Mutual Fund Taxation

Taxation of gain from Mutual Fund

Objective for Mutual fund Investment

Everyone investing in mutual fund has a primary objective to have earning through mutual funds.

The income earned from mutual funds is taxable under the head “Income for Capital gains”.

ELSS funds which are Equity linked saving scheme funds have lock-in period of 3 years comes with deduction under 80 C, the profit on them is also taxable which is mentioned below and shown in a chart.

The taxation of mutual funds generally depends upon their holding period means the duration for which you stayed invested in a fund.

Types of Holding Periods

Long Term/Short Term

Just like stocks if you held equity or balance equity funds for a period more than 12 months then same are called Long term while if you held Debt funds for more than 36 months tenure same are called Long term

Similarly for Equity and debt fund period of holding less than 12 months denotes short term and for debt fund less than 36 months is so called Short term.

Chart presentation

Period Equity Balanced Debt
Short Term < 12 Months < 12 Months < 36 Months
Long Term >12 Months >12 Months >36 Months

Note: “<” denotes “Less than”   and   “>” denotes “more than”

Taxation of Mutual Funds

  • Equity linked saving schemes (ELSS)

As mentioned above ELSS comes with a handy 80C deduction upto ₹ 1.5 Lakh. These funds invests amount received from investors into Equity shares of companies according to their asset classification in prospectus.

As mentioned above they comes with a lockin period of 3 years and the gain on maturity proceeds is taxable under LTCG (Long term capital gain) as period of holding is > 1year in this case.

Gain upto first ₹ 1.0 Lakh is tax free while the gain above this amount is taxable @ 10% without the benefit of indexation.

  • Other Equity Mutual Funds (Non Tax Saver)

In case of other MF too in case of Long term capital gain upto 1 lakh is tax free and tax is charged @ 10% on rest without indexation.

but for short term cap gain the tax rate is 15% if redeemed before holding period of 12 months.

  • Debt Funds

Long term capital gains on Debt funds is taxed @ 20% after indexation

While Short term Capital gain in this case is taxed as per your income slab. For example if you fall in tax slab of 30% then tax @ 30% will be charged and if you have total income below Rs. 2.5 Lac than tax @ 0% would be charged as you are below the threshold basic tax exemption limit.

  • Balanced Fund

These are treated just like other equity mutual funds as mentioned above.

Easy to remember chart for Mutual fund taxation

Type of Fund Less than 1 Year 1 Year – 3 Years More than 3 Years
ELSS Lock in period Lock in period 0% for Gain upto 1 Lac
and 10% above that
Equity/balanced 15% 0% for Gain upto 1 Lac
and 10% above that
0% for Gain upto 1 Lac
and 10% above that
Debt Fund As per your Income Slab As per your Income Slab 20%

Check out these links to know more about mutual funds :

Everthing about Mutual Funds

Right time to invest into mutual funds

Systematic Investment Plan (SIP)

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