Decoding the taxation of Mutual Funds

In recent years, Mutual Funds have become a popular investment category. Mutual funds have historically offered great returns, and technology has made buying, selling and managing mutual fund investments easier. But before you invest in Mutual Funds, you must understand various tax provisions related to them.

Here is a brief overview of the tax implications on Mutual Funds under the Income Tax Act, 1961.

Taxes applicable on your Mutual Fund investments

1. Income tax

You are liable to pay income tax on the dividends and capital gains that you earn from mutual funds. The tax rates and calculation methods depend on the type of mutual fund and the holding period.

2. Securities transaction tax

Securities transaction tax is levied on selling units of an Equity-oriented Mutual Fund or Hybrid Equity-oriented Mutual Fund. 0.001% of the transaction value is collected from you as securities transaction tax.

Taxation of dividend on Mutual Funds

The dividend received from mutual funds is taxed under 'Income from Other Sources' at regular tax rates. The tax rates are decided as per the tax slab applicable to you. Fund houses deduct a 10% TDS (Tax Deducted at Source) from the dividend paid to you if it is more than ₹5,000.

Taxation of capital gains on Mutual Funds

Similar to shares, the value of your mutual fund units also rises or falls according to market movements. Whenever you redeem your mutual fund units, you either incur profits or losses. The profits are taxable under 'Capital Gains'. If you incur losses after selling your Mutual Fund units, you can set off the losses against any other income under this category.

Mutual Fund taxation is different for equity-oriented and debt-oriented mutual funds.

Capital gains on Equity-oriented Mutual Funds

• Long-term capital gains: If you sell the units of equity-oriented mutual funds after 12 months from the date of purchase, you incur long-term capital gains.
• Short-term capital gains: The gains on selling units within 12 months of purchase are called short-term capital gains.

The benefit of indexation is not available for equity-oriented mutual funds.

Capital gains on Debt-oriented Mutual Funds

Earlier, gains on debt-oriented mutual funds sold after 36 months of purchase were taxed as long-term capital gains after indexation. The long-term gains were taxed at flat 20% after indexation.

However, the Finance Act, 2023 removed this benefit for debt-oriented funds purchased after 1st April, 2023. Both the long-term and short-term gains on debt funds are now taxed at regular slab rates.

Here's a summary of how Debt-oriented funds are taxed post the amendment.

Deductions under Section 80C on Mutual Fund investments

Individuals and HUFs can claim a deduction of up to ₹1,50,000 for investments in an ELSS (Equity Linked Saving Scheme) mutual fund. However, you can claim this benefit only if you are filing your returns under the old tax regime.

Also Read: How to invest in Mutual Funds in 7 easy ways

Conclusion

If you want to stay tax-compliant, you must understand the basics of mutual fund taxation. The tax provisions may seem complex at first, but once you understand the terminologies, you can easily navigate them. Understanding these provisions allows you to pay your taxes correctly and claim the tax benefits related to your investment.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.