How are Mutual Fund Returns Taxed in India?

How Investors Can Earn by Investing in Mutual Funds?

When investors invest money in mutual funds, they earn in three ways. These are as follows,

1. Income from Dividend or Bond Interest Gain

Investors can earn from dividends on shares of stocks and interest on bonds that are included in a portfolio. Investors can choose to receive dividends and earn from them, or they can reinvest their dividends and earnings to buy more shares.

2. Capital Gain from Selling Securities

Investors buy units of mutual funds at a particular price. If that price increases in the future, investors can choose to sell units and earn capital profit.

Note: Both the income from dividends and capital gains under the mutual fund are taxable.

3. Increase the Price of the Mutual Fund Scheme

When the prices of mutual funds increase, and the fund manager decides not to sell them, the prices automatically go up. Here, investors can sell units of mutual funds to make a profit.

How Mutual Fund Returns are Taxed?

Fund Type Short-term Capital Gains Long-Term Capital Gains
Equity Funds Shorter than 12 months

20% + cess + surcharge
12 months and longer

Up to ₹1 lakh a year is tax-exempt. Any gains above ₹1 lakh are taxed at 12.5% + cess + surcharge.
Debt Funds Shorter than 36 months

Taxed at the investor’s income tax slab rate
36 months and longer

20% + cess + surcharge
Hybrid Equity-Oriented Funds Shorter than 12 months

15% + cess + surcharge
12 months and longer

Up to ₹1 lakh a year is tax-exempt. Any gains above ₹1 lakh are taxed at 10% + cess + surcharge.
Hybrid Debt-oriented Funds Shorter than 36 months

Taxed at the investor’s income tax slab rate
36 months and longer

20% + cess + surcharge

Mutual fund taxation is indeed a complex topic. However, after reading the sections mentioned, understanding the same is not an issue anymore. Now, investors can make an informed investment decision as per their investment goals and risk appetite.

FAQs about Mutual Fund Taxation

Do investors of the hybrid equity-oriented fund have to pay Securities Transaction Tax (STT)?

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Yes, investors who decide to buy or sell the hybrid equity-oriented fund have to pay a Securities Transaction Tax of 0.01%.

Do you have to pay Securities Transaction Tax if you sell a debt fund unit?

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No, you do not have to pay a Securities Transaction Tax if you sell a debt fund unit.

Is it possible to avoid the capital gains tax?

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No, it is not possible to avoid the capital gains tax.

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