The mutual funds have grown popular among Indian investors, but there is one thing which most of them forget when deciding to invest in any such fund – tax. It would depend on the kind of mutual fund, its holding period, and the kind of gain made from the fund. There are different rules that apply to equity, debt, and hybrid mutual funds, and all of them have been changed since the budget of 2024. A good understanding of the basic rules can help you save money and avoid confusion during the return filing process.
How are Mutual Funds Taxed in India?
The income earned from mutual funds is taxable and is classified as either short-term capital gain (STCG) or long-term capital gain (LTCG), depending upon the tenure and the type of fund.
Each category of mutual fund has its own tax treatment under the Income-tax Act. The equity fund invests in equity, the debt fund in fixed income instruments, while the hybrid or balanced fund is a blend of the two funds.
The indexation benefits for debt funds were done away with since April 2023, and Budget 2024 saw more changes in the holding period and rates for taxation in different categories of funds. The most important thing before anything else is knowing what category the fund falls into.
Tax on Equity Mutual Funds
Equity mutual funds generally qualify for the equity-fund capital-gains regime when they meet the applicable statutory conditions.
Holding Period | Type | Tax Rate |
Less than 12 months | STCG | 20% |
More than 12 months | LTCG | 12.5% (gains above ₹1.25 lakh in a financial year) |
Short-Term Capital Gains (STCG)
Any profit made by selling equity fund units within 12 months of acquisition is treated as short term. As per Budget 2024, any STCG from equity mutual funds is taxed at the rate of 20%.
In case you make investments of ₹2 lakhs in an equity fund and you sell it within 8 months at ₹2.3 lakhs, then your profits of ₹30,000 will be taxed at the rate of 20%, making the tax liability ₹6,000.
Long-Term Capital Gains (LTCG)
Any unit of equity funds that have been held beyond 12 months falls under LTCG. In a fiscal year, any LTCG up to ₹1.25 lakh is completely exempt from taxation. All amounts beyond this limit will attract tax at the rate of 12.5% without any indexation.
Consider that you make a gain of ₹1.8 lakh through an equity fund in one year. Then your LTCG of ₹1.25 lakh is exempt, while the rest of ₹55,000 is liable for taxation at the rate of 12.5%.
Tax on Debt Mutual Funds
Debt mutual funds invest mainly in fixed-income instruments such as government securities, corporate bonds, and money market instruments. Their tax rules were updated in 2023 and modified again in the Budget 2024.
Acquisition Date | Holding Period | Tax Treatment |
On or after 1 April 2023 | Any duration | Taxed at slab rate (treated as short-term) |
Before 1 April 2023 | More than 24 months | LTCG at 12.5% without indexation |
Before 1 April 2023 | 24 months or less | STCG at slab rate |
Tax Treatment Based on Acquisition Date
Debt fund units bought on or after 1 April 2023 no longer get indexation benefits or a separate long-term rate. Regardless of how long you hold them, gains are added to your income and taxed at your applicable slab rate.
For units bought before this date, the older rule still applies: hold for more than 24 months and you qualify for LTCG at 12.5% without indexation. For example, an investor who bought debt fund units in January 2023 and sells them in March 2026, after holding for over three years, pays 12.5% tax on the gain, with no indexation adjustment.
Tax on Hybrid Mutual Funds
Hybrid funds invest across both equity and debt, and their tax treatment depends on how much of the portfolio sits in each asset class.
Fund Type | Equity Allocation | Tax Treatment |
Equity-oriented hybrid | 65% or more | Same as equity funds |
Debt-oriented hybrid | Less than 65% | Same as debt funds |
Equity-Oriented Hybrid Funds
If a hybrid fund holds 65% or more of its assets in equity, it's taxed exactly like an equity fund. STCG is taxed at 20%, and LTCG above ₹1.25 lakh a year is taxed at 12.5%.
Debt-Oriented Hybrid Funds
If the equity allocation falls below 65%, the fund is taxed like a debt fund. Gains are added to your income and taxed at your slab rate, following the same acquisition-date rules that apply to debt funds.
Tax on International Mutual Funds
International or overseas mutual funds, which invest in foreign stocks or global indices, are treated as debt funds for tax purposes because their domestic equity exposure is low.
Holding Period | Tax Treatment |
Any duration | Taxed at slab rate (as per current debt fund rules) |
This means gains from international funds are added to your taxable income each year, regardless of how long you've held the units, in line with the post-2023 debt fund framework.
TDS on Mutual Fund Investments
TDS on mutual funds mainly applies to dividend income, not capital gains.
Type of Income | TDS Rate | Threshold |
Dividend income (resident investors) | 10% | Above ₹10,000 in a financial year |
Dividend income (NRI investors) | 20% (plus surcharge and cess) | No threshold |
Capital gains from mutual fund redemptions are not subject to TDS for resident investors, but NRIs may face TDS deductions on capital gains as well, so it's worth checking the applicable rate before you redeem.
How to Calculate Tax on Mutual Fund Gains
- 1. Identify the fund type: equity, debt, or hybrid.
- 2. Check the holding period from purchase to redemption date.
- 3. Classify the gain as short-term or long-term based on the fund's rules.
- 4. Apply the relevant tax rate or slab rate.
- 5. Deduct any applicable exemption, such as the ₹1.25 lakh LTCG exemption for equity funds.
Worked example: Suppose you invested ₹5 lakh in an equity fund in June 2024 and redeemed it in September 2026 for ₹6.5 lakh. The holding period is over 12 months, so LTCG is applicable. The gain is ₹1.5 lakh. After the ₹1.25 lakh exemption, ₹25,000 is taxable at 12.5%, giving a tax liability of ₹3,125.
Key Factors That Affect Mutual Fund Taxation
- Category of fund: Equity, debt, or hybrid are the criteria for determining the basic taxation criteria.
- Duration of holding: Helps in determining if the gain is a short-term gain or long-term gain.
- Purchase date: Debt funds that were purchased before or after April 2023 will have different taxation criteria.
- Nature of income: Capital gain and dividend income will be taxed differently.
- Resident status: NRIs have different TDS rates than residents.
- Exemption limit: The LTCG exemption of ₹1.25 lakh applies only to equity and equity hybrid funds.
Conclusion
There are three key factors related to the taxation of mutual funds in India which include the category of mutual funds, period of time for which mutual funds are held, and the nature of gains from mutual funds. In the case of equity mutual funds, STCG and LTCG are levied at 20 percent and 12.5 percent respectively. However, in the case of debt mutual funds after April 2023, there is a need to pay taxes according to the slab rates.
FAQs on Tax on Mutual Funds in India
Are any mutual funds tax-free in India?
None of the mutual funds are completely tax-free; however, ELSS funds have deductions under Section 80C up to ₹1.5 lakh, and LTCG up to ₹1.25 lakh in a year is exempted.
What is the LTCG exemption limit for mutual funds in India?
Up to ₹1.25 lakh LTCG in a financial year on equity and equity-oriented hybrid mutual funds are exempt from tax, as per Budget 2024.
How is dividend income from mutual funds taxed?
The dividend amount received will be added to your overall income and taxed according to your income tax slab. If the dividend income exceeds ₹10,000 a year, TDS @ 10% will be deducted.
Does a Systematic Investment Plan (SIP) attract tax?
Each SIP instalment is considered a separate investment having its own date of purchase. Each individual instalment is taxed separately on the basis of its holding period.
What did Union Budget 2024 change for mutual fund investors?
STCG on mutual funds from 15% to 20%, LTCG on mutual funds from 10% to 12.5%, and the annual LTCG exemption limit increased from ₹1 lakh to ₹1.25 lakh under Budget 2024.
How are international mutual funds taxed in India?
International mutual funds are similar to debt funds. The gains are included in the taxpayer’s income and charged at slab rates, irrespective of the holding period.
How are mutual funds taxed in India?
Taxation is dependent on the type of the mutual fund and its holding period. Equity funds are liable to pay STCG/ LTCG, debt funds to slab rate, and hybrid funds according to their asset allocation of equity or debt.
What is the LTCG tax rate on mutual funds?
The LTCG exceeding ₹1.25 lakh per year in equity mutual funds and equity-oriented hybrid mutual funds will be subject to tax at 12.5% rate. In debt mutual funds held for more than 24 months from before April 2023, LTCG will be 12.5%.
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