The objective behind any investment is to maximize earnings over a specific period of time. With mutual funds, what an investor earns is referred to as capital gains. These gains are taxable and in this article, we will talk about the applicable taxes on various types of mutual funds.

Holding period

Before understanding the applicable taxes on capital gains earned from mutual funds, it’s essential to know about holding period. This is because the taxes applicable are based on a fund’s holding period, which in other words mean the time till which you remain invested or hold on to the fund. The holding period differs across fund types. There are two types of holding period namely:
  • Long-term holding period
  • Short-term holding period

In case of equity funds, a long-term holding period is one that exceeds 12 months or a year. On the other hand, if the fund is held for less than 12 months, it’s a short-term holding period. In case of debt funds, if the fund is held for more than 36 months or 3 years, it’s a long-term holding period. On the contrary, if the fund is held for less than 36 months, it’s a short-term holding period.

How are mutual funds taxed?

Based on the holding period, mutual fund taxation is classified as long-term capital gains tax and short-term capital gains tax. These taxes vary across funds as given below:

  • Equity funds
  • 10% long-term capital gains taxes on equity funds are applicable if the gains are above Rs. 1 lakh in a financial year without indexation benefit. Indexation factors in inflation during the holding period and raises the acquisition price, thus lowering tax implications.

    Long-term capital gains tax on equity funds were introduced in the Union Budget 2018. On the other hand, they attract a short-term capital gains tax of 15%, if you sell them before 12 months.

  • Debt funds
  • Debt funds attract a 20% long-term capital gains taxes with indexation benefit. However, if you sell your debt funds before 36 months, the gains made are added to your income and taxed as per the applicable income tax rates.

How are the other types of mutual funds taxed?

It is essential to note that in case of other types of mutual funds, if the equity component is 65% or more than it will get the tax treatment of equity funds. On the other hand, if the equity component is less than 65%, the fund attracts taxation scheme applicable for debt funds.

It is important to hold on to your mutual fund investment for a long period. This is because the longer you hold onto your investments, the better are the chances of making real gains. Also, taxes on long-term gains are much lesser than short-term ones.

Explore Various Mutual Funds here.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



Trending Articles

Article Links

Equity Linked Savings Scheme (ELSS)

Types of Mutual Fund

What is Debt Fund

What is Mutual Fund

What is an Index Fund

Latest Articles

mutual-funds
mutual-funds

Should I shift my current mutual funds to Index Funds?

Read More
Posted on 05 March 2020
mutual-funds
mutual-funds

Planning to buy a mutual fund? Here are some of the best tips

Read More
Posted on 05 March 2020
mutual-funds
mutual-funds

Mutual Fund Monthly Income Plans - Risk and Returns, features, Taxation

Read More
Posted on 05 March 2020

Featured Articles

image abc-of-personal-money
abc-of-personal-money

Are Millennials Any Different When It Comes To Planning Financials?

Read More
Posted on 05 February 2020

Relevant Articles

image pension-funds
pension-funds

What is the PM-SYM Scheme?

Read More
Posted on 27 March 2020
image pension-funds
pension-funds

NPS vs PPF – Which Is A Better Option For Investing?

Read More
Posted on 27 March 2020
image pension-funds
pension-funds

How to Have a Monthly Income Throughout Life

Read More
Posted on 27 March 2020