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Taxes offered on mutual fund investment primarily depend on the type of fund, investment duration and income tax slab an investor falls under.
Income from mutual funds is also included in the taxable income. Dividends are taxed as per the applicable tax slabs too.
Individuals willing to learn about mutual fund taxation and invest accordingly must read the following sections to make an informed investment decision.
When investors invest money in mutual funds, they earn particularly in three ways. These are as follows,
Investors can earn from dividends on shares of stocks and interest on bonds that are included in a portfolio. Investors can choose to receive dividends and earn from them, or else they can reinvest their dividends and earnings to buy more shares.
Investors buy units of mutual funds at a particular price. If that price increases in future, investors can choose to sell units and earn capital profit.
Note: Both the income from dividends and capital gains under the mutual fund are taxable.
When the prices of mutual funds increase, and the fund manager decides not to sell them, the prices automatically go up. Here, investors can sell units of mutual funds to make a profit.
There are different types of mutual funds, namely equity funds, debt funds and hybrid funds. These funds are taxed in India differently. Let’s learn about Mutual Fund taxation in detail.
Dividends that the investors get added in the calculation of total taxable income are taxed as per applicable slab rates. This amendment reduces the burden on small investors.
Taxation rates of capital gains earned from mutual funds depend on mutual fund type (equity, debt and hybrid) and holding period. The holding period refers to the time between the purchase date of units of a mutual fund and the selling date of the same.
Equity funds are those mutual funds that primarily invest in equities (at least 65%). Investors can gain short term capital gains (STCG) at a tax rate of 15% (irrespective of the income tax bracket they are all under) if they hold units of equity mutual funds for less than 1 year.
In case of a holding period of more than a year, the investor realises long term capital gains (LTCG). If investors sell units after 1 year and gain ₹1 lakh, these are tax-exempt. However, if the gains cross the threshold of ₹1 lakh, it attracts long term capital gains tax at 10% without indexation on amounts exceeding ₹1 lakh.
Debt funds are mutual funds that invest in fixed income securities like bonds, treasury bills etc. Investors can gain short-term capital gains (STCG) tax if they redeem units of debt funds within a period of 36 months. Here, the debt mutual fund taxation will occur according to the applicable income tax slab rates. Capital Gains from debt funds are included in the Total Taxable Income of the person.
On the other hand, if one sells units of debt funds after a holding period of 36 months, the taxation on long term capital gains (LTCG) will occur at a rate of 20% with indexation. Debt fund taxation will further include cess and surcharge.
The taxation of hybrid funds or balanced fund occurs as per the equity exposure of a portfolio.
If a portfolio has an equity exposure of more than 65%, then the taxation follows similar rules to that equity mutual fund taxation policy.
On the other hand, in case the equity exposure is less than 65%, then the taxation follows similar rules of debt fund taxation policy. In addition, if a hybrid or balanced fund has 50% investment in equity and 50% investment in debt, the taxation rule will follow the debt fund taxation policy.
Systematic Investment Plans (SIPs) are investment methods where investors make small investments periodically (weekly, monthly, quarterly, bi-annually, or annually) in a mutual fund scheme.
In case investors sell units of a mutual fund invested through SIP after holding it for more than 1 year, investors can realise long term capital gain (LTCG) on that purchased unit. Here, there is no SIP taxation if the gains do not exceed ₹1 lakh.
On the other hand, investors can start getting short term capital gains (STCG) from the second month onwards. Here, irrespective of income tax slab, investors have to pay 15% tax on these gains, including applicable cess and surcharge. The taxation rules differ in the case of investors investing in mutual funds through Systematic Investment Plans (SIPs).
Fund Type |
Short-term Capital Gains |
Long-term Capital Gains |
Equity Funds |
Shorter than 12 months 15% + cess + surcharge |
12 months and longer Up to ₹1 lakh a year is tax-exempt. Any gains above ₹1 lakh are taxed at 10% + cess + surcharge. |
Debt Funds |
Shorter than 36 months Taxed at the investor’s income tax slab rate |
36 months and longer 20% + cess + surcharge |
Hybrid Equity-oriented Funds |
Shorter than 12 months 15% + cess + surcharge
|
12 months and longer Up to ₹1 lakh a year is tax-exempt. Any gains above ₹1 lakh are taxed at 10% + cess + surcharge. |
Hybrid Debt-oriented Funds |
Shorter than 36 months Taxed at the investor’s income tax slab rate |
36 months and longer 20% + cess + surcharge |
Mutual fund taxation is indeed a complex topic. However, after reading the sections mentioned, understanding the same is not an issue anymore. Now investors can take an informed investment decision as per their investment goals and risk appetite.
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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