Home > Income Tax > Help Center > Quick read on mutual fund taxes?Last Updated: Dec 09th 2023
Mutual Funds: How are they taxed in India?
Mutual funds are a popular investment option, but taxation varies by fund type (equity, debt), holding period, and gain type (STCG, LTCG). Learn more
This document covers
- Mutual Funds
- Types of Mutual Funds
- Taxation of Equity Mutual Funds
- Taxation of Debt Mutual Funds
1. Mutual Funds
Mutual funds are investment vehicles that pool the funds of numerous investors and invest them in the equity market. Mutual funds are managed by a professional money manager, who invests the funds in a variety of stocks, bonds, and other securities based on a predetermined investment objective. If the mutual fund's value increases, so does the investor's return, and vice versa.
2. Types of Mutual Funds
Mutual Funds are of 2 types. They are
- Equity Mutual Funds: An Equity fund is a mutual fund that invests primarily in equity stocks. In accordance with SEBI Regulations, an equity mutual fund must engage at least 65 percent of its assets in equities and related instruments.
- Debt Mutual Funds: A Debt fund is a mutual fund that primarily invests in fixed income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments, among others. If the fund invests at least 65 percent of its total assets in debt securities, it will be classified as a debt fund.
3. Taxation of Equity Mutual Funds
The tax treatment of equity mutual funds depends on the ownership period (aka holding period). Different tax rates apply to short- and long-term capital gains.
| Holding Period | Type of Gain | Rate of Tax | Deductions | Basic Exemption Limit |
|---|---|---|---|---|
| Less than 12 Months | Short Term Capital Gain (Sec 111A) | 15% (plus surcharge and cess as applicable) | Residents or NRI’s cannot claim any deductions u/s Chp VIA against STCG | Residents Individual/HUF Can claim the basic exemption limit of 2.5 lakh (if not exhausted by any other income) NRI Cannot claim the basic exemption limit of 2.5 lakh |
| More than 12 Months | Long Term Capital Gain (Sec 112A) | 10% (plus surcharge and cess as applicable) | Residents or NRI’s cannot claim any deductions u/s Chp VIA against LTCG | Residents Individual/HUF Can claim the basic exemption limit of 2.5 lakh (if not exhausted by any other income) NRI Cannot claim the basic exemption limit of 2.5 lakh |
4. Taxation of Debt Mutual Funds
4a. Funds Invested Upto 31st March 2023
The tax treatment of debt mutual funds depends on the holding period. The tax rates are different for short term and long-term capital gains
| Holding Period | Type of Gain | Rate of Tax | Indexation Benefit | Deductions | Basic Exemption Limit |
|---|---|---|---|---|---|
| Less than 36 Months | Short Term Capital Gain | Slab Rate (plus surcharge and cess as applicable) | No Indexation as it is short term | Residents or NRI's can claim any deductions u/s Chp VIA against STCG | Residents/NRI’s can claim the basic exemption limit of 2.5 lakh |
| More than 36 Months | Long Term Capital Gain (Sec 112) | 20% (plus surcharge and cess as applicable) | Indexation benefit is available | Residents or NRI's cannot claim any deductions u/s Chp VIA against LTCG | Residents Individual/HUF Can claim the basic exemption limit of 2.5 lakh (if not exhausted by any other income) NRI Cannot claim the basic exemption limit of 2.5 lakh |
4b. Funds Invested from 01st April 2023
The amendments to the taxation of debt mutual funds were made by the Finance Bill of 2023. The modifications to the taxation of debt mutual funds are detailed below.
- Indexation Benefit has been removed.
- Capital gains from Debt mutual funds will be taxable as short-term capital gain irrespective of holding period.
- Capital gains from Debt mutual funds will be added to taxpayer income and taxed at slab rates.
The above modifications will be pertinent to invested funds beginning on April 1, 2023. However, if a taxpayer redeems their investments before March 31, 2023, earlier provisions apply.