Tax implications of mutual fund investments

Investing in mutual funds is as good as investing in the underlying security itself. So, the taxation aspect of each scheme depends upon the asset classes in which the scheme invests. Like any other investment, it is important to consider the tax implications of mutual fund investments before making them.

Type of scheme

For taxation purposes, mutual fund schemes can be categorised into two main types—equity-oriented schemes and non equity-oriented schemes. The former are those that invest at least 65% and above of their net assets in shares of listed Indian companies. Schemes that invest less than 65% or don’t invest in equity are non-equity schemes, such as liquid funds, debt funds, gold funds, etc. Both types are taxed differently.

Capital gain

The gain made from sale of the security is termed as capital gain. If the security is held for a short term, the gain is short-term capital gain (less than one year in case of equity schemes and less than three years in case of non-equity schemes).

  • Equity funds: Gains from equity funds redeemed within one year are taxed at 15%. If the same is redeemed after one year, the gains over Rs.1 lakh are taxed at 10%.
  • Non-equity funds: If these are redeemed within three years, the gains are added to the income and taxed as per the applicable income tax slab. However, if non-equity funds are redeemed after three years, the gains are taxed at 20% with indexation benefit.

Dividend income

Dividend received on mutual funds are taxed at the respective income tax slab rate. Dividends received in excess of Rs.5,000 are subject to tax deduction at source (TDS) at 10%.

Points to note

  • As international funds invest in shares of foreign companies, they are taxed as non equity-oriented schemes.
  • Securities transaction tax (STT) is also applicable at 0.001% on redemption from equity funds, irrespective of holding period.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

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