Mutual Fund Taxation in India [2025]
Mutual funds are a popular investment option for Indian investors, but understanding how they are taxed is crucial to maximize returns and stay compliant with the law. Taxation differs based on the type of fund (Equity vs Debt) and the holding period.
🧾 1. Types of Mutual Funds & Tax Treatment
✅ a. Equity Mutual Funds
Funds that invest at least 65% in equity or equity-related instruments.
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Holding Period
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Capital Gains
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Tax Rate
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✅ b. Debt Mutual Funds
Funds that invest primarily in debt instruments like bonds, government securities, etc.
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Holding Period
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Capital Gains
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Tax Rate
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🔺 From April 1, 2023, indexation benefit has been removed for non-equity mutual funds. All gains are taxed at slab rate, even for long-term holdings.
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- ✅ c. Hybrid Funds (Balanced)
- Taxed based on their equity exposure:
- If equity ≥ 65% → Taxed like equity funds
- If equity < 65% → Taxed like debt funds
- 💰 2. Dividend (IDCW) Taxation
- All dividends from mutual funds (called IDCW – Income Distribution cum Capital Withdrawal) are:
- Added to your income
- Taxed as per your income tax slab
- No dividend is tax-free now, and there’s no Dividend Distribution Tax (DDT) on the AMC side.
- 🔖 3. TDS on Mutual Fund Gains
- No TDS for resident individuals on capital gains.
- TDS of 10% on dividends if total payout exceeds ₹5,000 in a financial year.
- For NRIs, TDS applies on capital gains and dividends.
- 🧮 4. Mutual Fund Tax Calculation Example
- Suppose you invested ₹2,00,000 in an equity fund in Jan 2024 and redeemed it for ₹2,50,000 in March 2025.
- Holding period: > 12 months → LTCG
- LTCG = ₹50,000
- Tax applicable = 10% of ₹50,000 = ₹5,000
- However, if total LTCG is below ₹1 lakh/year, no tax is payable.
- 📌 5. How to Save Tax with Mutual Funds?
- Invest in ELSS (Equity Linked Savings Scheme):
- Tax deduction under Section 80C up to ₹1.5 lakh/year
- 3-year lock-in
- Taxed as equity fund on redemption
- Tax deduction under Section 80C up to ₹1.5 lakh/year
- 📤 6. Reporting Mutual Fund Gains in ITR
- Report all capital gains (STCG/LTCG) under “Capital Gains” section.
- Use Form 26AS or AMC statement to cross-check TDS.
- File using ITR-2 if you have capital gains.
FAQs on Mutual Fund Taxation
Yes. Each SIP installment is treated as a separate investment and taxed based on its holding period when redeemed.
No. Dividends (IDCW) are added to your income and taxed as per your income tax slab.
Depends on the fund type and holding period. Equity funds attract 15% STCG or 10% LTCG, while debt funds are taxed at your income slab rate.
No. Tax is applicable only on redemption (sale of units) or receipt of dividends.
No. From April 1, 2023, indexation benefit is removed for most debt mutual funds.
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