Mutual fund returns are taxable, as are the returns of most other asset classes in India. Generally, mutual fund returns are taxed based on the type of mutual fund scheme you’re invested in and the period you’ve held your investment before selling it. These two basic rules are foundational in understanding taxation on mutual funds.
No taxes are levied during the holding period for mutual fund investments as they are unrealised gains. Mutual fund returns are only taxed when you sell your allocations or receive dividends from your investment. So, let’s review the complete details of how various types of mutual funds are taxed and what dividend income taxes are.
When you either receive dividends from your mutual fund investments or sell your allocations, you have to pay taxes to the government. The taxes on mutual fund returns are calculated and levied following the Income Tax Act of 1961. There are three taxes commonly associated with mutual fund returns: short-term capital gains tax (STCG), long-term capital gains tax (LTCG), and income tax on dividends. Knowing how these taxes affect your mutual fund returns can help you plan tax-saving measures to maximise your returns accordingly
Four main factors influence how much tax investors have to pay on mutual funds. Once mutual fund taxation is broken down into these four subsections, it becomes much easier to understand.
The two broad categories of mutual funds necessary for taxation are equity-oriented and debt-oriented. Let’s review how a mutual fund is classified into these categories.
There are other hybrid funds, but their taxation is determined by first classifying them as equity-oriented or debt-oriented mutual funds.
Mutual funds generate profits in two main ways: capital gains and dividends. Let’s understand how each of these profits works to understand their taxation better.
The rules regarding the taxation of dividends provided by mutual funds have recently changed. Before March 31, 2020, mutual fund houses only deducted a small Dividend Distribution Tax before paying dividends to investors. After the introduction of the Finance Act 2020, dividend returns are now taxed in the hands of the investors at their respective income tax slabs under the heading “income from other sources”.
TDS is also deducted at 10% on dividend payments over ₹5,000 annually by mutual fund houses before dividend payouts to investors. The deducted TDS can be claimed in income tax returns to lower the tax liabilities on dividend returns.
When investors try to calculate how much tax on mutual funds they have to pay, this is one of the most important taxes to consider. Capital gains tax is levied as either STCG or LTCG on mutual fund holdings. The two factors that help determine the tax rate are the type of fund you’re invested in and the holding period. Here’s a tabulated view of mutual fund types and taxes they attract based on their holding period.
Fund Type |
STCG Holding Period |
LTCG Holding Period |
Equity-Oriented Funds |
Less than 12 months (1 year) |
More than 12 months (1 year) |
Debt-Oriented Funds |
Less than 36 months (3 years) |
More than 36 months (3 years) |
Equity-Oriented Hybrid Funds |
Less than 12 months (1 year) |
More than 12 months (1 year) |
Debt-Oriented Hybrid Funds |
Less than 36 months (3 years) |
More than 36 months (3 years) |
Mutual fund equity taxation is imposed based on the holding period. Short-term or long-term capital gains taxes are levied on equity-oriented mutual fund returns. Here’s a detailed look at how equity-oriented mutual funds attract capital gains taxes.
1. Equity-oriented fund returns are taxed during redemption at 15% flat for STCG.
2. LTCG is levied at 10% without indexation benefits beyond the exemption limit of ₹1 lakh.
Cess and surcharge taxes may also be levied on both short-term and long-term capital gains taxes for equity-oriented funds.
A securities transaction tax (STT) is also debited on the purchase and sale of equity-oriented mutual fund units at 0.001% of the transaction amount.
After the Union Budget 2023, the indexation benefits of debt funds were removed. Any short-term or long-term capital gains you generate from debt funds are taxed per your current income tax slab without indexation benefits.
Hybrid funds are taxed as per their orientation. Here’s a detailed look at how hybrid mutual funds are taxed.
Dividend returns on mutual fund returns are taxed regardless of whether they’re paid out in cash or reinvested to buy additional units. As per the new Finance Act 2020, dividend gains, even ones where the dividends are automatically reinvested into the scheme, attract the same income tax and TDS as dividends paid out to you in cash.
Knowing the latest information regarding income tax on mutual funds is crucial to staying ahead of your tax liabilities. It also helps plan your tax-saving measures in due time. Taxation rules and regulations are subject to change with new government policies or budget announcements. So, make sure you regularly keep your eye on the latest tax regulations for mutual fund investments.
Visit the Sharekhan Knowledge Centre to learn more about mutual funds and other investment options. This resource is designed to help you gain deeper insights and make well-informed investment decisions.
Delve into the world of futures and options trading with Sharekhan expert guidance. Our comprehensive resources and intuitive platform empower you to make informed decisions and capitalize on market movements.
Embark on your stock trading journey with Sharekhan's comprehensive platform. Learn the fundamentals of equity trading, gain insights into market trends, and access powerful tools to make informed investment decisions.
Safeguard your investments with Sharekhan's secure and reliable Demat account. Our platform offers robust security features to protect your holdings, ensuring your investments are in safe hands. Open Demat account today and enjoy peace of mind while you invest.
Make informed mutual fund investment decisions with Sharekhan's expert guidance. Explore a wide array of funds to match your financial goals and risk tolerance. Start building your wealth today.
Leverage Sharekhan's market knowledge and experience to make informed decisions in the initial public offering (IPO) space. Our research and analysis equip you with the insights you need to identify promising IPOs and participate in their growth potential.