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How does taxation work for Mutual Fund investments?

1) Equity Funds

  1. Equity funds essentially mean any fund which has more than 65% invested in equity. For example, large-cap funds, small cap funds, balanced funds(equity oriented), etc.
  2. Short Term Capital Gains (STCG) of 15% will be applicable if the units are sold within 1 year of allotment.
  3. Long-Term Capital Gains (LTCG) will be 10% if the units are sold after 1 year of allotment (if your capital gains are more than 1 lac a year) - This is grandfathered till 31 Jan 2018. Meaning, whatever gains you had until 31 Jan 2018 are tax-free. Only FURTHER gains will be taxed at 10%.
  4. Dividends received in excess of Rs 10 lacs, will be chargeable at the rate of 10%.
  5. Short-term capital loss can only be offset against STCG or LTCG
  6. Long-term capital cannot be offset against LTCG.
2) Non - Equity Funds

  1. This is funds in which the percentage of equity investments is less than 65%. ex: debt schemes, liquid schemes, etc.
  2. STCG will be applicable as per the tax bracket.
  3. LTCG will be applicable at 20% after indexation. Indexation means to adjust the cost of purchase as per the inflation index number which the government releases every year. Let's assume, you purchased a unit at Rs 100 in 2018 and sold the unit at Rs 150 in 2020. Also, cost inflation index is 1000 for 2018 and 1200 for 2022 respectively. Then the indexed cost of acquisition is (100*1200)/1000 is now Rs 120. The capital gains post indexation is Rs 150 - 120 = Rs 30 (instead of 150 - 100). So, 20% tax on 30 is Rs 6 per unit.
  4. Dividends from non-equity schemes will be given after deducting DDT (Dividend Distribution Tax) which is 28.84%. So, it is best to choose a growth-oriented scheme in this case.
  5. Short-term capital loss can be offset with STCG or LTCG
  6. Long - term capital loss can be offset with LTCG
In both the cases, the capital loss cannot be offset against any Head of Income.

Note: This is applicable under the current taxation rules and could be subject to changes.