Taxation on Mutual Funds – A Detailed Guide

Knowing the policies related to taxation on mutual funds can help you calculate your total returns and even choose the right scheme. With a cohesive understanding of this topic, you can maximise your gains and invest according to your financial goals. 

What is Taxation on Mutual Funds?

When investing in mutual funds, you earn dividends or capital gains. In most cases, you are taxed on the scheme, its investments, the holding period and your tax slab. This is why, before investing in mutual funds, you should understand your tax liability for better financial planning. 

What is Securities Transaction Tax (STT)?

Alongside regular tax, your investment may be subject to another taxation scheme called the Securities Transaction Tax (STT). The Ministry of Finance levies this tax on hybrid and equity funds at a rate of 0.001%. 

Factors That Determine Tax

The following determines the income tax in mutual funds that you must pay:

• Scheme Type: The tax you pay may be different based on whether you’ve invested in equity funds, debt funds or hybrid mutual funds. 

• Holding Period: This period starts when you buy mutual fund assets and ends when you sell them off. As per the taxation laws, your gains are subject to lower tax if your holding period is longer and vice versa.

• Dividend: The mutual fund house distributes a portion of the overall profit to all the investors, called a dividend. Tax is calculated on these returns too. 

• Capital Gains: When you profit from your mutual fund investment by selling units for a higher price, it is called a capital gain. The tax amount also varies for these gains. 

Taxation of Capital Gains

If your holding period is longer than 12 months, you will need to pay tax based on long-term capital gains. If your holding period is shorter, you will be taxed accordingly. Check the details 

• Equity funds: If your holding period is less than 12 months, your gain is considered a short-term capital gain. It is a long-term gain if your holding period is more than 12 months. This is also true of hybrid equity-oriented funds. 

• Debt funds: Gains from such funds are always considered short-term capital gains unless you invested in them before April 1, 2023 and sold them on or before July 23, 2024. This is also true of hybrid debt-oriented funds. 

Taxation on Mutual Funds

To learn about how to pay tax on mutual funds, you can follow the list below, which offers a look at the different types of funds and the taxation rules that apply: 

Taxation on Equity Funds with a Minimum 65% Corpus Invested in Equity	Holding Period	Long-Term Capital Gains Tax	Short-Term Capital Gains Tax
Sold before July 23, 2024	More than 12 months	10%	15%
Sold on or after July 23, 2024	More than 12 months	12.50%	20%

Taxation on Debt Funds with Minimum 65% Corpus Invested in Indian Debt Instruments Before 1st April 2024	Holding Period	For Long-term	For Short-term
Before July 23, 2024	More than 36 months	20% with indexation benefit	As per the latest slab rate
On or after July 23, 2024	More than 24 months	12.50%	As per the latest slab rate
If invested after 1st April 2024 and sold on any date	No period of holding	As per the latest slab rate	As per the latest slab rate

Taxation on Hybrid Funds with More Than 35% and less than 65% Invested in Equity	Holding Period	For Long-term	For Short-term
Sold before July 23, 2024	More than 36 months	20% with indexation benefit	Slab rate
Sold on or after July 23, 2024	More than 24 months	12.50%	Slab rate

Also Read : Compounding in Mutual Funds

Taxation on SIP

Due to the periodic investment structure of SIP, you invest a small amount weekly, monthly, quarterly, twice a year or annually. The tax is based on when you invest. If you hold the units from your first investment over a year, any gains are treated as long-term capital gains. If this amount is below ₹1.5 lakhs, no tax is applicable. 

For your second month’s investment, a short-term capital gains tax at a flat rate of 20% is levied. This has no relation to your tax slab. Keep in mind that you also need to pay cess and surcharge. 

Mutual funds may require time to give you the returns you desire, so opting for a longer lock-in period can be helpful. If you need funds during this time, apply for a Loan Against Mutual Funds from Fibe and get up to ₹10 lakhs. This is a great way to continue your investment and increase your potential for gains while accessing funds for immediate use. Apply now to get your loan disbursed within a few minutes.

FAQs on Taxation on Mutual Funds

Are mutual fund taxes payable every year?

Tax on mutual funds only applies when you want to redeem units or sell them. It also applies to any dividends you may receive, which are counted towards your total income. 

How much of my mutual fund investment is exempt from taxes?

Under Section 80C of the Income Tax Act, you can invest up to ₹1.50 lakhs per year in Equity Linked Savings Scheme and get a tax deduction. Your savings can go up to ₹46,800 each year in this way. 

How can I avoid paying taxes on mutual funds?

You can redeem units of your equity fund after a year and if the gains are under ₹1.25 lakhs, you can avoid long-term capital gains tax. 

Are international mutual funds taxed differently in India?

After the recent Budget 2024, the holding period of international funds was reduced to 24 months, where a long-term capital gains tax is levied at 12.5%. This makes investing in these funds more attractive.