Mutual funds continue to be one of the most popular investment options for individuals and institutions in India. However, the taxation of mutual funds varies based on the type of fund, the investor’s residency status, and the holding period of the investment.
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For the financial year 2024-25, the Securities and Exchange Board of India (SEBI) and the Income Tax Department have set specific tax rules applicable to different mutual fund categories. This article explains the capital gains tax rates, taxation of dividend income, and tax deducted at source (TDS) implications for mutual fund investors.
Taxation Based on Type of Mutual Fund
The taxation of mutual funds is categorised into three major segments:
1. Equity-Oriented Mutual Funds (Except Fund of Funds)
Equity-oriented mutual funds are those where at least 65% of the portfolio is invested in equities. These funds enjoy a relatively favorable tax treatment.
Tax on Capital Gains (Equity Funds)
| Type of Investor | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
|---|---|---|
| Resident Individual / HUF / AOP / BOI | 15% / 20% | 10% / 12.5% |
| Domestic Companies | 15% / 20% | 10% / 12.5% |
| Non-Resident Indians (NRIs) | 15% / 20% | 10% / 12.5% |
- STCG (holding period less than 1 year): Taxed at 15% or 20%.
- LTCG (holding period more than 1 year): Taxed at 10% beyond ₹1 lakh in gains, or 12.5% in certain cases.
Dividend Income Taxation for Equity Funds
- Dividends are taxed as per the investor’s applicable tax slab rate.
- TDS (Tax Deducted at Source): 10% on dividend income for both resident and non-resident investors.
2. Specified Mutual Funds (Debt Funds with Less Than 35% Equity Allocation)
SEBI classifies specified mutual funds as those where less than 35% of assets are invested in equities. These funds are taxed differently from equity funds.
Tax on Capital Gains (Specified Mutual Funds)
| Type of Investor | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
|---|---|---|
| Resident Individual / HUF / AOP / BOI | Taxed at slab rate | Not applicable |
| Domestic Companies | 15% / 22% / 25% / 30% | Not applicable |
| Non-Resident Indians (NRIs) | Taxed at slab rate | STCG – 30% |
- Capital gains on specified mutual funds are taxed as per the investor’s tax slab.
- There is no LTCG benefit; all gains are treated as short-term.
Dividend Income Taxation for Specified Mutual Funds
- Dividends are taxed at the applicable slab rate.
- TDS on dividends is 10% for both residents and NRIs.
3. Other Mutual Funds (Debt, Hybrid, and Fund of Funds)
Other mutual funds include debt funds, hybrid funds, and fund of funds (FoFs) that do not qualify under equity-oriented or specified funds.
Tax on Capital Gains (Other Mutual Funds)
| Type of Investor | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
|---|---|---|
| Resident Individual / HUF / AOP / BOI | Taxed at slab rate | 20% / 12.5% |
| Domestic Companies | 15% / 22% / 25% / 30% | 20% |
| Non-Resident Indians (NRIs) | STCG – 30% | LTCG – 20% (Listed Units) / 10% (Unlisted Units) |
- STCG is taxed at slab rate for individuals and at 30% for NRIs.
- LTCG is taxed at 20% with indexation (listed units) or 10% without indexation (unlisted units).
Dividend Income Taxation for Other Mutual Funds
- Dividends are taxed as per the applicable slab rate.
- TDS of 10% applies to dividend payouts.
TDS (Tax Deducted at Source) on Mutual Funds
- TDS on Capital Gains:
- Residents: No TDS on capital gains.
- NRIs: TDS applies at 10% (listed units) and 20% (unlisted units).
- TDS on Dividends:
- 10% for both residents and NRIs.
Surcharge and Cess on Mutual Fund Taxation
- A surcharge is applicable based on income slabs (10%, 15%, 25%, or 37%).
- Health & Education Cess of 4% applies to all taxes.
Security Transaction Tax (STT) on Mutual Funds
- STT applies to equity-oriented funds but not to debt funds.
- STT is 0.001% on the redemption of equity mutual funds.
Conclusion
The tax treatment of mutual funds in India depends on the type of fund, the holding period, and the investor’s residency status.
- Equity mutual funds enjoy a lower LTCG tax rate of 10% beyond ₹1 lakh in gains.
- Specified mutual funds (mostly debt funds) are treated as short-term gains, taxed at slab rates.
- NRIs face higher TDS on capital gains and dividends.
Investors should assess their investment horizon, risk profile, and tax efficiency before selecting a mutual fund to maximise returns while optimising tax liability.
