What are Mutual Funds in India?
If you have invested in Mutual Funds, you need to file your ITR and pay tax on this income. Trading in various types of mutual fund schemes has become very easy due to the availability of online trading platforms. Under Income Tax, trading in mutual funds is classified as a Capital Gains Income.
- Equity Mutual Funds – Equity-oriented Mutual Funds are funds that invest 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, 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.
Income Tax on Mutual Funds
Capital Gains on Mutual Funds
Equity Mutual Funds – Since these mutual funds invest in equity-oriented instruments, the treatment is the same as equity shares.
- Long Term Capital Gain (LTCG) under Section 112A: Any gain arising on the sale of an equity mutual fund held for more than 12 months is considered as Long Term Capital Gain i.e. LTCG on mutual funds.
- Short Term Capital Gain (STCG) under Section 111A: Any gain arising on the sale of an equity mutual fund held for less than 12 months is considered as Short Term Capital Gain i.e. STCG on mutual funds.
Debt Mutual Funds – These mutual funds invest in debt instruments, and the taxes will be levied as per the individual’s slab rate.
As per the amendment proposed by the central government, returns earned on investments made in debt mutual funds (where not more than 35% is invested in equity shares of an Indian company) will now be deemed to be short-term capital gains (STCG).
If funds are held for more than 36 months, it will not be considered as LTCG and so the taxes will not be levied at 20% tax rate with an indexation benefit.
Debt Mutual Funds are now taxed at normal slab rates, for the investments made on or after April 1, 2023.
Apart from debt funds, this may also include gold mutual funds, international equity mutual funds, fund of funds, and hybrid mutual funds as well.
Tax on Equity Mutual Funds & Debt Fund Taxation
The taxability of Mutual Funds would depend upon the nature of income. Following is the tax treatment for Capital Gains on mutual funds.
| Type of Mutual Fund | Period of Holding | Long Term Capital Gain | Short Term Capital Gain |
| Equity Mutual Fund | 12 months | 10% in excess of INR 1,00,000 under Section 112A | 15% under Section 111A |
| Debt Mutual Fund | NA | NA | applicable slab rates |
Dividend on Mutual Funds & Interest on Mutual Funds
- Dividend Income from Equity Mutual Funds
- Up to FY 2019-20 – Exempt Income.
- FY 2020-21 onwards – Tax on Dividend Income is applicable at slab rates and income is classified under the head Income From Other Sources (IFOS).
- Interest Income from Debt Mutual Funds
- Income tax will be applicable on Interest Income under the head Income From Other Sources (IFOS) at slab rates.
ITR Form, Due Date, and Tax Audit Applicability for Investors of Mutual Funds
- ITR Form: Traders having income on the sale of mutual funds should file ITR-2 (ITR for Capital Gains Income) on the Income Tax Website since income is treated as Capital Gains.
- Due Date
- Up to FY 2019-20
31st July is the due date for traders to whom Tax Audit is not applicable
30th September is the due date for traders to whom Tax Audit is applicable - FY 2020-21 Onwards
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
- Up to FY 2019-20
- Tax Audit: Since the income on the sale of mutual funds is treated as Capital Gains, the applicability of tax audit under Section 44AB need not be determined.
Carry Forward Loss for Mutual Fund Investors
Following are the rules for set off and carry forward of losses for capital gains on mutual funds trading by the mutual fund investors:
- Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). The remaining loss can be carried forward for 8 years and set off against STCG and LTCG only.
- Long Term Capital Loss (LTCL) can be set off against Long Term Capital Gain (LTCG) only. The remaining loss can be carried forward for 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.
1) Tax on Equity Mutual Funds – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
2) Tax on Debt Mutual Funds – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates.
Further, the trader can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.
Yes. The dividend income earned on Equity Mutual Funds which was earlier exempt is now a taxable income.
1) Dividend on mutual funds up to FY 2019-20 was exempt from tax.
2) Dividend on mutual funds from FY 2020-21 is taxable at slab rates. The amount in excess of INR 5,000 is liable for deduction of TDS under Section 194K at 10%.
Yes. Income from mutual funds trading is a Capital Gains income. Any loss on such sale of equity mutual funds or debt mutual funds is a Capital Loss. The Short Term Capital Loss (STCL) can be adjusted against Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). The LTCL can be adjusted against LTCG. Further, the mutual fund investor can carry forward the remaining loss for 8 years and set off against future incomes from Capital Gains.
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. FY 2020-21 onwards, the government abolished DDT (Dividend Distribution Tax). As a result, dividend income which was earlier exempt is now taxable. Further, the payer must deduct TDS under Section 194K at 10% on dividends paid on Mutual Funds in excess of Rs. 5000. However, there is no provision for 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.