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Home Mutual Funds Mutual Fund Tax - How to Calculate Tax on the Mutual Funds?

Mutual Fund Tax – How to Calculate Tax on the Mutual Funds?

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Mutual Fund is one of the best investment options. You can achieve whatever financial goal you have by investing money in mutual funds. Mutual funds are expected to give higher returns compared to all other investment options. You may not be aware that mutual fund gains are taxable in nature. This means when you redeem mutual funds you need to pay tax. The tax applicable to the mutual funds is based on mutual fund types and holding period. In case you want to redeem your mutual fund you should know the applicability of income tax on capital appreciation. Here is complete information on Mutual Fund Tax.

Mutual Fund Returns – Dividend & Capital Gain

Mutual Funds returns are of two types dividends and capital gains. It is a known fact that these returns are dependent on the type of mutual funds.

If you have invested in dividend-based mutual funds you will be paid with a profit share of the funds. The dividend would be based on the number of units held by the holder.

In case you have invested money in a growth type of mutual funds you will not be paid with dividends but whenever you sell mutual funds unit at a higher price and earn profit it will be called capital gain. The capital gain is a profit made by you on the mutual funds. Dividend income and capital gain both are taxable on the hand of the investor.

Mutual Fund Tax on Dividend

The Mutual Fund tax rule on the dividend is changed. As per the latest rules dividend income of investors is added to the overall income and taxed as per applicable tax slab rates. Earlier dividend income was tax-free in the hand of the investors. The dividend income from mutual funds shall be subject to 10% TDS if received dividend income is exceeding Rs.5000 in a year. The TDS amount shall be used against credit against tax payable.

Mutual Fund Tax on Capital Gain

Mutual Fund tax on capital gain is based on the type of mutual funds and holding period. The holding period is also known as the term. The term is the time frame between the time of buying mutual funds and selling them. The money earned as profit is known as a capital gain. Based on the time frame this gain is divided into two types short term capital gain and long-term capital gain. The categorization detail of capital gain based on duration is given below.

Type of Fund Short term capital gain Long term capital gain
Equity Funds Less than 12 months More than 12 months
Debt Funds Less than 36 months More than 36 months
Hybrid Equity Funds Less than 12 months More than 12 months
Hybrid Debt Funds Less than 36 months More than 36 months

The tax rates applicable for short-term capital gain and long-term capital gain are different.

Tax on Debt Funds

The mutual fund where debt exposure is more than 65% is known as debt mutual funds. Two types of taxes are applicable to the debt mutual funds. The first tax is applicable on the dividend income of the mutual funds. The dividend income is added to the overall income of the investor and taxed as per the applicable tax slab. The second type of tax is Short term or long-term capital gain tax. This tax is applicable when you sell your mutual funds.

If you sell debt mutual funds before 3 years’ entire profit will be added in your income and tax is applicable on the entire capital gain. In case you sell debt mutual funds after 3 years the gains will be known as long-term capital gain tax and taxed at rate of 20% after indexation. You also need to pay a surcharge on the tax.

Tax on Equity Funds

Equity mutual funds are funds where equity exposure is more than 65%. Long-term and short-term capital gain tax is applicable on the equity mutual funds. In case you hold equity mutual funds for less than 1 year you need to pay short-term capital gain. Short-term capital gain is taxed at a flat rate of 15%.

In case you hold an equity mutual fund more than 1-year long-term capital gain tax is applicable. The gains up to 1 lakh in a year are exempted in this case. For capital gain above 1 lakh in a year, you need to pay tax at the rate of 10% flat.

Tax on Hybrid Mutual Funds

The hybrid mutual fund is the combination of equity and debt mutual funds. If equity exposure is more than 65% the scheme is taxed as an equity mutual fund. In case the debt component is higher in the mutual funds it will be taxed as debt mutual funds. This means you need to know the exposure of the scheme where you are investing your money. These details will be useful when you do the redemption of your funds.

Tax on SIP

SIP is another method of investing money. Usually, as an investor, you invest your money via SIP. The SIP can be monthly, quarterly, half-yearly or annually. Now in the case of SIP tax is applicable based on FIFO (First in first out) basis. Say you decided to redeem your mutual funds after 12 months of holding period, in this case, first units purchased via the first SIP are held for more than 12 months so long term capital gain tax is applicable on that for the rest of the unit short term capital gain tax is applicable.

How to Calculate Tax on the Mutual Funds?

By now you must be clear on how to calculate tax on mutual funds. Refer to the summary table given below to calculate tax on the mutual funds.

Fund type Short-term capital gains Long-term capital gains
Equity funds 15% + cess + surcharge Up to 1 Lakh a year tax exempted. Gains above 1 lakh are taxed at 10% + cess + surcharge
Debt funds Tax as per tax slab 20% + cess + surcharge
Hybrid equity-oriented 15% + cess + surcharge Up to 1 Lakh a year tax exempted. Gains above 1 lakh are taxed at 10% + cess + surcharge
Hybrid debt-oriented funds Taxed at the investor’s income tax slab rate 20% + cess + surcharge

E.g – If you have invested 1 Lakh in the equity mutual funds and you are holding period is more than 1 year. After 1 year of holding period the value of the mutual fund is 1.20 Lakh and you decided to sell all funds. The gain applicable on the fund is Rs.20000. Now in this case, long term capital gain tax is applicable, and as the gain is less than 1 Lakh you need not pay any tax.

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