Tax on Mutual Funds in India

What are Equity Mutual Funds?

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 funds 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 Mutual Funds are funds that invest in fixed income securities like bonds, treasury bills, and other debt instruments. Types of debt mutual funds include liquid funds, short-term funds, income funds, hybrid funds, etc.
ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
[Rated 4.8 stars by customers like you]
ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
[Rated 4.8 stars by customers like you]

Income Heads for Tax on Equity 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): Any gain arising on the sale of 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): Any gain arising on the sale of equity mutual fund held for less than 12 months is considered as Short Term Capital Gain i.e. STCG on mutual funds.

Other Income from Mutual Funds

  • Dividend Income from Equity Mutual Funds
File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

Types of Mutual Fund Schemes

  1. Based on the maturity period
    • Open-ended schemes: This scheme doesn’t have a fixed maturity period. Investors can buy and sell directly at any time in this scheme.
    • Closed-ended scheme: This scheme has a stipulated maturity period. In this scheme, the investor can directly invest at the time of the initial issue. Once they are listed on the stock exchange, the investor can buy and sell these units.
    • Interval scheme: this scheme has the combined advantage of open-ended as well as close-ended schemes. Investors can trade at predetermined intervals.
  2. Based on investment objectives
    • Growth Schemes: Most importantly the aim of this scheme is to provide capital appreciation. These schemes generally invest in equities and are ready to bear short-term loss to gain in the long run.
    • Income Schemes: These schemes provide a steady flow of income to its investors. It will generally tend to invest in bonds and stocks.
    • Balanced Schemes: These schemes aim to provide the combined benefits of Growth schemes and income schemes. They invest in shares and fixed income securities in the proportion indicated in their offer documents.
    • Money Market Schemes: This is suitable for investors looking to utilize their surplus funds for a short period of time while searching for better options. These schemes invest in short-term debt instruments and try to provide reasonable returns for the investors.
  3. Other schemes
    • Tax saving scheme: These schemes offer tax benefits to investors. The government offers tax incentives for investment in specific instruments. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes.
    • Sector Funds: Sector funds are for investors with the main objective to invest only in the equity of the companies existing in a specific sector, as mentioned in the fund’s offer document. For example, a technology fund will invest in software companies like Infosys Technologies, Satyam Computers, etc.
    • Index Funds: A fund that tries and works on the performance of a specific Index as BSE Sensex or NSE 50.

Tax on Equity Mutual Fund

Taxability of Mutual Funds would depend upon the nature of income. Capital Gains on mutual funds is taxable as per the table below.

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 Sec 111A

Other Income on sale of mutual funds is taxable in the following manner:

  • Dividend Income – Exempt up to FY 2019-20. Taxable at slab rates FY 2020-21 onwards.

ITR Form, Due Date and Tax Audit Applicability for Investors

  • ITR Form: Trader should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website if income is treated as Capital Gains.
  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
Tip
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
  • Tax Audit: Since the income is treated as Capital Gains, the applicability of tax audit under Section 44AB need not be determined.
Income Tax Calendar
Don't miss another Income Tax due date. Check out this amazing tax calendar for 2020 by Quicko.
Explore
Income Tax Calendar
Don't miss another Income Tax due date. Check out this amazing tax calendar for 2020 by Quicko.
Explore

Carry Forward Loss for Mutual Funds Trading

  • Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). 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. Remaining loss can be carried forward for 8 years and set off against LTCG only.

Example

Mr. Vijay is a salaried individual and has done mutual fund trading in FY 2020-21. His total salary income for a year is INR 8,70,000. And has Short Term Capital Loss of INR 30,000 from sale of equity shares and Long Term Capital Gain of INR 2,50,000 from Equity Mutual Funds. Dividend Income of INR 50,000 in FY 2020-21.

Now in the above example, Vijay needs to file ITR-2 for FY 2019-20. And his total income and tax liability will be as follows:

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
Import Your Trades
File ITR Online

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

Import Your Trades

File ITR Online

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

FAQs

How do I report income from trading in Mutual Funds in the Income Tax Return i.e. ITR?

A trader should file ITR-2 and report income from trading in Mutual Funds as Capital Gains.
– Equity Mutual Funds – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
– Debt Mutual Funds – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates.
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.

Is Dividend earned on Mutual Funds taxable?

Yes. The dividend income earned on Equity Mutual Funds which was earlier exempt is now a taxable income.
– Dividend up to FY 2019-20 – exempt
– Dividend FY 2020-21 onwards – taxable at slab rates. The amount in excess of INR 5,000 is liable for deduction of TDS under Sec 194K at 10%.

Is Mutual Fund taxable?

Yes. Income from Mutual Fund is taxable under the Income Tax Act.
(a) Capital Gain on Sale of Equity Mutual Funds – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
(b) Capital Gain on Sale of Debt Mutual Funds – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates
(c) Dividend Income on Mutual Funds – Taxable at slab rates from FY 2020-21
(d) Interest Income on Mutual Funds – Taxable at slab rates

Got Questions? Ask Away!

  1. Hey @Jay_Tanna,

    The Finance Minister has introduced a new Section 194K in Budget 2020. Sec 194K was applicable on or after 1st April 2020.

    As per Income Tax Act, Sec 194K mentions TDS on ‘Income’ from Mutual Funds leading to a confusion if TDS was required to be deducted on Capital Gains on Sale of Mutual Funds also.

    CBDT issued an official clarification on 4th Feb 2020. It clarified that TDS should be deducted at 10% on Dividend Income only and not on Capital Gains from the sale of mutual funds. Thus, Sec 194K is applicable as follows:

    Sec 194K - AMC paying dividend on equity mutual funds should deduct TDS at 10% if the dividend exceeds INR 5,000.

    Read more here -