How Are Equity Mutual Funds Taxed?

This is the first post on a new series of blogs on how gains on your mutual funds are taxed. As per feedback received, we will attempt to write very short blogs and try to explain in the simplest way possible.

Ok, there are various categories of mutual fund investments. Equity mutual funds are schemes that invest in shares or stocks in the INDIAN market.

As per our Securities & Exchange Board of India – SEBI the Indian regulator, a mutual fund scheme is identified as an equity mutual fund if 65% or more of its assets are invested in Indian stocks.

Why the emphasis on Indian stocks? Because there are funds that invest in international stocks the taxation of those are as non-equity mutual funds which we will cover later.

What are the Gains in mutual funds Schemes?

If you invest say 1 lac in a mutual fund scheme and when you redeem if the value is 1.25 lacs then the gain is 25k, on which tax has to be paid to the income tax authority.

What are Short term Gains / Long term Gains?

For taxation purposes gains are classified as Short-term or long-term based on how long was the investment held.

If an investment is held for less than a year & sold the gains if any are considered as short-term & are taxed as short-term capital gains.

If an investment is held for more than a year, gains if any are considered as long-term and taxed accordingly.

What is the tax rate for Equity Mutual funds?

The tax rate for short-term gains is 15%.

The tax rate of Long term gains is:

1. Upto gains of Rs. 100,000 are exempt from tax.
2. Gains beyond Rs. 100,000 are taxed at 10% +applicable surcharge & cess.

For Eg, for an investor, if the long-term gains from equity mutual funds are Rs. 5 lacs then the first 1 lac is exempt & on the balance of Rs 4 lacs, the tax is 10% + surcharge & cess ie a little above Rs.40k. (The first 1 lac exemption is for equity mutual funds and direct stocks.)

If an investor invests in direct stocks and for a financial year has gains of Rs. 5 lacs in direct stocks and 5 lacs in equity mutual funds then the 1 lac exemption is for both Equity mutual funds & Stocks together. On the balance gain of 9 lacs, the investor has to pay tax.

If you have any questions, please comment on the box below.  Do not hesitate, happy to answer even seemingly basic questions :).