How Are Mutual Funds Taxed

A Mutual Fund is an expertly-handled trust in which various investors poll in finances for extended operations of securities. Such securities are handled by an expert fund manager. Investors, who are recognized as unit holders have the same goal of improving their income by investing in different assets. Normally, they are not scared to take a high risk when it comes to such funds. If you have been investing in such funds, then it is essential for you to understand the different types of tax on mutual funds you need to pay when retrieving or selling your investments.

How is Mutual Funds Set Up?

As a mutual fund is a trust that includes trustees, sponsors, and asset management organizations, it needs to be registered with the Securities and Exchange Board of India (SEBI) to gather information from the general public. There are two types; one that is based on maturity periods and the other that is based on investment objectives. The maturity funds consist of the close-ended fund, open-ended fund, and interval fund.

Equity or growth fund, income or debt fund, gilt fund, balanced fund, and liquid fund are so some of the prime examples of a mutual fund based on investment purposes. For some, investing in mutual funds is one of the simplest ways to save on taxes and earn extra money as well.

Importance of Investing in Mutual Funds

If you compare a mutual fund to an investment in stock, you’ll learn that a mutual fund is much more affordable. You just need a minimum amount of Rs. 100 to invest in this fund via the Systematic Investment Plan (SIP). It promises to provide much better inflation-adjusted returns and ensure income without putting out too much time and energy.

In fact, these types of funds are a lot easier to purchase and sell and possess the benefits of acquiring money directly. There are numerous institutes that provide mutual funds and have superb research teams and fund managers. Besides this, you acquire tax on mutual funds and its perks. All the investments made for a period of 12 months or more are qualified for capital gains and are taxed.

Types of Holding Periods

● A mutual fund units’ holding period can either be short-term or long term. For an equity mutual fund and balance mutual fund, a holding period of 12 months or more is provided and it is known as long-term. Its capital gains tax or LTCG applies to those investments. Although, in this case of debt funds, the investment is regarded as long term if the holding period is 36 months or more.

● An equity or balanced fund is a short-term investment only if the holding period is less than 12 months. Also, a debt fund is seen as short-term securities if the holding period is less than 36 months. Thus, short-term capital gains taxes apply to any type of income made from securities held for less than 36 months or three years.

Ways of Taxing Mutual Funds

The main purpose of any investment is to earn an income from it and investing in a mutual fund creates capital gains that are taxable. A tax saving mutual fund offers income tax exception under Section 80C of the IT Act, 1961. They perform the double motive of saving tax every year and also offer the possibility for higher returns when compared to other tax-saving schemes included under the same. Let’s know how are mutual funds taxed:

● Tax-Saving Equity Funds

Equity-Linked Saving Scheme (ELSS) is the most coherent tax-saving tools under Section 80C. Such diversified funds invest in equity shares of numerous firms across market capitalization. Don’t forget, ELSS comes with a lock-in period of about three years. It means you will not be able to regain your units before three years are passed.

During post redemption, you will get access to long-term capital gains (LTCG) up to Rs 1 lac that are absolutely tax-free. However, LTCG above Rs 1 lac is taxable at the rate of 10% without the advantage of indexation. Make sure to invest in excellent ELSS funds through a paperless and stress-free way.

● Debt Funds

A method that involves factoring the increase in inflation from the time of purchase to the sale of the units is called indexation. Long-term capital gains on debt funds are taxable after indexation. It also allows inflating the purchase rate of debt funds to put down the quantum of capital gains. You will need to add short-term gains from debt funds to your complete income.

● Balanced funds

Such funds are equity-oriented hybrid funds that investment at 65% of assets towards equities. The tax treatment on these balanced funds is literally the same as non-tax saving equity funds.

Once you know how to save tax by investing in mutual funds and other essential information, you have nothing to worry about. Check the available mutual funds and choose the right fund. Just go through the basic formalities and ensure to understand all the terms and conditions. Also, check the track record, consistency and experience of the fund manager in order to avoid risks.


Neha Singh is a full-time writer cum blogger with a keen interest in making friends and penning articles on any topic under the sun. She believes in living life to the fullest, and is on a constant lookout for new skills that she can acquire. You can check her blogs on Feature of Instagram Insights.

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