Mutual Fund Taxation in India: What Every Investor Should Know

Explained: How will Budget 2024 impact your mutual fund investments - India  Today

Mutual funds are some of the most profitable investments that people can make to fulfil their financial objectives. It is tax-efficient and comes with significant benefits. At the same time, if you are under the high income tax brackets then you need to be informed about how taxation will affect your mutual fund investments. For instance, a few factors determine what your tax will be according to the type of fund you have.

Begin with understanding which factors determine the tax on mutual funds in India, and then you can discover what the tax rates are for funds purchased before and after the Union Budget 2024.

Factors that Determine Tax on Mutual Funds

Taxation on mutual funds in India is influenced by some of these essential factors:

  • Type of Fund: Taxation rules are different depending on the kind of mutual fund you have.
  • Holding Period: This period is the time between the sale and purchase of the mutual fund units. You are liable to pay a low tax amount if you hold your investment for a prolonged period. So, the holding period will influence the tax rate that must be paid on your capital gains.
  • Capital Gains: If you sell your capital assets at a higher price than its amount, then the profit is called capital gains, which again falls into the taxable category.
  • Dividend: A dividend is a section of the profit distributed among people by mutual fund houses.

Taxation on Equity Funds

The following is the tax rate for equity-oriented mutual funds India:

Equity-Oriented Mutual FundHolding PeriodLong-TermShort-Term
Sold before 23rd July 202412 months10%15%
Sold on or after 23rd July 202412 months12.50%20%

These funds have 65% of the money in Indian stocks, and these include pure equity schemes like mid-cap, large-cap, aggressive hybrid, arbitrage funds, etc.

Taxation on Debt Mutual Funds in India

These schemes have 65% of the money invested in SEBI-regular debt instruments such as conservative hybrid funds, liquid funds, etc. Its tax rate includes the following:

Debt-Oriented Mutual FundHolding PeriodLong-TermShort-Term
Acquired after 1st April 2023 and sold on any dateNo periodSlab rateSlab rate
Acquired before 1st April 2023 –
Sold before 23rd July 202436 months20% with indexation benefitSlab rate
Sold on or after 23rd July 202424 months12.50%Slab rate

Taxation on Hybrid Funds

These mutual funds in India are those that invest between 65% and 35% of their corpus in Indian equities. Here are its tax rates:

Hybrid-Oriented Mutual FundHolding PeriodLong-TermShort-Term
Sold before 23rd July 202436 months20% with indexation benefitSlab rate
Sold on or after 23rd July 202424 months12.50%Slab rate

Taxation on Other Mutual Funds in India

These funds have less than 65% of their money in debt instruments or Indian stocks, and they include silver funds, gold funds, and international equity funds. Here are its tax rates:

Other Mutual FundsHolding RateLong-TermShort-Term
Acquired after 1st April 2023
Sold before 1st April 2025No holding periodSlab rateSlab rate
Sold on or after 1st April 202524 months12.50%Slab rate
Acquired before 1st April 2023
Sold before 23rd July 202436 months20% with indexation benefitSlab rate
Sold on or after 23rd July 202424 months12.50%Slab rate

Taxation of Capital Gains

The taxation rate of the capital gains offered by mutual funds in India depends on the type of funds and holding period. The gains are realised by selling units of funds in the following categories:

Fund TypeLong-Term Capital GainsShort-Term Capital Gains
Hybrid debt-oriented fundsAlways short-term
Hybrid equity-oriented funds12 months and longerShorter than 12 months
Debt fundsAlways short-term
Equity funds12 months and longerShorter than 12 months

Taxation of Dividends

Dividends received by investors are added to their taxable income and taxed at their particular rates. At the same time, previously, dividends were tax-free since the companies would pay the dividend distribution tax.

Wrapping Up!

While there are some taxes applicable on mutual funds they become highly tax-efficient the longer you hold on to its units. At the same time, you will need to disclose the details of redeemed investments in the subsequent ITR filing. You need to involve details including the date of purchase and sale of the funds among other aspects. Overall, the taxation of mutual funds in India depends on the holding period and whether the funds are debt or equity-oriented. It becomes incredibly easy to file your taxes once you understand the terminologies and their meaning, along with keeping up with the changing tax slabs.

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