Taxation of Mutual Funds in India (As of FY 2024-25 and AY 2025-26)
The taxation of mutual funds in India depends on the type of fund (equity or debt), the holding period, and recent changes in tax laws. Here’s a comprehensive summary based on the latest rules:
1. Equity Mutual Funds
- Definition: Funds with at least 65% of assets in equity shares of Indian companies.
| Holding Period | Tax Type | Tax Rate (before July 23, 2024) | Tax Rate (on/after July 23, 2024) |
|---|---|---|---|
| Up to 12 months | Short-Term (STCG) | 15% | 20% |
| More than 12 months | Long-Term (LTCG) | 10% (on gains > Rs. 1 lakh) | 12.5% (on gains > Rs. 1.25 lakh) |
- Note: Securities Transaction Tax (STT) must be paid on sale for these rates to apply.
2. Debt Mutual Funds
- Definition: Funds with less than 35% in equity shares.
For investments made before April 1, 2023:
- Short-Term (held ≤ 36 months): Gains added to income, taxed as per your income tax slab.
- Long-Term (held > 36 months): 20% tax with indexation benefit.
For investments made on or after April 1, 2023:
- All gains, regardless of holding period, are treated as short-term and taxed as per your income tax slab. No indexation benefit is available.
3. Other Mutual Funds
- Hybrid and balanced funds (35.01% to 64.99% in equity):
- Short-term (≤24 months): Taxed as per slab.
- Long-term (>24 months): 20% with indexation or 12.5% (as per recent updates).
4. Specified Mutual Funds
- Definition: Funds with ≤35% in Indian-listed equities (includes most debt funds, gold funds, international funds).
- Taxation: All gains are taxed as per the investor’s income tax slab, regardless of holding period.
5. Dividend Income from Mutual Funds
- Since April 1, 2020: Dividends are added to your income and taxed as per your income tax slab. There is no Dividend Distribution Tax (DDT) at the fund level anymore3.
6. Key Points
- LTCG exemption: For equity funds, the first Rs. 1.25 lakh of long-term capital gains in a financial year is tax-free; excess is taxed at 12.5% (from July 23, 2024).
- No indexation: For most new debt fund investments, indexation benefits are no longer available.
- Surcharge and cess: All capital gains taxes are subject to applicable surcharge and health & education cess.
Summary Table:
| Fund Type | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
|---|---|---|
| Equity Mutual Funds | 15% (before 23 Jul 2024), 20% (after) | 10% (before 23 Jul 2024), 12.5% (after, on gains > ₹1.25 lakh) |
| Debt Mutual Funds | Slab rate (all investments after Apr 1, 2023) | Slab rate (no LTCG benefit for new investments) |
| Other Mutual Funds (Hybrid) | Slab rate (≤24 months) | 20% with indexation or 12.5% (>24 months) |
| Specified Mutual Funds | Slab rate (regardless of period) | Slab rate (regardless of period) |
| Dividends | Taxed as per slab | N/A |
Final Summary:
Equity funds enjoy preferential tax rates, but these have increased recently. Debt and specified funds are now taxed at slab rates for most new investments, and dividends are always taxed as regular income. Always check the latest rules and consult a tax advisor for your specific situation.
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Mutual Fund Taxation