Mutual funds present a straightforward and low-risk investment approach by pooling funds from diverse investors and being professionally managed. They ensure diversification, accessibility, and cost efficiency, aligning with various investment goals and regulated for ease. Additionally, it’s crucial to note that when withdrawing such investments, there is a tax liability under Capital Gains and Losses, as mutual fund holdings are treated as capital assets.
Budget 2024
Budget 2024 introduces these changes effective FY 2024-25:
- Assets will now be classified as long-term or short-term based on holding periods of 12 months or 24 months. The 36-month holding period is eliminated.
- Listed securities held for over 12 months are considered long-term. For all other assets, the holding period is 24 months.
- Short-Term Capital Gains tax on listed equity shares, equity-oriented funds, and business trust units increases from 15% to 20%. Other short-term assets will continue to be taxed at slab rates.
- The exemption limit for Long-Term Capital Gains on equity shares, equity-oriented units, and business trust units rises from ₹1 lakh to ₹1.25 lakh annually. The tax rate increases from 10% to 12.5%.
- The ₹1.25 lakh exemption applies for the full year, but the new tax rate applies from 23rd July 2024.
- Tax on other long-term assets reduces from 20% to 12.5% starting 23rd July 2024. However, indexation benefits are removed. For real estate bought before 23rd July 2024, taxpayers can choose between 12.5% tax without indexation or 20% tax with indexation.
What are Mutual Funds in India?
Mutual funds refer to investment vehicles where investors purchase units that are correlated with the performance of assets in the fund’s portfolio. These funds come in various types, such as equity funds, debt funds, and hybrid funds, and cater to diverse investment goals and risk preferences. Investors can choose funds based on their financial objectives, risk tolerance, and investment timeline.
Further, Systematic Investment Plans (SIPs) allow for regular contributions, encouraging disciplined and systematic investing. This approach enables individuals to align their investments with their unique financial plans and preferences.
Types of mutual funds
- Equity Mutual Funds – Equity-oriented Mutual Funds are funds that invest more than 65% in equity instruments. Types of equity mutual funds include large-cap funds, mid-cap funds, small-cap funds, ELSS (Equity Linked Savings Schemes), Index funds, Arbitrage funds, etc.
- Debt Mutual Funds – Debt-oriented Mutual Funds are funds that invest in fixed-income securities such as bonds, treasury bills, and other debt instruments. Types of debt mutual funds include liquid funds, short-term funds, income funds, hybrid funds, fund of funds (FOF), etc.
- Floater Mutual Funds – Under these funds, a minimum of 65% of funds are invested in floating rate instruments.
- Hybrid Mutual Funds – These funds invest in a mix of both equities and debt instruments. They aim to balance risk and return, making them suitable for investors seeking a diversified portfolio. These funds are also known as balanced funds.
Capital Gains on Mutual Funds
The taxation on mutual funds depends on the holding period of the asset. Hence, to determine the capital gain tax rate firstly we need to derive the holding period of the mutual funds.
Holding Period
| Fund Type | Short term | Long term |
| Equity Funds and Hybrid Equity-oriented funds | < 12 months | >= 12 months |
| Debt Funds and Hybrid Debt-Oriented funds (including floater funds and other funds which invest <= 35% in Equity) | Always Short Term | Always Short Term |
Note: In the case of Debt Funds and Hybrid Debt-Oriented funds (including floater funds and other funds that invest <=35% in Equity) which are purchased on or before 31st March 2023, the holding period will be 36 months. Hence, if the investment period is more than 36 months then such an asset will be termed Long Term Capital Asset.
Taxation on Mutual Funds
Following is the tax treatment for Capital Gains on mutual funds:
| Type of Mutual Fund | Short-Term Capital Gains | Long-Term Capital Gains |
| Equity Mutual Funds (funds which invest >65% in Equity) | 15% under section 111A | Upto INR 1 lakhs- NIL Above INR 1 lakhs – 10% under section 112A |
| Aggressive Hybrid Funds (where Equity investment is 65% to 80%) | 15% under section 111A | Upto INR 1 lakhs- NIL Above INR 1 lakhs – 10% under section 112A |
| – Debt Mutual Funds – Floater Funds – Other funds (which invest <=35% in Equity) | Slab rates | Slab rates |
| Conservative Hybrid Funds (where Equity investment is 10%-25% and Debt is 75%-90%) | Slab rates | Slab rates |
| Balanced Hybrid Funds (Equity is 40% – 60% and Debt is 60% – 40%) | Slab rates | 20% with Indexation |
| Other Funds (where investment in Equity is >35% but <65%) | Slab rates | 20% with Indexation |
Note: In the cases of Debt Mutual Funds, Floater Funds, Conservative Hybrid Funds, and Other Funds (where Equity investment is <=35%), which are purchased on or before 31st March 2023, the long-term capital gains will be taxed at 20% with Indexation.
Dividend Income from Mutual Funds
Investors receiving dividend income from mutual funds must report this income under the “Income From Other Sources” category while filing income tax returns, as it is taxable at slab rates. Additionally, when Mutual Funds Schemes distribute dividends to investors, the Asset Management Company (AMC) is required to deduct TDS at 10% under section 194K. However, if the dividend amount does not exceed INR 5,000, TDS is not applicable.
ITR Form, Due Date, and Tax Audit Applicability
- ITR Form: Traders having income on the sale of mutual funds should file ITR-2 – ITR for Capital Gains Income.
- Due Date
31st July is the due date for traders to whom Tax Audit is not applicable
31st October is the due date for traders to whom Tax Audit is applicable
- Tax Audit: Since the income on the sale of mutual funds is treated as Capital Gains, the tax audit will not be applicable.
Carry Forward Loss for Mutual Fund Investors
Following are the rules for set off and carry forward of losses incurred on the trading of mutual funds:
- Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). And, the remaining loss can be carried forward for 8 years and set off against both STCG and LTCG.
- Long Term Capital Loss (LTCL) can be set off against Long Term Capital Gain (LTCG) only. Further, the remaining loss can be carried forward for the next 8 years and set off against LTCG only.
Example for Tax on Mutual Fund
Mr. Vijay is a salaried individual and has done mutual fund trading in FY 2021-22. His total salary income for a year is INR 8,70,000. Further, he has a Short Term Capital Loss of INR 30,000 from the sale of Debt Mutual Funds and Long Term Capital Gain of INR 2,50,000 from Equity Mutual Funds. Dividend Income of INR 50,000 in FY 2021-22.
Now in the above example, Vijay needs to file ITR-2 for FY 2021-22. Below is the calculation for total income and tax liability.
| Particulars | Amount (INR) | Amount (INR) |
| Salary Income | 8,70,000 | |
| Capital Gains | ||
| Short Term Capital Loss | (30,000) | |
| Long Term Capital Gain | 2,50,000 | |
| Less: Exemption u/s 112A | (1,00,000) | |
| Taxable Long Term Capital Gain | 1,50,000 | |
| Total Capital Gains after set-off of losses (taxed @10%) | 1,20,000 | |
| Income from Other Sources | ||
| Dividend Income | 50,000 | |
| Total Taxable Income | 10,40,000 | |
| Tax at slab rate | 96,500 | |
| Tax at special rate | 12,000 | |
| Total Income Tax | 1,08,500 | |
| Health & Education Cess @4% | 4,340 | |
| Total Tax Liability | 1,12,840 |
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FAQs
A trader should file ITR-2 and report income from mutual funds trading as Capital Gains.
Yes. The dividend income earned on Equity Mutual Funds is taxable at slab rates under the head Income From Other Sources.
Yes, the losses for mutual funds can be carried forward for 8 years and can be adjusted against the capital gains in future years.
Yes, an Equity-linked savings scheme or ELSS mutual funds are eligible for exemption u/s 80C. Deductions can be availed up to Rs. 1.5 Lakh per year. However, no deductions u/s 80C are available to taxpayers who have opted for the new tax regime.
Yes, the payer must deduct TDS under Section 194K at 10% on dividends paid on Mutual Funds over Rs. 5000. However, there is no provision for the deduction of TDS on the sale of mutual funds.
Hi @CA_Niyati_Mistry
I had purchased an equity MF scheme long time and there was no tax on dividends at the hands of the receiver at that time. These dividends are not credited to my bank account but are in fact reinvested(not the growth option)and have one such transaction for the last FY. My AIS summary shows this as MF units purchased. Will this dividend, therefore, need not be considered as dividend received per se and tax need not be paid at the time of receipt?
Hello @gdshan,
The units received as dividends in last year will be considered as income in that year and hence will be taxable.
At the time of sale of these units you can claim the dividend as cost of acquisition and reduce it from the sale consideration.
Hope this helps!
Hi @CA_Niyati_Mistry
Got it. Thanks for clarifying
Hi @shriramsingla
If you sell your units of an international equity fund and make a profit/loss, it will be subject to capital gains tax. The capital gains can be categorized into short-term or long-term, depending on the holding period of the units.
If the units are held for a period of less than 36 months, they would be considered STCG and subject to tax at your applicable income tax slab rates.
If the units are held for a period of more than 36 months, they would be considered LTCG and subject to tax at 20% with indexation benefit.