The tax rules for mutual funds are slightly different than that of other financial products

Let’s say you invested Rs 1 lakh in a mutual fund which after a period of time became Rs 1.5 lakhs.

The increase in Rs 50,000 is known as Capital gains.

How and whether this capital gains will be taxed depends on two primary factors

1.) Type of Mutual Fund it was invested in ( Equity / Debt / Liquid )

2.) Duration of Investment – Capital gains are categorized, as short-term and long-term gains based on the period, for which they were held before transfer.

If the asset has been held for period not exceeding 36 months, the gains, if any, is considered short-term in nature. For units of equity mutual funds, shares of companies holding period of not more than 12 months is considered for short-term capital gains.

Rates of Taxation Short-term capital gains (STCG) for equity shares and equity-oriented funds are taxed at 15%. In case of all other securities and funds, STCG is taxed at the applicable rate of tax. STCG is added to the taxable income and taxed at the marginal rate applicable to the investor’s level of taxable income.

Long-term capital gains (LTCG) are now applicable for all equity funds.

In the case of all other securities and funds they are taxed at 20% after indexation. The rates of tax have to be increased by surcharges and cess where applicable.

Type of Mutual Fund scheme

Long Term Capital Gains

Short Term Capital Gains

Equity mutual fund/shares Units held for more than 12 months: Nil Units held for less than 12 months: 15%+ 10% Surcharge + 3% Cess
Non-equity schemes Units held for more than 36 months: 20% with indexation Units held for more than 12 months: Tax rate as per tax bracket + 10% Surcharge + 3% Cess

In case you have an investment horizon of more than five years, you should definitely invest some portion of your portfolio in equity due to tax free advantage after one year. This will provide growth to your portfolio on a tax-efficient basis.


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