Mutual Funda: Mutual Fund Taxation

Mutual Fund TaxationTo understand Mutual Fund taxation, classify Mutual Fund investments into two categories. Equity oriented Mutual Fund investments and Other Than Equity Oriented Mutual Funds.

Equity Oriented Mutual Fund Taxation

If Exit Before 12 months After 12 months
Applicable Tax Short Term Capital Gains Tax (STCG) Long Term Capital Gains Tax (LTCG)
Tax Rate 15% + surcharges + cesses as applicable 10% on LTCG above Rs 1,00,000 in a Financial Year

Equity Oriented Mutual Fund exits within a year will have STCG tax implications or 15% + surcharges + cesses as applicable.

LTCG tax on Equity Mutual Funds are 10% on LTCG above Rs 1,00,000 in one Financial Year. From April 1, 2018 onwards, Finance Act, 2018 introduced Section 112A to provide that long term capital gains arising from transfer a unit of an equity oriented fund shall be taxed at 10% without indexation and without foreign currency fluctuation benefit of such capital gains exceeding one lakh rupees

ELSS Schemes are equity oriented but they are an exception. They are designed as instruments for tax saving with a 3 year lock-in.

Taxation on Sale of Other than Equity Oriented Mutual Funds

If Exit Before 36 months After 36 months
Applicable Tax STCG Tax LTCG Tax
Tax Rate STCG are added to the individual’s taxable income.Tax is payable at the individual’s applicable tax slab 15% (20% with indexation) plus surcharges and cesses as applicable

STCG tax will apply if Other Than Equity Oriented Mutual Funds are exited within 36 months. In this case, the STCG should be added to the individual’s taxable income. Tax payable is computed using the tax slab applicable to the individual.

LTCG tax on Other Than Equity Oriented Mutual Funds are 15% (20% with indexation) plus surcharges and cesses as applicable.

Taxation on Dividend Income

Dividends are taxable in the hands of the investor from starting 01-Apr-20, as per the FY20-21 budget. Also, Mutual Funds shall no longer pay Dividend Distribution Tax on dividends received by them.

Earlier, any dividend received from Mutual Funds was tax free in the hands of the individual while Mutual Funds had to deduct taxes(DDT) from the dividend received by them. There was no tax on dividends  for Equity Oriented Schemes. For other than Equity Oriented Schemes, tax was deducted at 25% + applicable surcharges and cesses.

Tax is deductible by the Mutual Fund scheme for Non-Resident Investors

For Non Resident Investors, Mutual Funds have to deduct Capital Gains tax at the time of redemption of units. In effect, the investor will receive proceeds from a sale net of applicable Capital Gains Taxes.

Refer to the Tax Reckoner for Mutual Funds for this financial year from HDFC Mutual Fund for more details. The updated document for FY 2018-19 can be accessed here.

This note is applicable to individuals. It does not cover all details of mutual fund taxation and should be used as a general reference. Do consult a tax expert to understand the exact tax nuances.

We hope this increases your understanding of  Mutual Fund Taxation. If you have more questions, do write to us on [email protected].

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