• Muthoot Finance Logo
Quick Link

| September 9, 2021


One of the most preferred investment options in India that help you achieve your financial goals with ease is mutual funds. Tax on mutual funds is low and they offer you benefits of expert money management, better returns, and much more. Although, some people are still sceptical of mutual funds and invest in fixed deposits instead; the number of investors in mutual funds is gradually increasing by the day. 

Returns earned in mutual funds can be segregated into two heads – one is in the form of dividends and the other one is in the form of capital gains. In both forms (dividends and capital gains), tax on mutual fund redemption is applicable in the hands of the investors. 

In the dividend form, the returns are paid out of the company’s profit. The company whose mutual fund you have chosen may share a part of their profit with the investors in the form of dividends, provided the company has surplus cash. Investors will receive dividends that are proportional to the number of mutual fund units they hold. 

A capital gain, on the other hand, is the apprehended profit by the investors when the selling price of the security that they hold is higher than the purchase price. In simple words, capital gains are given when the price of the mutual fund units gets appreciated. 

The taxation of mutual funds is something that every investor needs to know. If you are an investor looking to gain some knowledge about how mutual funds are taxed in India, keep reading. 

Taxation of Dividends Offered by Mutual Funds

Previously, dividends were tax-free for the investors as the company paid the dividend distribution tax (DDT) before sharing the profits. During this mutual fund tax benefit, dividends of up to Rs. 10 lakh a year were received from domestic companies, which were free of tax for the investors. Any dividend that crossed the Rs. 10 lakh mark would be taxed at 10% under DDT. However, with amendments, the taxation policy changed as well. 

As per the amended rules in the Union Budget 2020, if returns are given in the form of dividends, irrespective of the mutual fund scheme, they will be taxed in a certain manner. That is, the dividends received by the investors will be added to their taxable income; here, the taxability of mutual funds is based on the rates of the income tax slab that the investor falls in. 

Taxation of Capital Gains Offered by Mutual Funds

Capital gains are taxed based on the holding period and the type of mutual fund scheme. The holding period is the tenure for which the investors hold the mutual fund units. In simple terms, the time between the date of purchase and the sale of a mutual fund unit is known as the holding period in capital gains. Tax on mutual fund returns of capital gains are levied as follows:

Taxation of Capital Gains of Equity Funds

Equity funds are mutual funds where the equity exposure of the portfolio exceeds 65%. Short-term capital gains are released on redeeming the equity fund units with a holding period of one year. Here, the taxation of mutual funds is done at a flat rate of 15%, regardless of the income tax slab that the investors come under. 

However, if you sell your equity fund units after a holding period of one year or more, you can make long-term capital gains. Here, for gains up to Rs. 1 lakh a year, tax on mutual funds is exempted. Any long-term capital gain that exceeds the given limit is taxed at 10%. Investing in equity funds with Muthoot Finance, India’s leading NBFC, will give you tangible tax benefits on your mutual fund investments along with numerous other advantages.

Taxation of Capital Gains of Debt Funds

Again, debt funds are mutual funds where the investor’s portfolio gets a debt exposure in excess of 65%. You can get short-term capital gains when you redeem the debt fund units with a holding period of three years. The gains received will then be added to your taxable income and the taxation of mutual funds will be done at the rate of your income tax bracket.

In debt funds, you can get long-term capital gains when the unit of the fund is sold after a holding period of three years. The gains received here are taxed at a flat rate of 20% after indexation. Adding to this, applicable cess and surcharge tax on mutual funds is levied. 

Taxation of Capital Gains of Hybrid Fund

Hybrid funds or balanced funds are those where the taxation of capital gains is based on the portfolio’s equity exposure. Here, if the equity exposure exceeds 65%, the fund scheme will be taxed like an equity fund. If the exposure is below or equal to 65%, the fund scheme will be taxed as per the rules of taxation of debt mutual funds in India. If you are investing in hybrid funds, make sure that you know the equity exposure before signing the papers. 

The taxation rate on long-term gains is lower than the taxation rate on short-term ones. With tax rates on mutual funds in India, it can be safely concluded that the longer you hold on to the mutual fund units, the more tax efficient they become.

At Muthoot Finance, our seasoned fund managers have the expertise and insights to make your mutual fund investments fruitful in the short and the long term. Visit your nearest Muthoot Finance branch to speak to our experts.

Enquire Now!




Subscribe to our newsletter

help us serve you better

Close Icon