Tax on Mutual Fund Returns

Many mutual fund investors have questions about how the income obtained from Mutual Funds are taxed. Well, the fact is the taxation varies for various mutual fund schemes. This article targets the budding investors and tries to explain the tax rates applicable on fund returns for equity and debt mutual fund schemes in simple terms.

Tax on Equity Fund Returns

Tax on Equity Funds held less than a year

Returns from equity funds sold with in one year of purchase will be treated as Short-Term Capital Gains (STCG). The returns on such equity funds will be taxed at 15%.

Tax on Equity Funds held beyond one year

Returns from equity funds held beyond one year from the date of purchase will be treated as Long-Term Capital Gains (LTCG). The returns on such holdings will be taxed at 10% of the amount excessive of 1 lakh rupees. If the returns are less than 1 lakh rupees there will not be any tax applicable for equity schemes.

Tax Table for Equity Mutual Funds

Holding PeriodTax
Less than 1 year15%
1 year & beyondNil (if Returns less than 1 Lakh)
10% of amount excessive of 1 lakh

Tax on Debt Fund Returns

Tax on Debt Funds held for less than three years

Debt funds offer stable income and the returns form them will be treated as Short-Term Capital Gains (STCG) if you sell them before 3 years from the date of purchase. Tax for short term holdings of debt funds is same as the tax slab applicable to you based on your annual income.

Tax on Debt Funds held beyond three years

Debt funds sold beyond three years from the date of purchase will be taxed at 20%. You can reduce this tax percentage by staying invested in the fund if you see the debt fund is expected to perform well in the future and can avail the benefit of Notified Cost Inflation Index (CII).

Tax Table for Debt Mutual Funds

Holding PeriodTax
Less than 3 yearsAs per the Income tax slab applicable to you.
3 years & beyondNil (if Returns less than 1 Lakh)
10% of amount excessive of 1 lakh

ELSS Funds

ELSS (Equity Linked Saving Schemes) Mutual Funds come with the advantage of zero tax on the returns. Investments in ELSS qualify for a tax deduction of up to Rs 1.5 lakh in India. But, you must be aware that the investments in ELSS funds have minimum lock-in period of 3 years.

To know about how dividend returns on mutual fund are taxed refer our article about Tax on Mutual Fund Dividends

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