Mutual funds are a popular investment vehicle, providing individuals with a diversified and professionally managed portfolio. However, understanding mutual fund taxation is crucial for investors to make informed decisions.
In this comprehensive guide, we’ll explore the key aspects of mutual fund taxation, helping investors navigate the complexities of tax treatment.
Table of Contents
Factors determining the Mutual fund tax on Withdrawal
Mutual fund tax Withdrawal depends on below mentioned three factors
- Type of fund -Equity or Debt Fund
- Tax treatment of Capital Gains on the basis of Holding period
- Your residential status
- Tax on dividend income
Type of fund – Equity or Debt fund
Equity mutual funds and debt mutual funds both carry different tax structures.
Equity Mutual Fund -The funds that invest (more than 65%) primarily in equity/stock-based investments are called Equity Mutual funds.
Debt Mutual Fund -The funds which invest in non-equity instruments such as Govt. Securities, treasury bills and CPs, and bond debentures are called debt funds.
Tax treatment of Capital Gains
Mutual fund taxation also depends on your holding period.
The profits/ losses from mutual funds/stocks/securities are called capital gains ( profit/loss).
The holding period means the time gap between the purchase and sale of a mutual fund or any security.
- Short-Term Capital Gains:
- Gains from the sale of securities held for one year or less are considered short-term capital gains and are taxed at the investor’s ordinary income tax rate.
- Long-Term Capital Gains:
- Gains from the sale of securities held for more than one year are classified as long-term capital gains.
| Type of gain | Equity Mutual Fund/ Hybrid Fund Equity oriented | Debt Mutual Fund/Hybrid Fund Debt oriented |
| Short Term capital gain | Holding period of LESS than 1 year | Holding period of LESS than 3year |
| Long term capital Gain | Holding period of MORE than 1 year | Holding period of MORE than 3 year |
Residential Status
Your tax also depends on your residential status. There are different tax rules for Indian resident and NRI.
Mutual Fund Tax Withdrawal ( FY 2023-24)
Please correlate it with the below-given chart
| Tax Status of Investor | Type of Fund | Short Term Capital gain tax | Long Term capital gain |
| Resident Individual / HUF / AOP / BOI /Domestic Companies/NRI | Equity Mutual Fund | 15% ( in case of NRI TDS is applicable) | Capital Gain above Rs 1 Lac is taxed @10% (in case of NRI TDS is applicable) |
| Resident Individual / HUF / AOP / BOI / | Debt Mutual Fund | Capital gain is added to income & taxed as per the investor slab rate | 20% |
| NRI | Debt Mutual Fund | Capital gain is added to income & taxed as per the investor slab rate | 10% ( unlisted units)- without indexation 20% ( listed units)- with indexation |
Let’s understand Short Term Capital gain – Equity MF/Hybrid Fund Equity Oriented
Bestii Singh invested in Equity Mutual Fund 6 months back and now he wants to redeem his money.
| Money invested in Equity Mutual Fund (6 months back) | Rs 10,00,000 |
| Current value | Rs 11,00,000 |
| Capital gain (STCG) | Rs 1 lac |
| Exit load applicable | usually 1% in equity MF |
| Exit load | Rs. 11,00,000 *1% =11000 |
| Capital Gain tax | Rs 1 lac @15% =15000 |
| Total STCG taxes | Rs 15000 |
Let’s understand Long Term Capital gain – Equity MF/Hybrid Fund Equity Oriented
Bestii Singh invested in Equity Mutual Fund 1 year back and now he wants to redeem his money.
| Money invested in Equity Mutual Fund (one year back) | Rs 10,00,000 |
| Current value | Rs 12,00,000 |
| Capital gain ( LTCG) | Rs 2,00,000 |
| LTCG on first 1 lac | Nil |
| LTCG on another 1 lac | 10% |
| Total LTCG | 1 LAC*10% |
| Long term capital gain | 10000 |
Let’s understand Long/ Short Term Capital gain – Debt MF/ Hybrid Fund Debt Oriented
Bestii Singh invested in Debt Mutual Fund 2 /3 year back and now he wants to redeem his money.
| Money invested in Debt Mutual Fund (TWO years back) | Rs 10,00,000 |
| Current value | Rs 12,00,000 |
| Capital gain ( STCG) | Rs 2,00,000 |
| Capital gain (STCG) rate | gains are added in income & taxed as per slab rate |
| If holding period is more than 3 years than LTCG will be applicable | Since it was purchased before 1 April 2023, indexation benefit will be applicable & gains are taxed @20% with indexation |
| Otherwise if purchased on or after 1 April 2023, no indexation benefit is available. |
Securities Transaction Tax (STT):
Whenever you buy or sell a security (other than commodity and currency) through a recognized stock exchange then you have to pay a tax called STT.
STT is levied on the value of taxable securities transactions as under
TDS on Dividend distributed- Equity Mutual Funds:
The TDS applies to dividends distributed from equity mutual funds @10%. In the case of NRI, the TDS rate is 20%
TDS on Distributed Income under IDCW Option – Debt Mutual Fund
The TDS applies to income distributed under the IDCW option from Debt mutual funds @10%. In the case of NRI, the TDS rate is 20%.
There shall be no TDS deductible if dividend income paid / credited in respect of units of a mutual fund is below ₹ 5,000 in a financial year.
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