Mutual funds offer tax-efficient returns compared to traditional investments like fixed deposits. However, profits from mutual funds — known as capital gains — are taxable. Here’s a concise guide to understanding how mutual funds are taxed.
Index Fund Corner
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| Scheme Name | 1-Year Return | Invest Now | Fund Category | Expense Ratio |
|---|---|---|---|---|
| Axis Nifty 50 Index Fund | +32.80% | Invest Now | Equity: Large Cap | 0.12% |
| Axis Nifty 100 Index Fund | +38.59% | Invest Now | Equity: Large Cap | 0.21% |
| Axis Nifty Next 50 Index Fund | +71.83% | Invest Now | Equity: Large Cap | 0.25% |
| Axis Nifty 500 Index Fund | — | Invest Now | Equity: Flexi Cap | 0.10% |
| Axis Nifty Midcap 50 Index Fund | +46.03% | Invest Now | Equity: Mid Cap | 0.28% |
What is the tax on mutual funds?
The gains you earn from mutual fund investments fall under the category of capital gains, which are taxable. Additionally, dividends distributed by mutual funds are also subject to taxation.
From April 1, 2023, debt mutual funds — funds with less than 35% equity exposure — are taxed at the investor’s slab rate without the benefit of indexation.
What factors determine mutual fund taxation?
Equity, debt, or hybrid funds have different tax rules.
- Capital gains: Profits from selling mutual fund units are classified as short-term or long-term, depending on the holding period.
- Dividend income: Dividends are taxed at your income tax slab rate.
- Holding period: Longer holding periods typically result in lower tax liability.
How do you earn returns on mutual funds?
- Dividends: Distributed from the fund’s profits and taxable as per your income slab.
- Capital gains: Profits realised when you sell fund units.
How are capital gains taxed?
The taxation of capital gains depends on the fund type and holding period:
Also read: SIP growth and economic strength to fuel mutual fund industry in 2025: ICRA Analytics
Equity funds (equity exposure >65%)
Short-term gains: Taxed at 20% if units are sold within one year.
Long-term gains: Gains above ₹1.25 lakh are taxed at 12.5% (post-July 23, 2024) without indexation.
Debt funds (equity exposure <35%)
Short-term gains: Always taxed at slab rates (from April 1, 2023).
Long-term gains: Previously taxed at 20% with indexation, now considered short-term capital gain and are taxed at slab rates.
Hybrid funds
Tax rules depend on equity exposure. If equity exceeds 65%, it is taxed like equity funds; otherwise, debt fund rules apply.
What about SIP investments?
For systematic investment plans (SIPs), each instalment is treated as a separate purchase. Gains are taxed based on the holding period of individual instalments.
If units bought through a SIP are held for over a year, long-term capital gains rules apply. Short-term gains are taxed at 15%.
How are dividends taxed?
Since the Union Budget 2020, dividends are added to your taxable income and taxed at your income slab rate.
Other applicable taxes
Securities transaction tax (STT): A rate of 0.001% on buying/selling units of equity funds or equity-oriented hybrid funds. No STT on debt fund transactions.
Also read: What is lock-in period in mutual funds: Understanding its meaning and advantages
Can mutual funds save tax?
Yes, Equity Linked Savings Schemes (ELSS) offer deductions under Section 80C of the Income Tax Act, with a maximum deduction of ₹1.5 lakh. ELSS has a three-year lock-in period.
Key updates post-2023
Debt funds: Gains taxed as per slab rates without indexation.
Equity LTCG: Tax rate increased to 12.5% (from 10%) on gains exceeding ₹1.25 lakh.
