Taxation is an important part of finance that everyone must have knowledge of. Investors, especially, are often interested to learn about mutual fund tax benefits as they make a significant difference in the growth of one’s portfolio and overall returns. The calculation of tax on mutual funds is different and involves a lot of complexities.
This article will focus on tax implications on mutual funds and the available tax benefits that may help an investor to unlock a world of potential for financial prosperity. Whether you intend to start your investment journey or are a consistent investor, giving a thorough reading will equip you with beneficial information.
Tax Benefits of Investing in Mutual Funds
Are there any tax benefits of investing in mutual funds? This question may crop up while starting your investment journey. Well, the good news is yes; one is eligible for mutual fund tax benefits. Below are explained the tax implications of mutual funds in detail.
Tax on Equity Oriented Mutual Funds:
For equity oriented mutual funds (exposure of at least 65% in equity shares of domestic company) that invest a significant part of their assets in equities, long-term capital gains tax is typically applied on the profit made from the selling of units for more than one year, which is 10% for profits above 1 Lakh. Cumulative Long-term capital gains on all equity shares and equity-oriented funds up to Rs 1 Lakh in a financial year is not taxable. If the equity mutual fund units are sold within a year of purchase, a short-term capital gain tax is imposed, which is 15% of the total gain amount.
Tax on Debt Funds other than Equity Oriented Funds:
Finance Act 2023 has amended provisions related to Funds other than Equity Oriented Funds by bringing in the concept of Specified Mutual Funds. Taxation of Funds other than Equity Oriented Funds is divided into two parts depending upon exposure to equity shares of domestic company:
1. Specified Mutual Funds- Exposure of maximum 35% in equity shares of domestic company
2. Other Mutual Funds- Exposure between 35% and 65% in equity shares of domestic company
Specified Mutual Funds
In case of Specified Mutual Funds purchased on or after 1 April 2023, capital gains on sale is considered as short-term capital gains irrespective of the holding period and are added to the taxable income of the investor.
However, for such Mutual Funds purchased before 1 April 2023, old taxation rules shall continue to apply. Profits acquired from the sale of units held up for three years are assumed as short-term capital gains and are added to the taxable income of the investor. The tax implications on the gains are then calculated at the income tax slab rate applicable to the individual. While gains from the sale of such Funds, mutual fund units held for more than three years are assumed as long-term capital gains, which are taxed at 20% with the benefit of indexation.
Other Mutual Funds
In the case of Other Mutual Funds, profits acquired from the sale of units held up for three years are assumed as short-term capital gains and are added to the taxable income of the investor.
The tax implications on the gains are then calculated at the income tax slab rate applicable to the individual. While gains from the sale of debt, Mmutual fund units held for more than three years are assumed as long-term capital gains, which are taxed at 20% with the benefit of indexation.
Other Mutual Funds
In the case of Other Mutual Funds, profits acquired from the sale of units held up for three years are assumed as short-term capital gains and are added to the taxable income of the investor.
The tax implications on the gains are then calculated at the income tax slab rate applicable to the individual. Mutual fund units held for more than three years are assumed as long-term capital gains, which are taxed at 20% with the benefit of indexation.
Table Summarizing Equity and Debt Mutual Funds Taxation
Type Of Fund |
Short Term Capital Gains |
Long-Term Capital Gains |
Equity Funds |
15% plus cess & applicable surcharge |
Profits exceeding Rs. 1 lakh in one financial year are taxed at 10% plus cess & applicable surcharge |
Specified Mutual Funds (Purchased on or after 1 April 2023) |
According to the applicable tax slab of the individual |
No concept of long-term as all gains are considered as short-term irrespective of holding period. Tax according to the applicable tax slab of the individual |
Specified Mutual Funds (Purchased before 1 April 2023) |
According to the applicable tax slab of the individual |
20% (plus cess & applicable surcharge) with indexation benefit |
Other Mutual Funds |
According to the applicable tax slab of the individual |
20% (plus cess & applicable surcharge) with indexation benefit |
Mutual Fund Tax Benefits Under Section 80C
Mutual fund tax benefits under section 80 C allow investors to claim tax deductions up to Rs. 1.5 lakhs a year under the old tax regime. If you are looking for the best mutual fund that entertains the potential to offer the highest returns among all Section 80C investments, you can opt for an ELSS (Equity-Linked Savings scheme) mutual fund.
Factors to Determine Tax on Mutual Funds
The tax implications on mutual funds are determined by various factors such as the type of fund, its holding period, and the tax status of the investor, among many more. Read below to learn about all the factors in detail.
Type Of Mutual Fund:
‘The treatment of tax significantly depends on the kind of mutual fund, which is usually classified depending upon exposure to equity shares of domestic company. Profits from the sale of equity mutual fund units are taxed differently than the sale of other mutual fund units.
Period Of Holding:
Equity oriented Mutual Funds
The total duration for which an investor holds the mutual fund units also determines whether the gain will be considered short-term capital gains or long-term capital gains. In the case of equity mutual funds, if the units are held for over more than one year and are sold after, it will invite long-term capital gains tax and will be taxable at 10%.
While if the units of an equity mutual fund are sold before one year, it will invite short-term capital gain tax, which is taxed at 15%.
Specified Mutual Funds
In case of Specified Mutual Funds purchased on or after 1 April 2023, capital gains on sale is considered as short-term capital gains irrespective of the holding period
For purchases before 1 April 2023, units sold after holding them for three years will fall under the consideration of long-term capital gains tax. Selling such units before 3 years shall be considered as short-term capital gains.
Other Mutual Funds
For Other mutual funds, the units sold after holding them for three years will fall under the consideration of long-term capital gains tax. They will be added to the total income of the individual, which will be taxable according to the tax slab of the individual.
Selling such mutual fund units before three years will be considered a short-term capital gains tax and will be taxed at 20%, along with the availability of indexation benefits.
Table summarising holding period is as under
Type Of Fund |
Short Term Capital Gains holding period |
Long-Term Capital Gains holding period |
Equity Funds |
12 months or less |
More than 12 months |
Specified Mutual Funds (Purchased on or after 1 April 2023) |
Considered short-term irrespective of holding period |
Specified Mutual Funds (Purchased before 1 April 2023) |
36 month or less |
More than 36 months |
Other Mutual Funds |
36 month or less |
More than 36 months |
Tax Status Of The Investor:
The treatment of tax for mutual funds is different for companies, Hindu Undivided Families, and individual investors. Therefore, the differentiation in tax rates deducts, and exemptions applicable for various investors impacts the overall liability of tax.
Dividend Or Option For Growth:
Mutual funds generally offer two primary options for individuals- growth and dividend. Dividends from mutual funds carry different tax implications as compared to capital gains.
Tax-Saving Funds:
ELSS offers significant tax benefits under Section 80 C of the IT Act under old tax regime. As per this law, ELSS investments are qualified for a deduction of up to Rs. 1.5 Lakhs from the overall taxable income of an individual during a financial year.
Conclusion:
In conclusion, it is essential to note that laws and regulations concerning tax are subject to change. Therefore, the investor must consult with a qualified tax advisor in order to refer to the latest changes in mutual fund taxation to ensure the highest possible returns and prevent financial complexities in the future.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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