Understand How Mutual Funds are Taxed


Mutual funds are a helpful investment vehicle for wealth creation and income generation. However, the gains from mutual fund investments are taxed depending on the kind of fund you invest in and the duration you remain invested. Here’s a quick guide to understanding how your mutual fund investments are taxed. 

There are two aspects to any investment – the returns or gains you make and the tax you pay on them. This applies to all investments, including mutual funds (but excluding certain exempted categories). The taxation of mutual funds varies depending on the type of fund, investment duration, and income in the form of Capital gain or distribution.

Understanding Mutual Fund Taxation

Broadly, mutual funds can be categorized into equity and non-equity mutual funds.

Mutual funds that invest at least 65% of their assets in equity and equity-related instruments are positioned into the equity mutual funds category. Non-equity funds invest primarily in debt instruments.

The tax liability for equity mutual funds and non-equity or debt mutual funds are different. The holding period of such mutual funds also are different. Short-term holdings attract an additional rate of tax as compared to holding investments for longer term.

An investment of fewer than 12 months is considered a short-term holding for equity mutual funds and a short-term capital gains tax of 15% is levied upon. Investments held for more than 12 months are called long-term. Long term capital gains are exempted up to Rs.100000 per financial year and the incremental gains are taxed at 10%.

Investments in debt mutual funds for up to 36 months are considered short-term investments. The tax liability on these gains is as per your individual income tax slab. Any holding of over 36 months is deemed to be long-term and taxed at 20% after inflation adjustment, also famously called as Indexation.

Mutual FundDetailsSTCGLTCG
Equity fundsHolding PeriodUp to 12 monthsOver 12 months
Tax Rate15%10%*
Non-equity fundsHolding PeriodUp to 36 monthsOver 36 months
Tax RateIndividual Income Tax Slab Rate20% after indexation

*Gains up to Rs. 1,00,000 per annum are tax-exempt.

For taxation purposes, hybrid funds that invest 65% or more of their funds in equities and arbitrage funds are considered equity mutual funds. Debt mutual funds, international funds, and fund of funds are taxed as non-equity mutual funds. **

** Subject to regulatory conditions.

Dividend Distribution Tax

If you invest in a mutual fund that pays dividends, you will have to pay a tax on these dividends received. Before April 1, 2020, companies were responsible for paying dividend distribution tax, before paying out dividends. Hence, individuals didn’t have to worry about the same. 

In the Union Budget of 2020, the Government of India did away with the dividend distribution tax for corporates and made dividends taxable in the hands of investors. Dividend income is added to your total income and taxed as per your tax slab. Mutual fund houses also deduct a TDS of 10% on dividends exceeding Rs. 5,000 a year.

Despite the different taxes applicable, mutual funds are good investment choice, that can generate wealth in the long run. If you are confused about how to plan your mutual fund investments, you can use the professional financial planning services to help you with your investments and tax planning. Geojit provides all types of financial and tax planning services.


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