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Taxability of Income & Capital Gains from Mutual Funds

Taxability of Income & Capital Gains from Mutual Funds

Every second person is now investing in mutual funds, mostly through SIP.  Mutual funds provides benefit of investment being managed by professionals and without taking the headache of tracking the market regularly.

But most of the persons is confused about the taxability and exemptions related to mutual fund. Here is a detailed guide about the taxation of income and capital gains from mutual funds.

Taxability of income (dividends) from mutual funds

Income from mutual funds are termed as dividends. Dividends are paid on regular basis to the investors. Dividend income is exempt in hands of investor both in case of Equity funds and Debt funds.

Also Read: Mutual Funds – Growth or Dividend option

Taxability of Capital Gains arising from sale of mutual fund units

Capital gain tax on mutual funds depend upon the type of mutual fund (Equity oriented or debt oriented) and nature of capital gain (Short term or long term).

Equity oriented Mutual Funds

Long term capital gain on equity orient mutual funds is exempt from tax.

While short term capital gains on mutual fund is taxable at the rate of 15%.

Debt oriented Mutual Funds

Long term capital gain is taxable at 10% without indexation or 20% with indexation whichever is lower.

Short term capital gain is added to the income of the assessee and taxed as per income tax slab applicable to the assessee.

Equity oriented or Debt oriented

“Equity Oriented Fund” is defined to mean:

  • Such funds where the investible funds are invested by way of equity shares in domestic companies to the extent of more then 65% of the total proceeds of such fund; and
  • Which has been setup under a scheme of mutual fund specified under section 10 (23D).

The percentage of equity shares holdings of such fund is required to be computed with reference to the annual average of the monthly averages of opening and closing figures.

All other funds are debt oriented funds.

Long term or Short term capital gain

Long term capital gain arises when units are sold by assessee after 12 months from the date of its purchase.

Short term capital gain arises when units are sold by assessee within 12 months from the date of its purchase. Units  held for exactly 12 months will also be considered as short term capital assets.

About Prateek Agarwal

I am Chartered Accountant by profession, practicing in Jaipur. I have interest in accounting and taxation field.

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