Mutual Fund income is taxed as per different perspective under Taxation Laws as Capital Gain income. Taxation of Mutual Funds is not much complicated as it seems to investors. SPA Capital has made it easy to understand for you.
Written by CA Pankaj Chhabra – 
No No No, Don’t worry about the word Taxation on your Mutual Funds Income. It’s normal and applicable on everyone who is a resident of India.
Mutual Funds are the most efficient and buzzing financial instruments that helps anyone in achieving their Financial Goals. Mutual Funds are also the tax efficient instruments if you fall under the highest tax slab bracket. Because if you invest in FD or any interest bearing instrument, that income shall be taxed at highest slab rate. That’s when Mutual Fund comes into play.
Let’s understand the taxation on Mutual Funds.
Whenever we invest in Mutual Funds we earn income in form of Dividend or Capital Gains.
You need to understand when you sell your Mutual Fund Units there are 2 types of Capital Gain/Loss that may arise:
- STCG / STCL (Short term Capital Gain/Loss)
- LTCG/LTCL (Long Term Capital Gain/Loss)
When does Capital Gain/Loss arise on Mutual Funds?
A Capital Gain is the amount of profit that arises whenever a unit holder sells his mutual fund units at a Price higher than its purchase price.
Simply, If Selling price > Purchase Price- Gain arises.
It means, your investment amount has appreciated due to appreciation in the mutual fund unit price.
A Capital Loss is the amount of loss that arises whenever a unit holder sells his mutual fund units at a Price lesser than its purchase price.
Simply, If the Selling Price < Purchase Price, Loss arises, and that loss is arising from a Mutual Fund Unit which you were holding after investing money in it.
It means, your investment amount has depreciated due to depreciation in the amount of mutual fund unit price due to different factors.
Taxation on Dividends offered by Mutual Funds
Dividends received by the Investors are taxable in hands of Investor as per the respective Slab Rates applicable on them. Earlier the dividends were tax free in the hands of Investors, as the Companies paid DDT on the profits before sharing them in the form of Dividends.
But amendments were made in Union Budget 2020, to tax dividend offered by Mutual Fund Schemes as per the Slab Rates.
Taxation on Capital Gains offered by Mutual Funds
| Type of a Fund | STCG | LTCG |
| Equity Oriented Fund | Holding Period Shorter Than 12 Months | Holding Period Greater Than 12 Months |
| Debt Oriented Fund | Holding Period Shorter Than 36 Months | Holding Period Greater Than 36 Months |
Taxation Rates on Capital Gains
| Type of a Fund | STCG | LTCG |
| Equity Oriented Fund | Flat 15% on Gain Amount + Cess + Surcharge | Upto Rs. 1 lakh is exempt, gains above than Rs. 1 Lakh are taxed at 10% + Cess + Surcharge |
| Debt Oriented Fund | Taxed as per Applicable Slab Rates on Investor | Flat 20% + Cess + Surcharge |
Let us understand it with the help of a practical examples:
1. Ram has invested Rs. 5 Lakh in a Equity Oriented Mutual Fund on 1st May 2021 @ Rs. 20 per unit. He sold all his units on 1st Dec 2021 @ Rs. 25 per unit. Calculate tax implications on Ram.
Answer: Date of Purchase: 1st May 2021
Date of Sale: 1st Dec 2021
Holding Period: 7 Months
Capital Gain/Loss: Short Term
Amount of Gain: Selling Price – Purchase Price
i.e. Rs. 25 – Rs. 20 = Rs. 5/per unit
No. of Units Purchased initially = Rs. 500000/20per unit = 25000 Units
Capital Gain Amount = 25000 units * Rs. 5/unit = Rs. 125000/-
Taxation Rate = 15% Flat rate plus Cess + Surcharge if applicable
Tax Amount = 15% on Rs. 125000/- + Cess + Surcharge if applicable
2. Ram has invested Rs. 5 Lakh in a Equity Oriented Mutual Fund on 1st May 2020 @ Rs. 20 per unit. He sold all his units on 1st Dec 2021 @ Rs. 25 per unit. Calculate tax implications on Ram.
Answer: Date of Purchase: 1st May 2020
Date of Sale: 1st Dec 2021
Holding Period: 19 Months
Capital Gain/Loss: Long Term
Amount of Gain: Selling Price – Purchase Price
i.e. Rs. 25 – Rs. 20 = Rs. 5/per unit
No. of Units Purchased initially = Rs. 500000/20per unit = 25000 Units
Capital Gain Amount = 25000 units * Rs. 5/unit = Rs. 125000/-
Taxation Rate = Upto Rs. 1 lakh is exempt, gains above than Rs. 1 Lakh are
taxed at 10% + Cess + Surcharge
Tax Amount = 10% on Rs. 25000 + Cess + Surcharge if applicable
3. Ram has invested Rs. 5 Lakh in a Debt Oriented Mutual Fund on 1st May 2018 @ Rs. 20 per unit. He sold all his units on 1st Dec 2021 @ Rs. 25 per unit. Calculate tax implications on Ram.
Answer: Date of Purchase: 1st May 2018
Date of Sale: 1st Dec 2021
Holding Period: 44 Months
Capital Gain/Loss: Long Term
Amount of Gain: Selling Price – Purchase Price
i.e. Rs. 25 – Rs. 20 = Rs. 5/per unit
No. of Units Purchased initially = Rs. 500000/20per unit = 25000 Units
Capital Gain Amount = 25000 units * Rs. 5/unit = Rs. 125000/-
Taxation Rate = Flat 20% on Gain Amount + Cess + Surcharge
Tax Amount = 20% of 125000 + Cess + Surcharge if applicable
4. Ram has invested Rs. 5 Lakh in a Debt Oriented Mutual Fund on 1st May 2020 @ Rs. 20 per unit. He sold all his units on 1st Dec 2021 @ Rs. 25 per unit. Calculate tax implications on Ram.
Answer: Date of Purchase: 1st May 2020
Date of Sale: 1st Dec 2021
Holding Period: Less than 36 Months
Capital Gain/Loss: Short Term
Amount of Gain: Selling Price – Purchase Price
i.e. Rs. 25 – Rs. 20 = Rs. 5/per unit
No. of Units Purchased initially = Rs. 500000/20per unit = 25000 Units
Capital Gain Amount = 25000 units * Rs. 5/unit = Rs. 125000/-
Taxation Rate = Shall be taxed as per the applicable slab rate on the Investor.
Why did we not considered indexation in Debt fund for long term capital gain ?