Mutual Fund Taxation in India - How are mutual fund gains taxed?

mutual fund taxation, mutual fund tax, capital gains tax

Mutual funds are gaining popularity with the financial savings waiting to get into equity markets. Interest rates on Fixed & recurring deposits have fallen in last 2-3 years & people are looking for new avenues of investment.

Most of the new budding investors are not very well versed with the taxation laws in the country with respect to mutual funds. Most of the information available on the internet around taxation is not structured, hence i have tried to explain in the simplest way possible.

Here are the factors that determine taxation - 

Mutual Fund Holding period

Whenever you invest in any mutual fund, the primary objective is to create wealth out of it. The taxation that you pay on mutual funds depend on the time frame for which you have held onto it. 

Holding period is categorized as short term or long term. The definition of these terms depend on the type of fund you have invested in. Any fund which holds more than 65% in equities is categorized into Equity funds. For equity & balanced mutual funds, period of 12 months or more is regarded as long term and is taxed as long term capital gain. Any fund redeemed before the period of 12 months is taxed as short term capital gain.

For debt funds, long term is when the fund is held onto for a period of 36 months. Any debt fund sold prior to this is taxed as a short term capital gain. 

Fund TypeShort Term DurationLong Term Duration
Equity or Balanced Fundless than 12 months 12 months or more
Debt Fundsless than 36 months36 months or more

Mutual Fund Type

ELSS - Many of us would have heard people investing in ELSS to get benefits under section 80C. ELSS refers to equity linked saving scheme. The lock in period for ELSS is 3 years, which basically means you cannot withdraw units until 3 years from the date of purchase. You can claim tax deduction of upto 1.5 lakh in section 80C.

When ELSS funds are redeemed, the long term capital gains upto 1 lakh is tax free & excess will be taxed at 10%.

Non Tax saving Equity Funds - These are treated at par with equities. Any long term capital gain of more than 12 months is taxed at 10%. Any redemption made prior to 12 months is taxed as a short term capital gain of 15%.

Arbitrage funds - Arbitrage funds are taxed same as equity mutual funds.

Debt Funds - Any debt funds redeemed prior to 36 months, carry a short term capital gain liability and are taxed as per your tax slab of 5%,20% or 30%. Any redemption made after 36 months are taxed as long term gain of 20%, with indexation. Indexation adds inflation to your purchase price & hence brings down the taxed component.

Systemetic Investment Plan (SIP) - Most popular method of investing is investing fixed or incremental amount in a fund every month (can be quarterly as well). All gains on SIP's are taxed as pet the type of mutual fund investment. All investments are treated as fresh investments. Hence, on redemption you may have the liability to pay both long and short term capital gains depending on your last SIP date.

Suppose you have an SIP for a period of 12 months & you put in a redemption request after 12 months, only the gains made from first SIP will be taxed as long term capital gain whereas rest of the gains would be short term.

You can refer to Best Mutual funds to invest in 2018 to get a glimpse of best performing funds across each category.

One liner Tip - 

The longer you hold your mutual funds, the better it is for taxation and compounding. 

Mutual funds as an investment instrument has been gaining popularity over the years, thanks to the wide range of options available and the ease of KYC process. To know more about them, check out The Mutual Funds Sahi Hai campaign, launched by The Association of Mutual Funds in India (AMFI) at

Share your thoughts in the comments section below!!

1 comment:

  1. Very well elaborated.Keep on writing like this.


Powered by Blogger.