Income Tax on Mutual Funds

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Sakshi Shah

income from trading
Income Tax
Mutual Funds
Last updated on April 24th, 2024

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.

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

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 TypeShort 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 FundShort-Term Capital GainsLong-Term Capital Gains
Equity Mutual Funds
(funds which invest >65% in Equity)
15% under section 111AUpto 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 111AUpto 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 ratesSlab rates
Conservative Hybrid Funds
(where Equity investment is 10%-25% and Debt is 75%-90%)
Slab ratesSlab rates
Balanced Hybrid Funds
(Equity is 40% – 60%
and Debt is 60% – 40%)
Slab rates20% with Indexation
Other Funds
(where investment in Equity is >35% but <65%)
Slab rates20% 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.

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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:

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

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

A trader should file ITR-2 and report income from mutual funds trading as Capital Gains.

Is Dividend on Mutual Funds taxable?

Yes. The dividend income earned on Equity Mutual Funds is taxable at slab rates under the head Income From Other Sources.

Can Mutual Fund Investor carry forward loss on the sale of mutual funds?

Yes, the losses for mutual funds can be carried forward for 8 years and can be adjusted against the capital gains in future years.

Is there any deduction available to mutual fund investors?

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.

Is TDS deducted on Mutual Funds?

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.

Got Questions? Ask Away!

  1. 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?

  2. 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!

  3. 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.

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