Capital Gains of Debt Funds-
Debt funds are those mutual funds whose portfolio’s debt exposure is in excess of 65%. As mentioned in the table above, you get short-term capital gains on redeeming your debt fund units within a holding period of three years. These gains are added to your taxable income and taxed at your income tax slab rate.
Long-term capital gains are realised when you sell units of a debt fund after a holding period of three years. These gains are taxed at a flat rate of 20% after indexation. Also, you are levied with applicable cess and surcharge on tax.
| Fund Type | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
|---|---|---|
| Equity-Oriented Mutual Funds | Held for less than 12 months: Taxed at 20% (plus cess & surcharge) | Held for more than 12 months: Taxed at 12.5% (up to ₹1.25 lakh exempt) |
| Debt-Oriented Mutual Funds | Held for less than 36 months: Taxed at Income Tax Slab Rate | Held for more than 36 months: Taxed at 12.5% (after indexation) |
| Hybrid Mutual Funds | Held for less than 24 months: Taxed at Income Tax Slab Rate | Held for more than 24 months: Taxed at 12.5% |
| Debt Mutual Funds (Purchased Before April 2023) | Taxed at Income Tax Slab Rate | Taxed at 12.5% (after indexation benefits for units held over 36 months) |
| Debt Mutual Funds (Purchased After April 2023) | Taxed at Income Tax Slab Rate | Taxed at 12.5% (long-term capital gains apply after 2 years) |
