Taxation of earnings from Mutual Funds

Published On - March 19, 2015

admin Income-tax Act, 1961, Mutual Funds
There are two ways that you may earn from a Mutual Fund –
  • earn a dividend and
  • have short term or long term capital gains.
Income or dividend received by an investor from a Mutual Fund is fully exempt from tax as per the Income Tax Act.
Capital Gains on Mutual Funds may be taxable depending upon the type of mutual fund – equity or debt and also depending upon the period for which it is owned.
Equity Funds are those funds that invest heavily in Equities, usually exceeding 65% of their total portfolio. A fund that does not meet the criteria of a equity fund is a debt fund.
Equity funds and Debt funds have different holding periods based on which they are classified as Long Term and Short Term.
  • Equity Funds are considered Short Term Capital Assets when held for 12 months or less.
  • Debt Funds are considered Short Term Capital Assets when held for 36 months or less.

(These changes are effective 11th July 2014. When Debt Funds are sold on or before 10th July 2014, they will have the same treatment as Equity Funds and be considered short term capital assets if holding period is of 12 months or less).
Now lets see how are Short Term and Long Term Gains taxed on Equity & Debt Funds.
Equity Funds
– Short term capital gains on Equity Funds are taxed @ 15% (irrespective of your tax slab)
– Long Term Capital Gains on Equity Funds are not taxable.
Debt Funds
– Short term gains on debt funds are added to your total income and taxed as per the slabs applicable to you.
– Long term gains on debt funds effective 11th July are taxed @ 20% with indexation. Any long term gains on debt funds up to 10th July are taxed at 10% without indexation or 20% with indexation whichever is lower.

Note that surcharge and cess will be also applicable, on your total tax payable.