When you invest in an equity mutual fund, profits arising on redemption or transfer are taxed under capital gains rules. Here’s how it works (for domestic resident investors):
1. Short-Term Capital Gains (STCG)
If you redeem units of an equity-oriented mutual fund within 12 months of purchase, the profit is treated as STCG. You’ll pay tax at a flat rate of 20% (plus applicable cess and surcharge) on the gains.
2. Long-Term Capital Gains (LTCG)
If you redeem units after holding them for more than 12 months, the profit is treated as LTCG. For equity mutual funds:
- Gains up to ₹1,25,000 in a financial year are exempt from tax.
- Gains above this exemption threshold are taxed at 12.5% (plus cess & surcharge) under the current regime.
3. Dividend Income from Mutual Funds
If the fund pays dividends, those are taxable in the hands of the investor. Since the dividend distribution tax (DDT) for funds was removed, such income must be included in your total income and taxed at your applicable slab rate.
4. Important Notes & Practical Considerations
- These tax rates apply to equity-oriented funds (where at least 65% of assets are invested in equity shares). Funds not meeting this may follow “debt fund” tax rules.
- Make sure to check the holding period precisely (purchase date to redemption date) to determine STCG or LTCG.
- Keep track of your exemption limit of ₹1,25,000 for LTCG from equity mutual funds when filing tax returns.
- Tax changes can occur—so stay updated each financial year with the latest budget announcements.
Since tax rules are dynamic and subject to change, we recommend consulting your tax advisor for the latest and detailed guidance.
