Tax on Mutual Funds in India – Equity Mutual Funds & Debt Mutual Funds

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.

Debt Mutual Funds – Since these mutual funds invest in debt instruments, the treatment is similar to other capital assets.

  • Long Term Capital Gain (LTCG): Any gain arising on the sale or redemption of a debt fund held for more than 36 months is considered LTCG.
  • Short Term Capital Gain (STCG): Any gain arising on the sale or redemption of a debt fund held for less than 36 months is considered STCG.

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 36 months 20% with Indexation under Section 112 Slab Rates

Dividend on Mutual Funds & Interest on Mutual Funds

  • Dividend Income from Equity Mutual Funds
  • 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
  • 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
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 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.
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.

Is Dividend on Mutual Funds taxable?

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%.

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

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.

Is there any deduction available to mutual funds 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. 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.