Mutual Fund Taxation – Full Details How Different Mutual Fund Taxed

Investing in mutual funds has become very popular, especially among teenagers today.

Just as learning about investing through SIP in mutual funds is important, understanding mutual fund taxation is equally crucial. Your final gains will depend on whether you have planned your taxes correctly before investing.

Today, I will simplify this complex topic to make it easier for you to understand and remember.

We will cover how mutual funds are taxed, the different types of taxes applied to various mutual funds, and much more.

So, let’s get started!

Introduction to Mutual Fund Taxation

Mutual funds are taxed based on multiple factors the capital gains type, mutual fund type, and date of purchasing that mutual fund.

Whenever you sell the mutual fund so all the gains you have incurred are known as capital gains and if you sold them in loss then it will be called as capital loss.

While in the case of capital gain, they are taxed based upon the holding period of your mutual fund.

Especially after the 2024 budget, a lot of new changes has been introduced and applied while taxing the mutual fund.

So will cover them all.

Types of Mutual Funds and Their Taxation

Equity Mutual Fund Taxation

Equity mutual funds are those funds that invest 65% or more of their assets in the stock market, purchasing various stocks based on industry, market capitalization, and other factors.

After the new union budget of 2024, all the gains earned from equities or equity mutual fund are tax exempted upto ₹1.25 Lakh gains.

After the tax exemption limit the taxation on equity fund depend upon what type of capital gains you have incurred.

• Long Term Capital Gain – If your holding period is more then 12 months or 1 year then the gains are counted as long term capital gains under which you will have to pay flat 12.5% tax on your total gains as per the new budget.

• Short Term Capital Gain – If your holding period is less than 12 months or 1 year then the gains are counted as short term capital gains under which you will have to pay flat 20% tax on your total gains as per the new budget.

Debt Mutual Fund Taxation

Debt Mutual Fund are those fund in which the 65% or more fund money is invested in debt instruments like bond, debentures, etc.

The tax on debt mutual funds are calculated based on the holding period and purchased date.

I have covered in depth guide on debt mutual fund taxation, you can check out that too.

Debt Fund Purchased Before 1 April 2023

Debt Fund Purchased After 1 April 2023

If you have invested in debt fund after 1st of April 2023, then as per new tax rules of budget 2024, there will be no long term capital gain on debt mutual fund.

All gains are counted and taxed as short term capital gain, under which you have to pay the tax as per your tax slab rate.

Hybrid Mutual Fund Taxation

Hybrid mutual fund are the mix of both equity and debt instruments. They are taxed as per what type of instrument is in majority.

• Equity-Oriented Hybrid Funds: If the equity component is more than 65%, they are taxed as equity mutual funds.

• Debt-Oriented Hybrid Funds: If the debt component is more than 65%, they are taxed as debt mutual funds.

Gold Mutual Fund Taxation

Gold mutual fund is a kind of fund that invests the money in gold and gold related assets like gold ETF, gold mines, etc.

While the 2024 Union Budget proved worse for investors due to increase in taxes but for gold mutual fund the case is different.

As per the new budget, if your holding period of the gold fund is more than 24 months then it will be going to taxed as long term capital gain, where you have to pay flat 12.5% tax.

Earlier before this new budget, the 20% long term capital gains tax was applied if your holding period was 36 months.

Taxation on International Mutual Fund

International mutual funds are those which invest in different financial option or asset classes like bonds, stocks, etc. of different countries, diversifying the risk.

As per the new budget, on international mutual fund you have to pay a flat 12.5% tax (earlier 20%) if the holding period of your mutual fund is more than 24 months to qualify as long term gains tax.

Taxation on Mutual Fund Dividends

Earlier dividends received on mutual fund were taxed to mutual funds but after the abolition of dividend distribution tax in april 2020, now they are taxed in the hands of the investor.

A 10% TDS is deducted on your dividends on mutual funds if your dividend value is more than ₹5,000.

The dividend taxed on mutual fund are based upon what type of mutual fund you have invested in.

• Equity Mutual Fund – Dividends received from equity mutual fund are tax free on investors hand but mutual fund deduct a 10% Dividend Distribution Tax before paying the dividend to you.

• Debt Mutual Fund – Dividends received from debt fund are marked as income from other sources in in income tax and are taxed as per your tax slab rate.

Securities Transaction Tax (STT)

Securities transaction tax (STT) is a tax charged on all the securities like stocks, mutual funds, etc. that trade on Indian stock exchange.

This tax is collected by the stock exchanges like National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and then the transfer this collected tax to the government.

Paying STT is mandatory and it automatically got deducted by the mutual fund or exchange, hence an investor don’t need to pay the STT separately.

On selling the mutual fund or ETF there is 0.001% securities transaction tax (STT) is charged.

Frequently Asked Questions

Final Words on Taxation of Mutual Fund

Doing a tax planning is much needed if you wanted to maximise the gains and take them home.

While mutual fund does all the heavy task for you, that is analysing the different asset class and investing as per that to get the best possible results for the investors.

But one thing you have to do on your that is learning about how different types of mutual funds are taxed and as per that you can plan which type of mutual fund will be best suited for you.

Disclaimer: The Honest American provides stock market news and strategies for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.