The Basics of Mutual Fund Taxation Norms in India

Mutual funds are India’s most attractive and preferred investment options as they offer many unique benefits. Along with benefits like suitability for all investors, higher returns, diversification, flexibility, transparency, etc., mutual funds are well regulated, and the tax-efficient investment options help you achieve your goals. Let’s take a look at the mutual fund taxation norms in India.

Mutual Fund Taxation Norms in India

Mutual fund investments can deliver returns in the form of dividends and capital gains depending on your option (dividend or growth). Both dividends and capital gains from mutual funds are subjected to tax. Let’s know in detail about the tax implications.

• Tax implications on the dividends offered by the mutual funds

Post the amendments made in Union Budget 2020, dividends offered by the mutual fund investments are added to the investor’s taxable income and taxed as per the applicable income tax slab rate to that investor.

• Tax implications on the capital gains from mutual funds

Capital gain refers to realised profit after the redemption of mutual fund investment. Tax implication varies for each mutual fund category depending on the corpus’s percentage allocation into different asset classes. Let’s take a look at the tax implication of each category of mutual funds below:

• Equity mutual funds:

Equity mutual funds are the funds that invest the majority of their corpus into equity and equity-related instruments. Short-term capital gains (equity funds withholding period of fewer than 12 months) from equity mutual funds attract a short-term capital gain tax of 15% plus applicable cess and surcharge. Long-term capital gains (holding period of funds is more than 12 months) from equity mutual funds attract capital gain tax at the rate of 10% + applicable cess and surcharge without indexation if the amount of gain in a year from equity exceeds INR 1 lakh. 

It is important to note that an equity-linked savings scheme (ELSS), a type of diversified equity mutual fund, offer tax benefit under Section 80C of the Income Tax Act, 1961, which can help you save on the tax outgo.

• Debt mutual funds:

Debt mutual funds are the type of mutual funds that invest most of the fund’s corpus into debt securities. Short-term capital gains (debt mutual funds withholding period of fewer than 36 months) from debt-oriented MF are taxed as per the investor’s applicable income tax slab rate. Long-term capital gains (holding period of debt mutual funds is more than 36 months) from debt-oriented MF are taxed at the rate of 20% plus applicable cess and surcharge with indexation benefit.

• Hybrid mutual funds:

Hybrid mutual funds are the type of mutual funds that invests in a mix of various asset classes like gold, equity, debt, real estate, etc., in varying proportion depending on the fund objective. For taxation, hybrid funds are classified as equity-oriented hybrid funds (equity exposure exceeds 65%) and debt-oriented hybrid funds. 

Equity-oriented hybrid funds are taxed the same as that equity mutual funds. That means STCG, i.e. short-term capital gains from equity-oriented hybrid funds, are taxed at the rate of 15% plus applicable cess and surcharge, and LTCG, i..e. long-term capital gains or from equity-oriented hybrid funds, are taxed at the rate of 10% plus applicable cess and surcharge without indexation, provided the total gain amount from equity funds exceed INR 1 lakh.

Debt-oriented hybrid funds are taxed the same as that debt mutual funds. That means that STCG from debt-oriented hybrid funds is taxed according to the applicable income tax slab of the investor, and the LTCG from debt-oriented hybrid funds are taxed at the rate of 20% plus applicable cess and surcharge with indexation.

Apart from tax on dividends and capital gains, a securities transaction tax (STT) of 0.001% is applicable on the buy and sell of fund units in equity and equity-oriented funds. 

Instead of manually calculating applicable taxes on your mutual fund investment, you can use an income tax calculator to calculate the taxes quickly without any hassles. An income tax calculator is a valuable online tool that helps you calculate the tax amount on return from your mutual fund investment. The income tax calculator is extremely easy to use. 

Knowing the taxation norms applicable for mutual funds in India helps you, as an investor, to make a rational and informed investment decision. Happy investing!