Tax Benefit of Mutual Fund, 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

For Resident Indians

Mutual fund 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, 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%, 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 is tax-free.
• 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.

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). Mutual fund income taxable 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.
• Dividend declared by a debt mutual fund is tax-free in the hands of investors; however, mutual fund needs to pay dividend distribution tax (DDT) from the distributable income at the rate of 28.33 % (including surcharge and cess) directly before releasing dividend to the investors.
• Tax Deduction at Source(TDS)- Nil

For Non-Resident Indians (NRIs)

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, 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%, 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 is tax-free.
• Tax Deduction at Source(TDS)- 15% for equity fund, if withdrawn before 12 months from the date of investment and NIL, if withdrawn after 12 months from the date of investment.

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.
• Dividend declared by a debt mutual fund is tax-free in the hands of investors; however, mutual fund needs to pay dividend distribution tax (DDT) from the distributable income at the rate of 28.33 % (including surcharge and cess) directly before releasing dividend to the investors.
• Tax Deduction at Source(TDS)- 30% for non-equity fund, if withdrawn before 3 years from the date of investment and 20% (with indexation), if withdrawn after 3 years from the date of investment.