How Mutual Funds Are Taxed?, Mutual Fund Taxation in India

For taxation purpose, mutual fund types in India can be categorised into 2 types:

1. Equity Fund
2. Non-Equity Fund

(1) For Resident Indians

1. Income from Equity Fund

Any mutual fund which invests 65% or more of its portfolio in equities or equity-oriented instruments is called equity fund. These funds include diversified equity funds, large/mid/small cap equity funds, equity oriented hybrid funds, Arbitrage Funds, ELSS, RGESS, sector funds etc.

• If an equity fund investor redeems his funds after 12 months from the date of investment, the income from his investment is considered as Long Term Capital Gain (LTCG) and as per mutual fund income tax act, income tax calculation on mutual fund on Long Term Capital Gain (LTCG) from an equity fund is 10% without indexation, if such gains are more than Rs 1 lakh in a financial year.
• If an equity fund investor redeems his funds before 12 months from the date of investment, the income from his investment is considered as Short Term Capital Gain (STCG). The tax on Short Term Capital Gain (STCG) from an equity fund is 15%.
• Dividend income from equity fund received by investors are added to their taxable income and taxed at their respective income tax slab rates.
• Tax Deduction at Source(TDS)- Nil

Securities Transaction Tax (STT)

Securities Transaction Tax (STT) is a tax levied on transfer of equity, mutual funds, options, futures and exchange traded funds (ETF). It was first introduced in the Union Budget 2004. STT rate is set by the government and depends upon the type of security and type of transaction i.e. purchase or sale transaction.

STT of 0.001% is levied by the mutual fund only when you sell units of an equity fund or balanced fund. There is no STT while purchasing of units of an equity fund or balanced fund. Further, there is no STT on the sale of debt fund units.

2. Income from Debt Mutual Fund

Any mutual fund which invests in debt securities is called debt fund. These funds include debt funds, liquid funds, gold funds, debt oriented hybrid funds, money market funds etc. and Floater Funds (minimum 65% invested in floating rate instruments)

• If a debt fund investor redeems his funds after 3 years from the date of investment, the income from his investment is considered as Long Term Capital Gain (LTCG). Mutual fund income tax on Long Term Capital Gain (LTCG) from a debt fund will be according to investor's slab rate.
• If an debt fund investor redeems his funds before 3 years from the date of investment, the income from his investment is considered as Short Term Capital Gain (STCG). The tax on Short Term Capital Gain (STCG) from an debt fund is taxed according to investor's tax slab.
• Dividend income from debt fund received by investors are added to their taxable income and taxed at their respective income tax slab rates.
• Tax Deduction at Source(TDS)- Nil

3. Income from Balanced Hybrid Funds (Equity: 40%-60% and Debt: 60%-40%)

Any mutual fund which invests in securities with equity 40%-60% and debt 60%-40%.

• If a investor redeems his funds after 36 months from the date of investment, the income from his investment is considered as Long Term Capital Gain (LTCG). Mutual fund income tax on Long Term Capital Gain (LTCG) from a debt fund will be 20% with indexation.
• If an investor redeems his funds before 36 months from the date of investment, the income from his investment is considered as Short Term Capital Gain (STCG). The tax on Short Term Capital Gain (STCG) from an debt fund is taxed according to investor's tax slab.
• Dividend income from debt fund received by investors are added to their taxable income and taxed at their respective income tax slab rates.
• Tax Deduction at Source(TDS)- Nil

(2) For Non-Resident Indians (NRIs)

1. Income from Equity Fund

Any mutual fund which invests 65% or more of its portfolio in equities or equity-oriented instruments is called equity fund. These funds include diversified equity funds, large/mid/small cap equity funds, equity oriented hybrid funds, Arbitrage Funds, ELSS, RGESS, sector funds etc.

• If an equity fund investor redeems his funds after 12 months from the date of investment, the income from his investment is considered as Long Term Capital Gain (LTCG). The tax on Long Term Capital Gain (LTCG) from an equity fund is 10% without indexation benefits, if such gains are more than Rs 1 lakh in a financial year.
• If an equity fund investor redeems his funds before 12 months from the date of investment, the income from his investment is considered as Short Term Capital Gain (STCG). The tax on Short Term Capital Gain (STCG) from an equity fund is 15%.
• TDS on dividend income for NRI is 20% (excluding cess and surcharge).
• Tax Deduction at Source(TDS)- 15% for equity fund, if withdrawn before 12 months from the date of investment and 10%, if withdrawn after 12 months from the date of investment.

2. Income from Non-Equity Fund

Any mutual fund which invests less than 65% of its portfolio in equity or equity-oriented instruments is called non-equity fund. These funds include debt funds, liquid funds, gold funds, debt oriented hybrid funds, money market funds etc.

• If a debt fund investor redeems his funds after 3 years from the date of investment, the income from his investment is considered as Long Term Capital Gain (LTCG). The tax on Long Term Capital Gain (LTCG) from a debt fund is 20% with indexation benefit. Here indexation means that the original cost of investment goes up after factoring in inflation. Due to indexation, tax amount on Long Term Capital Gain (LTCG) becomes negligible.
• If an debt fund investor redeems his funds before 3 years from the date of investment, the income from his investment is considered as Short Term Capital Gain (STCG). The tax on Short Term Capital Gain (STCG) from an debt fund is taxed according to investor's tax slab.
• TDS on dividend income for NRI is 20% (excluding cess and surcharge).
• Tax Deduction at Source(TDS)- 20% with indexation for LTCG for listed schemes and 10% without indexation for unlisted schemes and as per the income tax slab rate (at 30% assuming that the investor falls under the highest tax slab) for STCG..