Tax on Mutual Funds – How Mutual Funds are Taxed?

For many households, mutual funds sit right next to FDs in the “serious money” bucket. The first thing they look for is clarity on mutual fund capital gains tax—what gets taxed, when it gets taxed, and at what rate. In the context of Mutual fund taxation India, two ideas decide the bill: the type of fund (equity or not) and the time units were held. Once those are clear, planning redemptions and cash flows becomes far less stressful. Simply put, mutual fund capital gains tax is about paying tax on the profit, not on the entire redemption value.

Capital gains basics

A capital gain arises only when units are sold or switched. If the sale value exceeds the cost (after charges), the difference is taxable; if it is lower, there is a capital loss. The holding period drives the rate. Investors who keep a simple purchase-date tracker generally find mutual fund capital gains tax much easier to handle at filing time.

STCG vs LTCG definitions by holding period

In STCG vs LTCG mutual funds, equity funds use a 12-month line. Up to 12 months is Short-Term Capital Gain (STCG); beyond that is Long-Term Capital Gain (LTCG). For debt, international, gold and most fund-of-funds (FoFs), gains are typically treated like short term and taxed at slab rates. The STCG vs LTCG mutual funds distinction therefore matters most in equity-oriented schemes.

Category classification (equity, debt, hybrid, FoFs)

Category is decided by how much equity the scheme holds. Equity-oriented funds maintain higher equity exposure; conservative hybrids, debt funds, gold funds and many FoFs usually do not. This line matters because mutual fund capital gains tax follows the category, not the label on the factsheet.

What changed in FY 2025–26

The broad framework under Mutual fund taxation India stays familiar. Equity-oriented units face 15% on STCG and 10% on LTCG (beyond the annual threshold). Non-equity categories continue to be taxed at the investor’s slab rate. Indexation benefits remain largely unavailable for most new debt-oriented purchases. Investors still review Budget fine print each year, but there is no dramatic reset this time.

Category-wise tax treatment

Equity funds (STCG 15%, LTCG 10% over ₹1L)

For equity-oriented schemes, STCG is taxed at 15%. LTCG is taxed at 10% on gains above ₹1,00,000 in a financial year, counted together with listed shares. Example: if long-term equity gains total ₹1.60 lakh, only ₹60,000 is taxed at 10%. This small arithmetic check helps families align cash needs with mutual fund capital gains tax outcomes.

Debt/international/gold/hybrid FoFs under new rules

Debt funds, most international funds, gold funds and FoFs are treated as non-equity; their gains are taxed at slab rates, regardless of holding period. Post-tax comparisons therefore become important under Mutual fund taxation India—especially when the goal is steady income or short-term parking versus alternatives like FDs or government-backed options.

Indexation availability or removal

For most new debt-oriented investments, indexation (inflation-adjusted cost) is not available. Legacy units purchased before rule changes may follow earlier provisions. Good record-keeping—contract notes, statements of account and the annual capital gains statement—keeps this clean.

Dividends, TDS, and taxation

Dividends are not part of capital gains; they are added to total income and taxed at slab rates. AMCs generally deduct TDS at 10% on dividends exceeding ₹5,000 for resident investors (PAN dependent). For NRIs, TDS applies at rates in force. In short, dividends and mutual fund capital gains tax are two separate lanes.

Tax-loss harvesting and set-off rules

Losses can cushion the tax hit. Short-term losses can be set off against both STCG and LTCG; long-term losses only against LTCG. Unused losses may be carried forward for eight assessment years (subject to timely filing). Thoughtful year-end rebalancing lets investors trim mutual fund capital gains tax without derailing long-term asset allocation.

Resident vs NRI notes (high level)

NRIs face TDS on gains and dividends; final liability may change after filing returns and applying treaty benefits. Repatriation depends on bank account type (NRE/NRO) and paperwork. Many NRIs prefer equity-oriented funds for clearer rates, while evaluating slab-based results in debt-like categories.

Reporting in ITR and documentation

Most individual investors use ITR-2 for capital market gains. AIS/Form 26AS should align with the AMC’s capital-gain statement. Schedule CG captures category-wise numbers, while set-offs are shown separately. Clean documentation keeps Mutual fund taxation India smooth and reduces notices or mismatches.

Conclusion

A quick checklist serves most families well: identify category, note holding period, apply the correct rate, and record everything. Equity enjoys preferential rates plus the ₹1 lakh LTCG cushion; non-equity follows slab rules. Dividends are taxed as income. For decisions around rebalancing or cash needs, comparing Equity vs debt fund tax after surcharge and cess usually leads to the right call on timing and product.

FAQs

How are mutual funds taxed?

Tax depends on fund category and holding period. Equity STCG is 15%; equity LTCG is 10% on gains above ₹1 lakh in a year. Debt, international, gold and most FoFs are taxed at slab rates. That is the backbone of mutual fund capital gains tax in India.

How are taxes paid on a mutual fund?

 Taxes are computed while filing the income-tax return. AMCs may deduct TDS on dividends for residents, and on certain payouts for NRIs. The final figure is settled through self-assessment after matching statements under Mutual fund taxation India.

What is the 7/5/3-1 rule in mutual funds?

It is a popular thumb rule used to frame return expectations over different horizons; it is not a tax rule. Actual outcomes vary by category, market cycle and holding period.

Are mutual funds taxed twice?

No. The scheme does not pay tax on behalf of the investor. The investor is taxed once—on dividends (as income) and/or on gains when units are sold—based on category and timing, with Equity vs debt fund tax rules applied accordingly.

Disclaimer : Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.