How Mutual Fund Taxation Works in India
Taxation on mutual funds depends on the type of fund (equity or debt) and the holding period of your investment. Understanding these rules is crucial to calculating your net post-tax returns.
Taxation of Equity Mutual Funds
A mutual fund is classified as equity-oriented if it invests at least 65% of its assets in domestic equities. The holding period for long-term classification is 12 months:
- Short-Term Capital Gains (STCG): If sold within 1 year, gains are taxed at 15%.
- Long-Term Capital Gains (LTCG): If sold after 1 year, gains up to Rs. 1 Lakh per financial year are tax-free. Gains exceeding Rs. 1 Lakh are taxed at 10% without indexation.
Taxation of Debt Mutual Funds
For debt mutual funds (investing less than 35% in equity), recent tax amendments require all capital gains to be treated as short-term and taxed at your applicable income tax slab rates, regardless of the holding period.
